MIAMI -- Attorneys thinking about advising bankruptcy clients to pay their legal fees with credit cards better think twice after a Florida judge ruled that doing so is a violation of federal law.
U.S. Appeals Court Judge Kevin Newsom's March 30 ruling revives a putative class lawsuit accusing attorneys at Orlando-based Kaufman Englett & Lynd PLLC of violating federal law by encouraging Loyd P. Cadwell to put their fees on his credit card while he considered filing for bankruptcy. The court ruled an attorney violates the law "if he instructs a client to pay his bankruptcy-related legal fees using a credit card."
The appeals court reversed the dismissal of Cadwell's suit, saying the district court had incorrectly interpreted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which was enacted "to correct abuses of the bankruptcy system."
The Orlando Sentinel reported that the firm dissolved in April 2016.
Newsome with the concurrence of Chief Judge Ed Carnes and Sixth Circuit Judge Eugene Siler Jr., found an attorney who advised a client to "incur more debt" runs afoul of the BAPCPA. They also rejected Kaufman Englett's argument that the law's provision is an unconstitutional violation of the First Amendment because it restricts attorney-client communication.
In January 2016, Cadwell consulted Kaufman Englett in January 2016 about the possibility of filing a bankruptcy petition. After the initial meeting, he entered into an agreement to pay $1,700 in attorney fees, which were broken down into monthly installments of $250 to $300. In his complaint, Cadwell said Kaufman Englett instructed him "to pay the initial retainer and all subsequent payments by credit card."
The suit didn't specify the size of the proposed class but said it "exceeds several hundred Florida customers. In response, Kaufman Englett argued the "mere advice to use a credit card to pay fees, without any accompanying improper motivation, does not create a cause of action." The law firm maintained the U.S. Supreme Court's ruling in Milavetz Gallop & Milavetz v. United States only precluded an attorney from advice where the purpose was to incur more debt in ordered to discharge debt."
In 2017, U.S. District Judge Paul G. Byron dismissed the case, saying the bankruptcy abuse law only prohibits "advising a debtor to incur additional debt for an invalid purpose." On appeal, Kaufman Englett reiterated the district court's interpretation of the law, but the appellate panel said that was a misinterpretation.
In his opinion, Newsome noted the first portion of the law bars advising a client to incur debt while considering a bankruptcy filing, describing the act of an attorney encouraging the use of a credit card to pay fees as abusive.
"It puts the lawyer's own interests ahead of the creditors' in that, while ensuring the lawyer's full payment, it leaves a diminished estate on which creditors can draw," the opinion reads.