U.S. Supreme Court Agrees to Hear Challenge to Debt Relief Agency Provisions of BAPCPA

Posted on June 10, 2009. Filed under: Uncategorized |

The United States Supreme Court has granted certiorari in a case in which the Eighth Circuit interpreted the term “debt relief agency,” for purposes of an amendment to the Bankruptcy Code prohibiting a debt relief agency from advising a client to incur debt in contemplation of bankruptcy, as including attorneys, and then held that the amendment violates First Amendment free speech rights because it is unconstitutionally overbroad in prohibiting attorneys from advising debtors to engage in prudent pre-bankruptcy planning that is not an attempt to circumvent, abuse, or undermine the bankruptcy laws.

However, the Eighth Circuit’s decision upheld against a free speech challenge another amendment to the Code requiring debt relief agencies to disclose in their advertising to the general public their role in helping debtors file for bankruptcy relief.

The case began as a declaratory judgment action against the United States, brought by a law firm practicing bankruptcy law, two lawyers from the firm, and two clients of the law firm. The plaintiffs challenged the constitutionality of the advice restriction, 11 U.S.C.A. 526(a)(4), and the advertising disclosure requirements, 528(a)(4), (b)(2)(B), which were added to the Code as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).

As amended, the Code defines “debt relief agency” as “any person” who provides “any bankruptcy assistance” to an assisted person in return for the payment of money or other valuable consideration, or any person who is a bankruptcy petition preparer, 101(12A). The Code’s definition of “bankruptcy assistance” includes providing advice, counsel, or legal representation with respect to a bankruptcy proceeding, 101(4A).

The Code’s disclosure requirements for advertising by debt relief agencies include making the following statement or something substantially similar to it: “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.”

The district court granted summary judgment to the plaintiffs, declaring that the Code’s definition of “debt relief agency” excludes attorneys and that the advice restriction and advertising disclosure requirements are unconstitutional as applied to attorneys.

In its appeal to the Eighth Circuit, the Government asserted that the broadly worded definition of “debt relief agency,” by referring to “any person” who provides “any bankruptcy assistance,” plainly includes attorneys. The plaintiffs responded that attorneys are not debt relief agencies, pointing to the lack of a direct reference to attorneys in the definition of “debt relief agency” and the failure of the Code’s definition of “attorney” to make any reference to debt relief agencies. In contrast, the definition of “debt relief agency” specifically refers to bankruptcy petition preparers and the Code’s definition of “bankruptcy petition preparer” excludes attorneys, the plaintiffs argued, showing Congress’s intent to exclude attorneys from the definition of “debt relief agency.” The plaintiffs also cited the doctrine of constitutional avoidance, which favors construing statutes to avoid constitutional questions, as support for construing “debt relief agency” as excluding attorneys. That doctrine had been applied by the district court.

The Eighth Circuit, after observing that the definitional question was a matter of first impression in the courts of appeals and that the lower courts had not been unanimous, followed the majority view that attorneys are debt relief agencies. That view was supported by a plain reading of the definition of “debt relief agency” and of the defined terms that make up that definition, the Eighth Circuit said, and the doctrine of constitutional avoidance would not be applied to adopt an alternative interpretation that would be plainly contrary to the intent of Congress.

Turning to the free speech challenge to the advice restriction, the Eighth Circuit said it was unnecessary to decide whether the appropriate review standard was strict scrutiny or instead the more lenient balancing approach which the Supreme Court applied, in Gentile v. State Bar of Nevada, 501 U.S. 1030, 111 S.Ct. 2720, 115 L.Ed.2d 888 (1991), to the ethical regulation of attorneys, since under either standard the advice restriction is overly broad as applied to attorneys. The advice restriction prohibits an attorney from providing beneficial advice that could help a debtor avoid filing for bankruptcy, such as refinancing a home mortgage to lower the mortgage payments. An attorney is also unable to advise a debtor to purchase a reliable vehicle before filing for bankruptcy so that the debtor will have dependable transportation to travel to and from work, which will likely be necessary to maintain the debtor’s payments in bankruptcy. These types of debts, the Eighth Circuit stated, will often survive bankruptcy or can be reaffirmed by the debtor.

The case name is U.S. v. Milavetz, Gallop & Milavetz, P.A. 

-from Westlaw Bankruptcy Updates

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