Bankruptcy lawyer’s speech suit runs into Supreme obstacle

Friday, May 21, 2010

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An appeals court had good reason this week to reverse a ruling by a U.S. District judge in Connecticut that had invalidated part of a 2005 federal bankruptcy law on First Amendment grounds. Last March, the U.S. Supreme Court rejected similar arguments to the same provision.

In October 2005, Zenas Zelotes, a bankruptcy attorney in Norwich, Conn., filed a federal lawsuit challenging a provision of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) that prohibited debt-relief agencies, which include attorneys, from advising consumers to “incur more debt” before filing bankruptcy. U.S. District Judge Peter Dorsey ruled in 2007 that the measure was too broad and prohibited attorneys from “advising clients to take lawful, prudent actions as well as abusive ones.” He concluded that the provision violated the First Amendment.

While the Connecticut case was on appeal, the U.S. Supreme Court ruled on March 8 in a separate case from Minnesota that the same provision of BAPCPA did not violate the First Amendment. In Milavetz, Gallop & Milavetz, P.A. v. United States (2010), the Supreme Court interpreted the provision narrowly to prohibit attorneys “from advising an assisted person to incur more debt when the impelling reason for the advice is the anticipation of bankruptcy.”

In other words, the Court said that an attorney could give general advice about debt to a consumer but could not encourage clients to load up on debt before filing bankruptcy — an abusive practice under bankruptcy law.

In light of Milavetz, a three-judge panel of the 2nd U.S. Circuit Court of Appeals reversed Judge Dorsey’s decision and ruled against Zelotes. In its May 18 decision Adams v. Zelotes, the 2nd Circuit noted that the Supreme Court’s decision “directly foreclosed” Zelotes’ arguments and compelled a reversal of the district court decision.

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