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Letters to the 107th Congress

August 30, 2001

The Honorable Patrick Leahy
Chairman
Committee on the Judiciary
United States Senate
224 Dirksen Senate Office Building
Washington, DC 20510

Re: Bankruptcy Reform Act of 2001 (H.R. 333) - Enhanced Attorney Liability Issues

Dear Mr. Chairman:

As you prepare to participate in the upcoming conference committee for H.R. 333, the "Bankruptcy Reform Act of 2001," the American Bar Association ("ABA") respectfully urges you to support the removal of several provisions from the legislation that unfairly increase the liability and administrative burdens of bankruptcy attorneys under the Bankruptcy Code. In particular, the ABA favors the removal of provisions that would require attorneys to: (1) certify the accuracy of factual allegations in the debtor's bankruptcy petition and schedules, under penalty of mandatory sanctions; (2) certify the ability of the debtor to make payments under a reaffirmation agreement; and (3) identify and advertise themselves as "debt relief agencies" subject to a host of new intrusive regulations. Attached for your review and consideration are specific amendments supported by the ABA that would eliminate these new attorney liability provisions.

The ABA, with over 400,000 members throughout the country, strongly opposes the new attorney liability provisions contained in H.R. 333, which apply only to debtors' counsel. In our view, these provisions will have a strong negative impact on individual debtors who are seeking a fresh start under the bankruptcy laws by subjecting their attorneys to costly new regulations and liability beyond those faced by lawyers in any other field of practice. These three provisions, discussed in greater detail below, would discourage many attorneys from agreeing to represent debtors, while significantly increasing the fees and expenses of clients who are able to obtain legal representation. In addition, these new provisions will discourage lawyers from volunteering their services for pro bono bankruptcy cases. Unless they are removed, these provisions pose a serious threat to the efficient operation of the bankruptcy system.

Certification of Bankruptcy Petitions and Schedules

The American Bar Association strongly opposes the provisions in H.R. 333 that would require the debtor's attorney to certify the accuracy of all factual allegations in the debtor's bankruptcy petitions and schedules and would require the court to impose sanctions on the attorney if any factual inaccuracies resulted in the dismissal of the debtor's Chapter 7 bankruptcy petition or in its conversion to a Chapter 13.

Under current Bankruptcy Rule 9011, bankruptcy attorneys, like all other attorneys appearing in federal courts, are required to certify that pleadings and other items that they prepare are supported by the facts before they are filed with the court. This rule, which is identical in form and substance to Federal Rule of Civil Procedure 11, applies to all pleadings and motions filed with the bankruptcy court. By its own terms, however, Rule 9011 does not apply to the bankruptcy schedules listing the debtor's financial information. Because those schedules are prepared almost entirely with information supplied directly by the debtor, the Rule allows bankruptcy attorneys to rely upon the accuracy of that information. Therefore, the debtor alone has been held responsible for the truthfulness and accuracy of the bankruptcy schedules.

Section 102 of H.R. 333 would change existing law by creating a new and higher standard for debtors' attorneys that goes well beyond the standards imposed upon other lawyers. By creating new 4(A) - (D) to 11 U.S.C. ' 707(b), Section 102 of the bill would hold the debtor's attorney-instead of the debtor-financially responsible for any factual errors contained in the debtor's bankruptcy petition or schedules. Therefore, if even innocent errors in the petition or the schedules result in the dismissal of the petition or in its conversion to a Chapter 13 proceeding, the debtor's attorney would be financially responsible unless it is proven that the lawyer conducted a time-consuming and costly investigation of these factual allegations before the filing.

In addition, although current Rule 9011 grants the court discretion to impose penalties against attorneys who are shown to have violated the rule, Section 102 of H.R. 333 would require the court to impose a civil penalty on any debtor's attorney who violates the rule, even inadvertently. In addition, if the debtor's petition or schedules were found to violate Rule 9011 and the debtor is denied a discharge under the means test outlined in H.R. 333, the debtor's attorney will be personally liable for the attorneys' fees of the trustee or bankruptcy administrator who contested the discharge. In contrast, attorneys representing creditors would not be required to make any additional certifications and would not be made subject to mandatory sanctions under the legislation.

