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Supreme Court to rule on Bankruptcy Act

Bankruptcy attorneys are keeping a close eye on a case that could have broad ramifications for their First Amendment rights when counseling their clients.

In October 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act became law. Almost immediately, bankruptcy attorneys filed legal challenges.

Now, the U.S. Supreme Court has granted certiorari to determine the constitutionality of some of the Act’s most controversial provisions.

This fall, the justices will hear oral argument on two key provisions:

  • Who qualifies as a “debt relief agency”?

    Under §526 of the statute, a debt relief agency is defined as “any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer.”

    Attorneys argue that they should not be considered debt relief agencies, but if they are, then the requirements under the statute violate their First Amendment rights.

  • What are the required disclosures?

    Under §528 of the Act, debt relief agencies must disclose the following in all of their advertising materials: “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code,” or a similar statement.

    Again, attorneys argue that these requirements violate their First Amendment rights and amount to mandatory deceptive disclosures that confuse the public.

    The court will consider an 8th Circuit ruling that said a law firm representing debtors met the definition of debt relief agency, but that this provision of the law was unconstitutional. However the court said that law firms are still required to give the disclosures.

    Alan Milavetz, a partner at the Minnesota firm of Milavetz, Gallop & Milavetz that was the plaintiff in the 8th Circuit case, said he plans to argue the case before the Supreme Court.

    “This case is really about what is so important about being a lawyer: that we are able to give our clients options and let them make their decisions within the boundaries of the law,” he said.

    Several Wisconsin attorneys said the law essentially “gags attorneys” and does not allow them to counsel clients about legitimate legal options.

    “If it makes sense to tell them to incur debt — which they’re going to repay by the way — then why not do it?” said Paul G. Swanson of Steinhilber, Swanson, Mares, Marone & McDermott in Oshkosh. “We can’t advise them to incur debt?”

    According to Todd Esser, of Todd C. Esser & Associates in Milwaukee, this is a significant First Amendment issue that raises questions for all attorneys when counseling clients. The issue concerns the entire bar, not just bankruptcy attorneys, he said.

    “Can the Legislature, through the law, tell attorneys that they cannot advise their clients about something?” Esser asked. “To me, that’s the bigger constitutional issue and that’s probably why the Supreme Court took it up.”

Courts Are Split

Across the country, federal courts have reached different conclusions about the constitutionality of the Act.

  • Debt relief agencies

    The 8th Circuit, U.S. District Courts in Connecticut, Minnesota, Oregon and Texas and a bankruptcy court in Virginia have all held that attorneys are debt relief agencies.

    The 5th Circuit and bankruptcy courts in Florida and Georgia have reached the opposite conclusion.

    Every court that has found §526(a)(4) applicable to attorneys has held that the provision is unconstitutional. However, they have also held that the disclosure and advertising requirements do not impose an undue burden on attorneys.

    In the 8th Circuit case, Milavetz, Gallop & Milavetz filed suit against the U.S. seeking a declaratory judgment that §526 and §528 were unconstitutional.

    The 8th Circuit held that bankruptcy attorneys do fall within the Act’s definition of “debt relief agency,” noting that Congress had listed exclusions to the section’s application and that lawyers were not included.

    It further held that §526(a)(4), which provides that “[a] debt relief agency shall not … advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title,” violated attorneys’ First Amendment rights.

    Advising clients to take on more debt is commonplace, explained Marc Stern, a solo bankruptcy attorney in Seattle.

    “Telling a client it might be time to re-finance the mortgage, or to turn in the Cadillac and get a Hyundai, those are reasonable things to advise a client to do,” he said. “But the [Act] says that it is illegal for me to advise my clients to take on new debt.”

    Ironically, such advice can sometimes prevent a client from filing bankruptcy, Stern noted.

  • Disclosure requirements

    The 8th Circuit went on to hold that the disclosure requirements of §§528(a)(4) and (b)(2) were constitutional.

    “Section 528 requires debt relief agencies to disclose: ‘“We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.” or a substantially similar statement,’ in all of their bankruptcy-related advertising materials directed to the general public. The requirement does not prevent those attorneys meeting the definition of debt relief agencies ‘from conveying information to the public; it … only require[s] them to provide somewhat more information than they might otherwise be inclined to present,’” the court said.

    Barbara Nevin, a bankruptcy practitioner at Milavetz, Gallop & Milavetz, said that her clients are “very confused” when she gives them the required disclosures.

    “Now I have people come in an extra half hour early just to go through the disclosures and help them understand what it means and why I have to give it to them,” she said. Swanson characterized the disclosures as intended to create a stigma associated with the process.

    “It’s mean spirited,” he said. “It was done for the sole purpose of trying to discourage people from practicing bankruptcy.”

Predictions?

Bankruptcy attorneys are refusing to predict the outcome of the case, but Henry Sommer, a Philadelphia attorney and president of the National Association of Consumer Bankruptcy Attorneys, said he will be watching how Justice Antonin Scalia interprets the statute.

“It will be interesting to see whether Justice Scalia follows the plain language of the law, which he supposedly adheres to, since the Justice Department is suggesting that the Court not look at the plain language and should read [§526] much more narrowly than the plain language provides,” said Sommer.

Howard Marc Spector, a sole practitioner in Dallas, said the justices will have to grapple with what level of First Amendment protection legal advice should receive.

“Is [legal advice] up there with political speech, or is it more like ciga
rette ads?” he asked.

Another issue that will be relevant to the Court’s analysis, said Stern, is a separation of powers problem.

The law “invade[s] the attorney-client relationship [by limiting] how you represent your clients and the advice you can give them, which puts the federal government in direct conflict with the state governments,” he said.

“It restrains speech,” Swanson said. “I hope the Supreme Court sees it the same way.” A decision from the Court is expected next term.

4 comments

  1. Christopher Missick

    We have seen the SCOTUS’ strict constructionist justices use bankruptcy cases in the past to advance federalist principles. I am hoping that a ruling on this case will be in line with recent rulings, and we’ll see a 5-4 decision, or better, in favor of attorney freedom of speech, and our right to counsel clients on what is truly best in their individual situation.

  2. You just know the court will do the wrong thing. When Obama forced GM into bankruptcy, was he acting as a “debt relief agency?”

  3. Hi
    Awesome post.thanks for sharing that useful and creative info.i really appreciate your effort.you will be find some more useful info related to bankruptcy atbluecapitallaw.com

  4. I agree with Schwartz – the rulings are not always about whats morally right or even constitutionally right.

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