Monday, March 08, 2010

Supreme Court Upholds Constitutionality of Debt Relief Agency Provisions

A unanimous Supreme Court has ruled that attorneys are "debt relief agencies" and that the provisions prohibiting debt relief agencies to advise debtors to incur debt in contemplation of bankruptcy and the mandatory disclosures required are constitutional. United States v. Milavetz, Gallop & Milavetz, P.A., No. 08-1119 (3/8/10). However, in doing so, the Court adopted a narrow reading of the speech restriction, finding that it did not apply to advice to incur debt for a permissible purpose.

Justice Sotomayor delivered the opinion for the Court. Justices Scalia and Thomas filed opinions concurring in part and concurring in the judgment.

Lawyers As Debt Relief Agencies

The Court had no trouble finding that attorneys were debt relief agencies. Justice Sotomayor wrote:

In advocating a narrower understanding of that term, Milavetz relies heavily on the fact that Sec. 101(12A) does not expressly include attorneys. That omission stands in contrast, it argues, to the provision's explicit inclusion of "bankruptcy petition preparer[s]"--a category of professionals that excludes attorneys and their staff, see Sec. 110(a)(1). But Milavetz does not contend, nor could it credibly, that only professionals expressly included in the definition are debt relief agencies. On that reading, no professional other than a bankruptcy petition preparer would qualify--an implausible reading given that the statute defines "debt relief agency" as "any person who provides any bankruptcy assistance to an assisted person . . . or who is a bankruptcy petition preparer."
Opinion of the Court, pp. 6-7.

This is no great surprise.

Advising Assisted Persons to Incur Debt In Contemplation of Bankruptcy

Having concluded that attorneys were debt relief agencies, the court turned its attention to whether the restrictions on debt relief agencies were constitutional. The first provision considered was Sec. 526(a)(4), which prohibits a debt relief agency from advising an assisted person to "incur more debt in contemplation of such person filing a case under this title."

The Supreme Court rejected the Eighth Circuit's conclusion that this was a broad restriction which precluded an attorney from advising a prospective debtor to incur any debt while contemplating bankruptcy regardless of whether it was in the debtor's best interest. Thus, the issue was whether the phrase "in contemplation of" meant "while considering whether to file bankruptcy" or something more narrow. The Court stated:

After reviewing these competing claims, we are persuaded that a narrower reading of Sec. 526(a)(4) is sounder, although we do not adopt precisely the view the Government advocates. The Government's sources show that the phrase "in contemplation of" bankruptcy has so commonly been associated with abusive conduct that it may readily be understood to prefigure abuse. As used in Sec. 526(a)(4), however, we think the phrase refers to a specific type of misconduct designed to manipulate the protections of the bankruptcy system. In light of our decision in Pender and in context of other sections of the Code, we conclude that Sec. 526(a)(4) prohibits a debt relief agency from advising a debtor to incur more debt because the debtor is filing for bankruptcy, rather than for a valid purpose.
Opinion of the Court, pp. 12-13.

The Court went on to on its narrow construction, stating, "In context, Sec. 526(a)(4) is best understood to provide an additional safeguard against the practice of loading up on debt prior to filing." The Court further explained:

Covered professionals remain free to tal[k] fully and candidly about the incurrence of debt in contemplation of filing a bankruptcy case. (citation omitted). Section 526(a)(4) requires professionals only to avoid instructing or encouraging assisted persons to take on more debt in that circumstance. . . . Even if the statute were not clear in this regard, we would reach the same conclusion about its scope because the inhibition of frank discussion serves no conceivable purpose within the statutory scheme.
Opinion of the Court, p. 16.

Having concluded that the statute had a narrow focus, the Court found that it was constitutional.

Mandatory Disclosures

Section 528 requires debt relief agencies to make certain statements, such as:

"We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code."

The Court found that this provision was aimed at preventing misleading commercial speech and thus was permissible so long as it was reasonably related to the government's interest in preventing deception of consumers. The Court addressed one of the most annoying aspects of the statute, the fact that attorneys must use the newly coined term "debt relief agencies."

