Volume 2, Number 1
|Table of Contents|
Attorney Liability and § 521: Dismissal for Failure to File Required Documents
[This is an excerpt from the forthcoming book, Cooper and Vance, Attorney Liability in Bankruptcy ( ABA forthcoming 2006.) In the interim, to find out more about attorney liability under BAPCPA 1 , you can purchase our latest article on attorney liability, Vance and Cooper, "Nine Traps and One Slap: Attorney Liability under BAPCPA," 79 Am. Bankr. L.J. 283 (2005) from the ABA at http://www.abanet.org/abapubs/books/5150411PDF ]
Among the many new Bankruptcy Code provisions regulating attorneys as “debt relief agencies” 2 is § 526(c)(2)(B), under which a debt relief agency shall be liable to an assisted person if the agency is found to have:
The biggest (but by no means the only) threat is that § 521 provides for automatic dismissal of a bankruptcy case where certain documents are not timely filed. Even where dismissal is not automatic, the risk of liability in this regard is high.
What does § 521 require?
Three general categories of documents are addressed by the relevant provisions of § 521:
A. The first category, general documents relating to the commencement of the case, is governed by §§ 521(a) and 521(i). Section 521(i) provides at paragraph (1):
The documents that are subject to § 521(i)(1)’s automatic dismissal are governed by § 521(a)(1) and include:
If any of these documents is not filed by the end of the 45 th day after the date the petition is filed, then the case is automatically dismissed on the 46 th day. Section 521 offers two express exceptions and two others that are suggested, but not clearly permitted.
Express Exceptions to Automatic Dismissal
First, on motion of the debtor the court can extend the time within which the debtor must comply by up to 45 days. The debtor’s motion for the extension must be filed before the 45-day period expires and the court must find “justification” for the extension. The statute is silent about whether the case is automatically dismissed if the debtor fails to file the various documents by the end of the extended period, but that is the presumed result.
Under the second exception, the trustee can ask the court to decline to dismiss the debtor’s case . The trustee’s motion must be filed before the end of the initial 45-day period or, if granted, the extension of that period. The section also says that the trustee can make the motion before the expiration of the five-day period after dismissal during which “any party in interest may request the court to enter an order dismissing the case.” Because this five-day period is confusing, it’s discussed in greater detail below.
The court can grant the trustee’s motion and decline to dismiss the debtor’s case if it finds that –
The second finding seems odd at first glance, but makes some sense in the context of all the documents required under § 521(a)(1). Evidence of payment from employers is the one filing requirement that is most out of the debtor’s control. For any number of reasons, the debtor may simply be unable to comply. But no good faith exception is provided for unless the trustee opposes dismissal of the case. Without a motion by the trustee, the debtor faces dismissal of his bankruptcy case despite even extraordinary efforts to acquire and file the required information. As a “debt relief agency” the attorney likely faces no liability for a dismissal under these circumstances because the failure to file must be intentional or negligent. The attorney’s ethical duty to the client, on the other hand, might require more, such as a challenge to the statute itself.
Two additional exceptions are implied under § 521. The first is the “unless the court orders otherwise” of § 521(a)(1)(B), which qualifies the debtor’s duty to file all the § 521(a) documents listed above except the list of creditors. This language pre-dates BAPCPA and could be interpreted as retaining with the court the discretion to order that a particular document need not be provided at all, such as where it is impossible for the debtor to comply. Another interpretation is that the “unless the court orders otherwise” language is now limited to orders granting the debtor’s request for additional time, or the trustee’s motion to not dismiss the case – the express exceptions found in amended § 521.
The second implied exception to automatic dismissal on day 46 comes from § 521(i)(2), which provides:
By itself, this language creates no exception, but provisions within § 521(i) treat paragraph (2) as if there were:
In other words, the plain language of paragraph (1) regarding automatic dismissal (“the case shall be automatically dismissed”) is in direct conflict with the “subject to” language of paragraph (1) and with paragraph (4)’s allowance for a motion by the trustee after day 46 but before the end of the five-day period after which a party requests that the court enter an order of dismissal. This could be interpreted to mean that the dismissal is not effective until and unless a party makes such a request and the order of dismissal is entered.
