Bankruptcy

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Eighth Circuit Says Bankruptcy Lawyers Can Advise Clients To Run Up Pre-Bankruptcy Debt

By Scott Riddle (all)

In  Milavetz, Gallop & Milavetz, P.A. v. U.S.,  --- F.3d ----, 2008 WL 4068448 (8th Cir. September 4, 2008) (click here for .pdf), the Eighth Circuit struck down the part of the Bankruptcy Code that prohibits lawyers from telling their clients they cannot incur more debt before filing a petition.

The code section at issue is 11 U.S.C. § 526(a)(4), which provides as follows:

(a) A debt relief agency shall not–
. . .
(4) advise an assisted person or prospective 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.
 

The Court held this as prohibiting free speech under the U.S. Constitution -

Nonetheless, § 526(a)(4), as written, does not allow attorneys falling within the definition of debt relief agencies to advise assisted persons (or prospective assisted persons)—i.e. clients (or prospective clients) meeting the definition of assisted person—to incur such debt. Thus, § 526(a)(4) is not narrowly tailored nor narrowly and necessarily limited to prevent only that speech which the government has an interest in restricting. Therefore, we hold that §526(a)(4) is substantially overbroad, and unconstitutional as applied to attorneys who provide bankruptcy assistance to assisted persons, as those terms are defined in the Code.

The Court, however, did hold that bankruptcy attorneys are "debt relief agencies" under the Code and had to disclose it.

Because attorneys were not specifically excluded from the definition of debt relief agencies, we hold that attorneys that provide "bankruptcy assistance" to "assisted persons" are "debt relief agencies" as that term is defined by the Code. Interpreting the definition of "debt relief agency" to exclude bankruptcy attorneys would be contrary to Congress's intent. ...

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. 11 U.S.C. §§ 528(a)(4), (b)(2). 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." Zauderer, 471 U.S. at 650. Moreover, if any of these attorneys are concerned that the required disclosures will confuse the public, we note that nothing in the Code prevents them from identifying themselves in their advertisements as both attorneys and debt relief agencies. Olsen, 350 B.R. at 920. Simply put, attorneys that provide bankruptcy assistance to assisted persons are debt relief agencies under the Code, and the disclosure requirements of § 528 only require those attorneys to disclose factually correct statements on their advertising.12 This does not violate the First Amendment. ...

The challenged sections of § 528 only require debt relief agencies to include a disclosure on certain advertisements. Although less intrusive means may be conceivable to prevent deceptive advertising, § 528's disclosure requirements are reasonably related to the government's interest in protecting consumer debtors from deceptive advertising, and thus the section passes constitutional muster.

See the Wall Street Journal Law Blog and Wall Street Journal article for further discussion.

Full post as published by Georgia Bankruptcy Blog on September 05, 2008 (boomark / email).