The new standards outlined in Section 102 of H.R. 333 also would fundamentally alter the attorney-client relationship in bankruptcy cases. It would transform the attorney from an advocate to a detective and informer. The legislation would create an unwaivable conflict of interest because the attorney would be unable to accept information provided by the client at face value without risking liability if the information later proved to be inaccurate. Further, the debtor's attorney would be required to independently verify all of the client's factual representations. Indeed, the attorney would be forced to appraise the value of all of the assets listed on the client's schedules.

Requiring the debtor's attorney to verify all of the client's representations would significantly raise the cost to the debtor of filing for bankruptcy. As a result of the new obligations and liability imposed on attorneys by Section 102, many bankruptcy counsel will no longer agree to accept debtors' cases because these attorneys will not be willing to become their client's insurer. In addition, those bankruptcy lawyers who continue to represent debtors will be forced to charge substantially higher fees (which most debtors will be unable to afford). Therefore, the practical effect of these provisions will be to deny debtors timely, effective, and affordable representation just when they need it most.

In addition, even when a debtor is fortunate enough to find a lawyer who is willing to handle the bankruptcy case, the new potential liability created by Section 102 will have a severe chilling effect on the attorney's willingness to advocate a new position or theory on behalf of the client. Because substantial monetary sanctions against a debtor's attorney will be mandatory if the attorney's efforts to maintain a Chapter 7 case are unsuccessful and the court finds that Rule 9011 was violated, the debtor's attorney will be reluctant to advance any but the most well established legal theories and arguments. As a result, debtors will no longer receive the kind of vigorous representation to which they are entitled under the law and which attorneys have always been required to provide. For all of these reasons, the ABA believes that new subsections 4(A) - (D) contained in Section 102 are counterproductive and should be removed from the bill.

Certification of Reaffirmation Agreements

The ABA also urges the conferees to remove the provisions from Section 203(a) that would require attorneys to certify the debtor's ability to make payments under a reaffirmation agreement.

Under current law, a debtor is not required to accept the discharge of all outstanding debt. Instead, the debtor may choose to reaffirm certain debts-thus retaining liability for these debts-provided that the decision is voluntary and will not create undue hardship for the debtor. Before such reaffirmation agreements can proceed under current law, however, the debtor's attorney must certify that the reaffirmation is voluntary and will not impose an undue hardship on the debtor or the debtor's dependents.

Section 203(a) of H.R. 333 would change these procedures by again imposing new burdens on the debtor's attorney. Unlike the current law, which simply requires the debtor's attorney to certify in writing that the reaffirmation agreement is voluntary and would not cause the debtor undue hardship, the new provisions require the attorney to certify that "the debtor is able to make the [reaffirmation] payment," in cases where there is a presumption of undue hardship under the debtor's budget (i.e., if the debtor's monthly income is less than monthly expenses, including the reaffirmation payments).

Bankruptcy attorneys do not conduct extensive audits of their clients' finances, nor do they make financial or household budgeting decisions for their clients. Indeed, this is not the attorney's proper role, and any attempt to force the attorney to assume these duties will substantially increase the cost of representing a debtor in bankruptcy. Therefore, this certification requirement, like the certification requirement in Section 102, will discourage many attorneys from representing debtors, while forcing the remaining debtors' attorneys to charge higher fees to cover the substantial additional costs and risk.

The new certification requirement contained in Section 203(a) of H.R. 333 also will create strong conflicts of interest between the debtor and the attorney in those instances when the debtor wants to reaffirm a debt and instructs the attorney to certify the debtor's ability to make payments. If the attorney follows the client's directive, the attorney may become subject to sanctions under Rule 9011 if the debtor later proves unable to pay the reaffirmed debt. This new mandate is particularly unfair because creditor's attorneys are not subject to sanctions under Rule 9011 for their clients' false disclosures or illegal collection practices if they can show they acted in good faith and did not participate in, or have knowledge of, these disclosures or practices. For all of these reasons, the ABA believes that the provisions in Section 203(a) requiring debtors' attorneys to certify their clients' ability to make reaffirmation payments are inappropriate and should be deleted from the bill.

