High court takes case involving bankruptcy advice

Tuesday, June 9, 2009

WASHINGTON — Bankruptcy lawyers may seem unlikely warriors in the fight for free speech. But their challenge to a federal law that restricts the advice they can give their clients will be heard by the Supreme Court this fall.

The high court yesterday agreed to hear a pair of cases raising the issue whether the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 muzzles lawyers in violation of the First Amendment. The cases are Milavetz, Gallop & Milavetz v. United States, and United States v. Milavetz, Gallop & Milavetz.

The cases, involving an Edina, Minn., law firm and some of its clients, represent one of many disputes over the meaning of the law, which prohibits “debt-relief agencies” from advising clients to incur more debt before filing for bankruptcy.

Since the law passed, bankruptcy lawyers have argued at the outset that they should not be considered as debt-relief agencies. But if they are, they assert the restriction on the advice they give violates the First Amendment. There are circumstances, they note, when advising clients to take on more debt in advance of bankruptcy is proper and in the best interests of their clients.

“The statute will have a chilling effect on attorneys,” wrote Alan Milavetz, one of the lawyers in the case, in a brief to the Court.

The 8th U.S. Circuit Court of Appeals gave the lawyers half of what they wanted. The panel said the language and legislative history of the law pointed to the intent of Congress to include lawyers in the definition of debt-relief agencies.

But on the First Amendment question, the appeals panel agreed with the lawyers that the restriction on advice they can give was “unconstitutionally overbroad.” The court said that conclusion could be reached under either a strict-scrutiny standard or the more-relaxed standard used in Gentile v. State Bar of Nevada that allows some restrictions on lawyers’ speech.

The Minnesota law firm is now challenging the part of the decision that classes lawyers as debt-relief agencies. U.S. Solicitor General Elena Kagan, in her classic role of defending federal laws, is challenging the part of the 8th Circuit ruling that struck down the advice restriction.

She argues that the statute should and can be interpreted narrowly only to prohibit advice from lawyers that would urge clients to abuse the bankruptcy system. Such a restriction would comport with lawyers’ ethics codes and would not pose a threat to free speech, she says.

Kagan's brief also notes that soon after the 8th Circuit ruled, the 5th U.S. Circuit Court of Appeals upheld the same provision despite a similar First Amendment challenge. An appeal in that case, Hersh v. United States, is also pending before the high court.

The cases granted review yesterday will be argued in the fall.