No attorney should rely upon the implication created by the poorly constructed language of paragraph (2), or the general “unless the court orders otherwise” language. However, either could prove useful for an attorney facing liability or, as mentioned above, any ethical obligation the attorney has to her client to challenge a statute that puts a debtor into a situation where compliance is impossible.
B. The second category is pre-petition tax documents. These are governed by § 521(e)(2), which requires the debtor to provide a copy of the most recent federal income tax return (or, at the election of the debtor, a transcript of that return) to the trustee and any creditor that requests a copy of the return or transcript. 5 The time for compliance is at least seven days prior to the first date set for the § 341 meeting of creditors.
If the debtor fails to provide the return as required, then “the court shall dismiss the case unless the debtor demonstrates that the failure to so comply is due to circumstances beyond the control of the debtor.”
Dismissal in this regard does not appear to be automatic. Section 521(e)(2) makes no explicit reference to an automatic dismissal, as § 521(i) does (which itself is somewhat ambiguous) and, because of the “unless” clause – under which the debtor may seek to be excused for the compliance failure – the statute seems to contemplate some form of notice and hearing.
C. The third category pertains to post-petition tax documents. The debtor’s duty is outlined in new § 521(j):
Of the various dismissals triggered by a failure to file documents under § 521, the duty with respect to post-petition tax returns is the most straightforward. Section 521(j) creates no new obligations; rather, it imposes an additional penalty for the failure to file tax returns.
Notice also that § 521(j) does not require the filing of any particular document with the court. Although some may argue ambiguity, it appears clear that “file” in paragraph (1) refers to the annual ritual of filing with the IRS. In addition, § 521(j) is not automatic and the attorney will have 90 from the date the IRS requests that the debtor’s case be dismissed or converted to insist on her client’s compliance with his duties under the tax code.Attorney Liability for Dismissal or Conversion
How does this affect the attorney who fits the definition of a “debt relief agency” (as opposed to the hapless client whose case is dismissed or converted)?
Because of new § 526(c)(2)(B), liability to the client is mandatory so long as it is shown that:
Because § 526(c)(2)(B) requires that the attorney act intentionally or negligently in order to be liable, diligent attention to the § 521 filing requirements is in the best interest of not only the debtor, but the attorney as well. The best way to avoid liability is to implement strict procedures for internal processing and filing of the required documents and an effective calendar system to ensure timely compliance. 6
Our book, Attorney Liability in Bankruptcy (Cooper and Vance, ABA forthcoming 2006) will provide checklists and other helpful information to assist attorneys not just with respect to § 521 compliance, but with liability that could arise under BAPCPA generally.
1 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23.
2 “Debt relief agency” is defined at 11 U.S.C. § 101(12A) and incorporates the terms “assisted person,” defined at § 101(3) and “bankruptcy assistance,” defined at § 101(4A).
3 Section 707(a): The court may dismiss a case under this chapter only after notice and a hearing and only for cause, including –
4 The § 342(b) notice requirement is broader than set forth here, addressing petition preparers and pro se filers.
5 The duty to creditors is stated twice in new § 521(e)(2): once in § 521(e)(2)(A)(ii) and again in § 521(e)(2)(C). The first qualifies the creditor’s request with “timely,” but the second does not.
6 Attorneys must also keep in mind that if the debtor refiles within a year, the automatic stay is restricted because the debtor is treated as a serial filer. Blaming the attorney for the prior case’s dismissal is one of the few ways the debtor can convince the court to lift the restrictions and give the automatic stay full effect. See Vance and Cooper, Nine Traps and One Slap: Attorney Liability under the New Bankruptcy Law, 79 Am. Bankr. L.J. 283, 323-25 (2005). This article is available from the ABA at http://www.abanet.org/abapubs/books/5150411PDF.