Because Sec. 528 by its terms applies only to debt relief agencies, the disclosure are necessarily accurate to that extent: Only debt relief agencies must identify themselves as such in their advertisements. This statement provides interested observers with pertinent information about the adviser's services and client obligations.
Opinion of the Court, pp. 21-22.

In other words, because Congress defines consumer bankruptcy attorneys as "debt relief agencies," it is not misleading to make them state this fact. This analysis does not really address whether the term is demeaning or whether the reference to "agencies" is misleading. Perhaps the result would have been different if Congress had chosen a term which more obviously intended to insult. For example, if Congress had required consumer bankruptcy attorneys to state, "We are unethical, thieving sleazebags who you should be embarrassed to associate with," the result might be different. By choosing a relatively innocuous term, Congress was able to meet the low bar for being rationally related.

The Court also dismissed the argument that the statute could be construed to apply to firms which only represented creditors and thus would be misleading. The Court noted that it was in a section of the Code labeled "Debtor's Duties and Benefits."

In context, reading Sec. 528 to govern advertisements aimed at creditors would be as anomalous as the result of which Milavetz complains. Once again, we decline Milavez's invitation to adopt a view of the statute that is contrary to its plain meaning and would produce an absurd result.
Opinion of the Court, pp. 22-23.

The Concurrences

Justice Scalia wrote a three page concurring opinion expressing his disagreement with a footnote which relied upon the legislative history to BAPCPA. He stated:

Such statements tell us nothing about what the statute means, since (1) we do not know that the members of the Committee read the Report, (2) it is almost certain that they did not vote on the Report (that is not the practice), and (3) even if they did read and vote on it, they were not, after all, those who made this law. the statute before us is a la because its text was approved by a majority vote of the House and the Senate, and was signed by the President. Even indulging the extravagant assumption that Members of the House other than members of its Committee on the Judiciary read the report (and the further extravagant assumption that they agreed with it), the Members of the Senate could not possibly have read it, since it did not exist when the Senate passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. And the President surely had more important things to do.

The footnote's other source of legislative history is truly mystifying. For the proposed that "the legislative record elsewhere documents misconduct by attorneys" which was presumably the concern of Congress, the court cites a reproduction of a tasteless advertisement that was (1) an attachment to the written statement of a witness, (2) in a hearing held seven years prior to this statute's passage, (3) before a subcommittee of the House considering a different consumer bankruptcy reform bill that never passed. "Elsewhere" indeed.
Concurring Opinion of Justice Scalia, p. 2.

Justice Thomas wrote separately to disagree with the Court's analysis of the Sec. 528 advertising requirements, but not to disagree with the result. He stated, "I have never been persuaded that there is any basis in the First Amendment for the relaxed scrutiny this Court applies to laws that suppress nonmisleading commercial speech." He found that in order to regulate speech, there must be a showing that "the particular advertising is inherently likely to deceive or where the record indicates that a particular form of advertising has in fact been deceptive."

However, in this particular case, the specific advertisements used by the Milavetz firm were not in the record. Because there was at least one set of facts (ad promising to wipe away debts without mentioning bankruptcy) in which the law could be constitutionally applied, he refused to strike it down on its face.


BAPCPA has survived its first constitutional challenge. However, the Court's ruling emphasizes a narrow, reasonable construction, one which would avoid the theoretical parade of horribles which the statute could have unleashed. In the heady days of 2005 when this legislation was first passed, there was concern that it signaled open season on consumer bankruptcy and consumer bankruptcy lawyers. For a period of time, filings dropped to a record low. However, as time has passed, filings are on their way back up and lawyers have learned to live with the new law. As a result, the Supreme Court's upholding of the debt relief agency provisions reflects the fact that the statute has grown up to be more of a house cat than a devouring lion.

The other take away from this case is NEVER, EVER cite legislative history to Justice Scalia.


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