March 08, 2010

Supreme Court Decides Milavetz, Gallop & Milavetz, P.A. v. United States

On March 8, the Supreme Court decided Milavetz, Gallop & Milavetz, P.A. v. United States, No. 08-1119, holding that lawyers who provide "bankruptcy assistance" as defined in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) are "debt relief agencies" subject to the BAPCPA's regulations and prohibitions.

The BAPCPA regulates the conduct of "debt relief agenc[ies]," a term that includes "any person who provides any bankruptcy assistance" to individuals whose debts are primarily consumer debts, in return for payment. The BAPCPA prohibits debt relief agencies from advising their clients to incur more debt in contemplation of filing a bankruptcy case. It also requires agencies to identify themselves as such in advertisements and to state that their services relate to bankruptcy relief.

A Minneapolis law firm sought a declaratory judgment that it was not subject to the BAPCPA, either because the statute did not apply to lawyers or because its application to them would be unconstitutional. The district court held both that the statute was unconstitutional as applied to lawyers and that the term "debt relief agency" did not include lawyers. The U.S. Court of Appeals for the Eighth Circuit affirmed in part, holding that the statutory language did extend to lawyers and that the disclosure requirements were constitutional, but that the prohibition on advising clients to incur additional debt was unconstitutional because it restricted lawyers' speech that the government had no substantial interest in restricting.

The Supreme Court affirmed in part and reversed in part. It agreed with the court of appeals that lawyers who provide services of the type identified in the BAPCPA are "debt relief agencies." The statutory definition of "debt relief agency" include services that lawyers typically provide—indeed, some can be provided only by lawyers—and it gives no indication that Congress intended to exclude lawyers from the broad definition.

The Court disagreed, however, with the court of appeals' constitutional analysis. It construed the BAPCPA narrowly as prohibiting only advice that a client incur more debt because the client intends to file for bankruptcy protection. The "controlling question," the Court found, is whether the "impelling reason" for advising the client to incur more debt is the prospect of a bankruptcy filing. The Court stressed that a lawyer remains free to "talk fully and candidly about the incurrence of debt in contemplation of filing a bankruptcy case," and is prohibited only from instructing or encouraging a client to take on more debt because the debt can be avoided in bankruptcy. Given this construction, the statutory prohibition is not so vague as to violate the First Amendment.

Finally, the Court held that the BAPCPA may constitutionally require law firms to identify themselves as a "debt relief agencies" and their services as potentially involving bankruptcy. Restrictions on commercial speech are constitutional if they directly advance a substantial governmental interest, and Congress's interest in preventing commercial speech that is potentially misleading is substantial. The disclosures "entail only an accurate statement identifying the advertiser's legal status and the character of the assistance provided," and they do not prevent debt relief agencies from conveying any additional information.

Justice Sotomayor delivered the opinion of the Court, in which Chief Justice Roberts and Justices Stevens, Kennedy, Breyer, and Alito joined and in which Justices Scalia and Thomas joined in part. Justices Scalia and Thomas each filed a separate opinion concurring in the judgment.

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