"Debt Relief Agency" Provisions

The American Bar Association also strongly opposes those provisions in Sections 227-229 of H.R. 333 that would require bankruptcy attorneys to identify and advertise themselves as "debt relief agencies" and then comply with a host of new burdensome regulations. These provisions would seriously interfere with the attorney-client relationship and would impose unfair additional burdens and liability on debtors' attorneys that constitute an unjustified government invasion of the relationship between private attorneys and their clients.

Under these provisions, any "person"-including both bankruptcy attorneys and non-attorney "bankruptcy petition preparers"-who assists individual debtors with their bankruptcies in return for compensation is deemed to be a "debt relief agency." Because the definition is worded so broadly, it may even be construed to apply to non-bankruptcy attorneys, such as family lawyers, criminal and civil defense attorneys, and general practitioners who, in the course of representing their clients, are compelled to advise them to consider filing bankruptcy to protect their rights. This will significantly jeopardize the attorney's ability to properly advise his or her client regarding their legal rights.

Any attorney who assists a client with bankruptcy will be subject to a long list of new regulations under the bill. In particular, attorneys will be required to provide lengthy written disclosure statements to potential and existing bankruptcy clients that explain the bankruptcy system and that provide general, government-approved legal advice. In addition, attorneys will also be required to advise the debtor in writing that the debtor need not be represented by a lawyer in the bankruptcy or in related litigation, which in many cases is bad advice.

By requiring that the debtor's attorney provide the debtor with preprinted, government-approved legal advice on bankruptcy law, and by forcing the attorney to state in writing that the debtor need not even retain a lawyer, the bill would usurp the attorney's role as the proper legal representative of the debtor. Perhaps even more troubling, the bill would also prohibit the attorney from giving certain proper pre-bankruptcy planning advice to the client, including advice to pay certain lawful obligations or to incur certain debts. In fact, these provisions of the bill are worded so broadly that the attorney could be subject to liability merely for making an unsuccessful attempt to help the client restructure the debt to avoid bankruptcy. These provisions, which dictate the types and content of legal advice that an attorney can and cannot render to his client, are particularly destructive of the attorney-client relationship.

Sections 227-229 also require attorneys to provide the debtor with a written contract, and if the contract fails to comply with each of the detailed requirements outlined in the bill, it would be void and unenforceable. Furthermore, if the debtor's attorney failed to follow any of the many technical requirements of the legislation, the attorney would forfeit the entire fee and could be sued in state or federal court by the debtor, the trustee, or state law enforcement officials for actual damages, civil penalties, attorneys' fees, and costs. Although existing law and ethical rules require all attorneys to provide quality legal representation to their clients, Sections 227-229 go well beyond existing law and would subject just one type of lawyer, debtors' bankruptcy attorneys, to a far stricter standard than lawyers in any other field of practice.

In addition, Section 229 of H.R. 333 also seeks to micromanage the bankruptcy attorney's advertising by requiring the attorney to include a conspicuous-and awkward-statement in all its advertising stating that "We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code." No such requirements will apply to creditors' attorneys under the bill. In addition, requiring attorneys to label themselves as "debt relief agencies" will discourage general practitioners and bankruptcy professionals who have a consumer and business, debtor and creditor practice, from advertising the availability of bankruptcy services, thus limiting consumer bankruptcy representation to attorneys with narrower practices. For all of these reasons, the ABA believes that attorneys should be exempted from the coverage of the "debt relief agency" provisions contained in Sections 227-229.

