In October 2005, Congress passed and President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Unfortunately, much of the law was poorly drafted leaving its various provisions open to multiple interpretations. Inevitably, bankruptcy attorneys filed legal challenges on many different fronts and the decisions by numerous bankruptcy judges and appellate courts have been all across the board.
Recently, the U.S. Supreme Court granted certiorari to determine the constitutionality of some of BAPCPA’s most controversial provisions. This fall, the Supreme Court will hear oral argument on two key provisions of the BAPCPA:
- Is a debtor’s attorney a “debt relief agency”?
- What disclosures are required to be given to a debtor by “debt relief agency”?
Is a debtor’s attorney a “debt relief agency”?
Under 11 USC §526, a debt relief agency is defined as “any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer.”
Bankruptcy attorneys argue that they should not be considered debt relief agencies, but if they are, then the requirements under the statute violate their First Amendment rights.
What disclosures are required to be given to a debtor by “debt relief agency”?
Under 11 USC §528, debt relief agencies must disclose the following in all of their advertising materials: “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code,” or a similar statement.
Again, attorneys argue that these requirements violate their First Amendment rights and amount to mandatory deceptive disclosures that confuse the public.
The Court will consider an 8th Circuit ruling that said a law firm representing debtors met the definition of debt relief agency, but that this provision of the law is unconstitutional. However the court said that law firms are still required to give the disclosures.
Alan Milavetz, a partner at the Minnesota firm of Milavetz, Gallop & Milavetz that was the plaintiff in the 8th Circuit case, said he plans to argue the case before the Court. “This case is really about what is so important about being a lawyer: that we are able to give our clients options and let them make their decisions within the boundaries of the law,” he said.
A decision from the Supreme Court can’t come soon enough for bankruptcy attorneys, who have experienced an increase in workload since the Act went into effect.
The questions involved in the case are “all the more important in these troubling economic times because our clients need lawful, accurate advice on financial matters in pre-bankruptcy litigation,” said Chad Schulze, a lawyer at the Milavetz firm who worked on the cert petition.
And the issues in the case go beyond bankruptcy practice, said Howard Marc Spector, a sole practitioner in Dallas who represented the plaintiff in similar case in the 5th Circuit. “It seems to me that all lawyers have to be very concerned about laws that prohibit them from giving legal advice to their clients,” he said.
Across the country, federal courts have reached different conclusions about the constitutionality of the Act.
Bankruptcy Courts and Appellate Courts are split as to whether bankruptcy attorneys are “debt relief agencies”
The 8th Circuit , U.S. District Courts in Connecticut , Minnesota , Oregon and Texas and a bankruptcy court in Virginia have all held that attorneys are debt relief agencies.
The 5th Circuit and bankruptcy courts in Florida and Georgia reached the opposite conclusion.
Every court that has found §526(a)(4) applicable to attorneys has held that the provision is unconstitutional. However, they have also held that the disclosure and advertising requirements do not impose an undue burden on attorneys.
In the 8th Circuit case, Milavetz, Gallop & Milavetz filed suit against the U.S. seeking a declaratory judgment that §526 and §528 were unconstitutional.
The 8th Circuit held that bankruptcy attorneys do fall within the Act’s definition of “debt relief agency,” noting that Congress had listed exclusions to the section’s application and that lawyers were not included.
It further held that §526(a)(4), which provides that “[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,” violated attorneys’ First Amendment rights.
Advising clients to take on more debt is commonplace, explained Marc Stern, a solo bankruptcy attorney in Seattle. “Telling a client it might be time to re-finance the mortgage, or to turn in the Cadillac and get a Hyundai, those are reasonable things to advise a client to do,” he said. “But the [Act] says that it is illegal for me to advise my clients to take on new debt.”
Ironically, such advice can sometimes prevent a client from filing bankruptcy, Stern noted.
Bankruptcy Courts and Appellate Courts are split as to “disclosure requirements”
The 8th Circuit went on to hold that the disclosure requirements of §§528(a)(4) and (b)(2) were constitutional.
“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. 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,’” the court said.
Barbara Nevin, a bankruptcy attorney at Milavetz, Gallop & Milavetz, said that her clients are “very confused” when she gives them the required disclosures. “Now I have people come in an extra half hour early just to go through the disclosures and help them understand what it means and why I have to give it to them,” she said.
Predictions?
Bankruptcy attorneys are refusing to predict the outcome of the case, but Henry Sommer, a Supervising Attorney at the pro bono Consumer Bankruptcy Assistance Project in Philadelphia and former president of the National Association of Consumer Bankruptcy Attorneys, said he will be watching how Justice Antonin Scalia interprets the statute.
“It will be interesting to see whether Justice Scalia follows the plain language of the law, which he supposedly adheres to, since the Justice Department is suggesting that the Court not look at the plain language and should read [§526] much more narrowly than the plain language provides,” said Sommer.
Spector said the justices will have to grapple with what level of First Amendment protection legal advice should receive.
Another issue that will be relevant to the Court’s analysis, said Stern, is a separation of powers problem. The law “invades the attorney-client relationship by limiting how you represent your clients and the advice you can give them, which puts the federal government in direct conflict with the state governments,” he said.
A decision from the Court is expected next term.
Source: LawyersUSAOnline.com
