Supreme Court Agrees to Hear Challenge to Bankruptcy Code Restrictions on Pre-Bankruptcy Planning Advice by Attorneys

07/09/2009 / L. Kathleen Harrell-Latham

On June 8, 2009, the United States Supreme Court granted the petitions for writ of certiorari of the Eighth Circuit Court of Appeals decision in Milavetz, Gallop & Milavetz, P.A., et. al. v United States of America that interpreted the potential application of the speech restrictions to attorneys that are imposed upon debt relief agencies by the Bankruptcy Abuse Prevention and Consumer Protection Act and the constitutionality of these restrictions (“BAPCPA restrictions”).

Facts of the Case
The plaintiffs in this case are a law firm, the law firm’s president, a bankruptcy attorney, and two clients who sought bankruptcy advice from the firm seeking a declaratory judgment against the United States that the BAPCPA restrictions imposed upon a debt relief agency did not apply to attorneys and are unconstitutional as applied to an attorney. The United States argued that the broad definition of a debt relief agency inherently included attorneys and that the BAPCPA restrictions should be narrowly interpreted to prevent an attorney from advising clients to incur additional debt only when it is done with intent to manipulate, abuse, or otherwise take unfair advantage of the bankruptcy system.

Lower Court Rulings
The District Court for the District of Minnesota granted summary judgment for the plaintiffs. On April 19, 2007, the District Court issued an Order declaring that attorneys in the District of Minnesota were excluded from the BAPCPA definition of a “debt relief agency” and the challenged provisions were unconstitutional as applied to attorneys in the District of Minnesota.

On appeal, the Eighth Circuit Court adopted the position of the United States and concluded that attorneys are “debt relief agencies” as defined by BAPCPA. However, the Eighth Circuit proceeded to conclude that the prohibition to advise a client to incur additional debt in contemplation of bankruptcy was unconstitutional under the overbreadth standard. Finally, the Eighth Circuit held that the BAPCPA restrictions compelling certain disclosures by a debt relief agency were constitutional to the extent “similar statements” were possible and that future challenges could be made on a case-by-case basis.

Judge Colloton dissented with the Eighth Circuit’s decision on the limited issue of the constitutionality of the prohibition of advice to incur additional debt in contemplation of bankruptcy. The Dissent relied upon the proffered narrow interpretation of the United States that inferred a requirement of a showing of intent to hinder or abuse the bankruptcy process before such speech could be deemed violative of the BAPCPA restrictions.

Both the Plaintiffs and the United States writs of certiorari were granted by the Supreme Court. The issues slated to be heard by the Supreme Court are: (1) whether attorneys fall within the definition of debt relief agencies; (2) whether application of the prohibition of debt relief agencies to advise clients to incur additional debt unconstitutionally restrains free speech when applied to attorneys; (3) whether the BAPCPA restriction precluding such advice is to be narrowly applied to attorneys only when there is an intent to abuse the bankruptcy system; and (4) whether the disclosure requirement when narrowly construed violates the Fifth Amendment..

What This Case Could Mean For Our Clients?
The Court’s ruling on this issue could have a sweeping impact in how an attorney may participate in a client’s pre-bankruptcy planning. As the Eighth Circuit pointed out in Milavetz, there are a number of instances when incurring additional debt is in the best interests of a client considering bankruptcy.

At the same time, there is a breadth of authority across the country reflecting a wide spectrum of complex and technical rulings as to whether an attorney is a debt relief agency and when the restrictions are unconstitutional was applied to attorneys.

Navigating the issues of exemptions and the potential litigation claims in bankruptcy is complex in this evolving field and requires the specialized knowledge of a bankruptcy attorney. In the context of the other stringent standards governing pre-bankruptcy activities, a failure to proceed without the requisite understanding of the law may give rise to litigation claims against the debtor and possibly even the debtor’s attorney. Thus, this issue is important not only to people contemplating bankruptcy but also to those entities holding claims against someone who may be considering bankruptcy.

Larkin Hoffman will be continuing to watch this seminal case in the bankruptcy field as this term of the Supreme Court progresses. The attorneys in Larkin Hoffman’s Bankruptcy Practice Group have substantial experience in complex bankruptcy issues and are able to assist with any questions about this case or any other bankruptcy or insolvency questions that you may have.