The three general types of enhanced attorney liability provisions outlined above, when taken together, will have a massive negative impact on the availability of quality legal counsel in bankruptcy. As a result of these burdensome and one-sided mandates on debtors' attorneys, many lawyers who currently represent both debtors and creditors will stop handling debtor cases altogether rather than comply with these new regulations. With fewer attorneys available to represent debtors, many more debtors will be forced to file their bankruptcies pro se, without first obtaining adequate advice regarding the necessity or advisability of filing for bankruptcy. Therefore, the enhanced attorney liability provisions ultimately will have an adverse effect on debtors, creditors, and the bankruptcy system as a whole. To avoid these problems, the ABA urges you to support the proposed amendments to H.R. 333 that are attached to this letter.

Thank you for your consideration, and if you would like to discuss the ABA's views on these important bankruptcy issues in greater detail, please feel free to contact Larson Frisby, our legislative counsel for bankruptcy issues, at (202) 662-1098.

Sincerely,

Robert D. Evans
Director, Governmental Affairs Office
Encl.

cc: All House and Senate conferees on H.R. 333.

PROPOSED ABA AMENDMENTS TO H.R. 333
(as passed by the House on March 1, 2001)

Amendment regarding certification of bankruptcy petitions and schedules:
On page 13, lines 10-24 and page 14, lines 1-25, strike subsections (4)(A)-(D).
On page 15, line 1, strike "(5)(A)" and insert "(4)(A)".
On page 15, line 2, strike "(6)" and insert "(5)".
On page 16, line 9, strike "(6)" and insert "(5)".
On page 17, line 5, strike "(7)" and insert "(6)".
On page 163, lines 4-19, strike Sec. 319 and renumber all subsequent Sections in Title III accordingly.

Amendment regarding certification of reaffirmation agreements:
On page 55, line 12, strike "5(A)" and insert "5".
On page 55, lines 23-24 and page 56, lines 1-2, strike "(B) In the case of reaffirmations in which a presumption of undue hardship has been established, the certification shall state that in the opinion of the attorney, the debtor is able to make the payment."
On page 56, line 3, strike "(C) In the case of a reaffirmation agreement under subsection (m)(2), subparagraph (B) is not applicable."

Amendment regarding "debt relief agency" regulations:
On page 106, after line 11, insert ",other than an attorney or an employee of an attorney,"
On page 114, lines 4 and 5, strike "AN ATTORNEY OR" and insert "A"
On page 114, line 11, strike "AN ATTORNEY OR" and insert "A"
On page 114, lines 13 and 14, strike "ATTORNEY OR"

PROPOSED ABA AMENDMENTS TO H.R. 333
(as passed by the Senate on July 17, 2001)

Amendment regarding certification of bankruptcy petitions and schedules:
On page 14, lines 6-25 and page 15, lines 1-20, strike subsections (4)(A)-(D).
On page 15, line 21, strike "(5)(A)" and insert "(4)(A)".
On page 15, line 22, strike "(6)" and insert "(5)".
On page 17, line 3, strike "(6)" and insert "(5)".
On page 17, line 24, strike "(7)" and insert "(6)".
On page 171, lines 19-25 and page 172, lines 1-9, strike Sec. 319 and renumber all subsequent Sections in Title III accordingly.

Amendment regarding certification of reaffirmation agreements:
On page 57, line 12, strike "5(A)" and insert "5".
On page 57, lines 21-24, strike "(B) In the case of reaffirmations in which a presumption of undue hardship has been established, the certification shall state that in the opinion of the attorney, the debtor is able to make the payment."
On page 58, lines 1-2, strike "(C) In the case of a reaffirmation agreement under subsection (m)(2), subparagraph (B) is not applicable."

Amendment regarding "debt relief agency" regulations:
On page 108, after line 11, insert ",other than an attorney or an employee of an attorney,"
On page 116, lines 2 and 3, strike "AN ATTORNEY OR" and insert "A"
On page 116, line 8, strike "AN ATTORNEY OR" and insert "A"
On page 116, line 10, strike "ATTORNEY OR"

107th Congress Letters Home

AMERICAN BAR ASSOCIATION
Governmental Affairs Office
740 Fifteenth Street, NW
Washington, DC 20005
ph: 202-662-1760
fx: 202-662-1762

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