Justices reject First Amendment challenges to bankruptcy law

Monday, March 8, 2010

The U.S. Supreme Court unanimously interpreted provisions of the 2005 federal bankruptcy law to avoid First Amendment problems in Milavetz, Gallop & Milavetz v. United States today, ruling in favor of the government on both statutory and constitutional  issues.

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act in response to abuses in the bankruptcy system. While the law principally made it harder for individuals to qualify for Chapter 7 bankruptcy as opposed to Chapter 13 bankruptcy (there is a greater discharge of debts in Chapter 7 cases), other provisions affected the speech of “debt relief agencies,” which the government interpreted to apply to attorneys.

One provision of the law provided: “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.” Two other provisions provide in part that debt-relief agencies must include disclaimers in their advertisements: “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.”

Attorneys Robert Milavetz and Barbara Nevins of the firm Milavetz, Gallop & Milavetz and two bankruptcy clients of their law firm challenged these provisions on statutory and constitutional grounds.

Their statutory argument was that the term “debt relief agency” did not apply to attorneys. They also argued that even if it did apply to attorneys, the provision violated the First Amendment.

A federal district court held that the phrase “debt relief agencies” did not apply to attorneys and that the speech provisions violated the First Amendment. On appeal, a three-judge panel of the 8th U.S. Circuit Court of Appeals reversed that ruling on the statutory-interpretation question of whether the law applied to attorneys. The 8th Circuit held that the term on its face did include attorneys. But the panel also ruled that the provision prohibiting attorneys from speaking to clients about “incurring more debt” violated the First Amendment. The 8th Circuit upheld the disclosure requirements.

On appeal, the U.S. Supreme Court agreed with the 8th Circuit that the term “debt relief agencies” includes attorneys. Writing for the Court, Justice Sonia Sotomayor said that “the statutory text clearly indicates that attorneys are debt relief agencies when they provide qualifying services to assisted persons.”

Sotomayor also wrote that the “incur more debt” prohibition is not overly broad and applies only to advice that an attorney might give to a debtor to load up on debt before filing for bankruptcy — something considered an abusive practice. She wrote that the provision “prohibits a debt relief agency only from advising an assisted person to incur more debt when the impelling reason for the advice is the anticipation of bankruptcy.”

In a footnote, Sotomayor said the law would not apply in situations when an attorney and his or her bankruptcy client were merely aware of the possibility of bankruptcy. Instead, she said, the law “proscribes only advice to incur more debt that is principally motivated by that likelihood.”

Professionals specializing in bankruptcy “remain free to talk fully and candidly about the incurrence of debt in contemplation of filing a bankruptcy case,” Sotomayor wrote.

Milavetz had argued that the law would criminalize attorneys advising a client to refinance a mortgage before filing for bankruptcy. Sotomayor said such advice would not violate the law because the principal motivation for it was “the promise of enhanced financial prospects, rather than the anticipated filing” of bankruptcy.

Sotomayor and the Court also rejected the challenges to the provisions that require bankruptcy attorneys to include disclosures in their advertisements.

Milavetz had argued that the government-mandated disclosures amount to compelled commercial speech in violation of the First Amendment. The Court discounted that argument, finding the disclosures reasonably related to the state’s interest in preventing deception of consumers who might not realize the costs of filing for bankruptcy and that obtaining debt relief could cost considerable money.

Justices Antonin Scalia and Clarence Thomas wrote concurring opinions. Scalia quibbled with Sotomayor over legislative history, while Thomas questioned whether there should be greater judicial scrutiny of compelled disclaimers of commercial speech.

Alan Milavetz, one of the partners in the Milavetz firm and the son of named plaintiff Robert Milavetz, told the First Amendment Center Online: “I’m a little disappointed, but I think after stepping back that it looks like the decision ultimately reaches the result that we sought.

“From the standpoint of the practitioner and for members of the public, it is a victory because we want to give honest and appropriate advice to clients.” Milavetz said. “Ultimately, when we began we brought this case so we could give appropriate advice to our clients and, in effect, all consumers when it comes to taking on debt. The Supreme Court stated that professionals remain free to talk fully and candidly about incurring debt in contemplation of filing bankruptcy.”

Milavetz added: “I think the Court is saying that you can’t give advice to load up debt on the eve of filing for bankruptcy. The Court does say that there is no conceivable purpose within the statutory scheme to inhibit frank discussion.”

Attorney William H. Schorling, who filed an amicus brief on behalf of the Commercial Law League of American in support of Milavetz, said, “I think the Court so narrowed the provisions that it took much of the argument that they were unconstitutional away.

“The debt-relief agency advertising provisions are unfortunate because there is no way that consumer-debtors will understand them. These do nothing but confuse consumers,” Schorling added.

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