July 2010Volume 98Number 7Page 342

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Bankruptcy lawyers are “debt relief agencies,” high court rules

As such, they may not advise clients to incur additional debt and must label themselves "debt relief agencies" in ads.

In an opinion written by the U.S. Supreme Court's newest justice, Sonia Sotomayor, the court has held that attorneys who provide bankruptcy assistance to assisted persons are debt relief agencies under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The case is Milavetz, Gallop & Milavetz, PA v US, Nos 08-1119 and 08-1225, 130 S Ct 1324 (US Sup Ct).

The facts

BAPCPA was Congress's effort to discourage people from filing for bankruptcy and thereby to encourage them to pay their debts. It did so by making the prerequisites for filing more stringent.

As the court noted, BAPCPA also included a number of provisions directed at the conduct of bankruptcy professionals, many of whom fall into a broad class that the statute terms "debt relief agencies." The statute defines "debt relief agency" as "any person who provides any bankruptcy assistance to an assisted person in return for…payment…, or who is a bankruptcy petition preparer." 11 USC section 101(12A). Debt relief agencies in turn, must comply with several rules of professional conduct under section 526(a) and to include certain disclosures in their advertisements under section 528.

Among other things, debt relief agencies may not "advise an assisted person…to incur more debt in contemplation of such person filing a case under this title or to pay an attorney or bankruptcy petition preparer fee or charge for services performed as part of preparing for or representing a debtor in a case under this title." Section 526(a)(4).

Debt relief agencies must also "clearly and conspicuously disclose in any advertisement of bankruptcy assistance services or of the benefits of bankruptcy directed to the general public… that the services or benefits are with re spect to bankruptcy relief under this title." Section 528(a)(3). They must also include the following language, or a substantially similar statement, in any advertisement: "We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code." Section 528(a)(4).

Milavetz, Gallop & Milavetz is a law firm based in Minnesota. Together with two of its lawyers as individuals and two clients, it filed a suit for declara tory relief, requesting a holding that it is not bound by the statute's debt relief agency provisions and, therefore, that it may freely advise clients to incur additional debt and need not identify itself as a debt relief agency in its advertisements.

The district court found that sections 526 and 528 are unconstitutional as applied to lawyers and held that the term "debt relief agency" does not include lawyers. The Court of Appeals for the Eighth Circuit affirmed in part and reversed in part. Noting a conflict among circuits on whether and to what extent section 526(a)(4) applies to lawyers, the Supreme Court granted certiorari.

Advising clients to take on debt is "abusive per se"

Noting that "bankruptcy assistance" includes services that not only may, but must, be performed by attorneys, the court first found that the statutory term "debt relief agency" necessarily includes lawyers who represent consumer bankruptcy debtors. It proceeded to consider whether and to what extent section 526(a)(4) may restrict attorney-client communications.

Milavetz argued, as the court of appeals found, that the provision is impermissibly broad, prohibiting lawyers from providing even advice that might help the client avoid filing for bankruptcy. The court disagreed, emphasizing that the section was designed to eliminate manipulation and fraud.

"Advice to incur more debt because of bankruptcy, as prohibited by §526(a) (4), will generally consist of advice to 'load up' on debt with the expectation of obtaining its discharge-i.e., conduct that is abusive per se." Milavetz at 1336. It found "§526(a)(4) 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…. [It] requires professionals only to avoid instructing or encouraging assisted persons to take on more debt in that circumstance." Milavetz at 1337.

Turning to section 528, the court said its required disclosures were "intended to combat the problem of inherently misleading commercial advertisements - specifically, the promise of debt relief without any reference to the possibility of filing for bankruptcy, which has inherent costs." Milavetz at 1340. Noting that the statute required only accurate statements, that it did not prohibit debt relief agencies from including any additional information in their advertisements, and that its requirements were reasonably related to the government's interest in preventing consumer confusion, the court upheld its application to the law firm.

University of Illinois College of Law Professor Robert Lawless, who blogs at http://www.creditslips.org/creditslips/ and administers Bankr-L, an e-mail list on which bankruptcy professionals may exchange information, found the court's resolution of Milavetz unsurprising, given that it closely follows the position taken by the solicitor general's brief.

"What bothers lawyers most about the notices is the potential for liability for not including them," he says. "But many lawyers have actually used BAPCPA's 'Debt Relief Agency' label effectively in getting clients. Although the Milavetz court technically upheld section 526(a)(4), it construed the provision so narrowly that it is a victory for debtors' lawyers."

Helen W. Gunnarsson is an attorney and writer in Highland Park. She can be reached at <helengunnar@gmail.com>.

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