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WASHINGTON – The U.S. Supreme Court is considering a case that could clarify the limits on what bankruptcy attorneys can advertise and what advice they can give their clients.

The case, Milavetz, Gallop & Milavetz v. U.S., began when two attorneys at a small firm in Edina, Minn., filed suit in federal court challenging several provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

They contended that attorneys should not be included in the definition of “debt relief agency.” Further, they claimed that the Act’s provision barring such agencies from advising a client “to incur more debt in contemplation of such person filing” for bankruptcy violated the First Amendment.

Finally, they argued that portions of the Act requiring certain disclosures in advertising were an unconstitutionally overbroad limitation of commercial speech. Those disclosures include statements such as: “We are a debt relief agency. We help people file for bankruptcy under the Bankruptcy Code.”

The government defended the law’s application to lawyers by arguing that the plain language and the legislative history show that attorneys were meant to be covered. The government also argued that the prohibition against advising bankruptcy filers to incur more debt was designed to stop the unethical and illegal manipulation of the bankruptcy system, and that the disclosure requirements were tailored narrowly enough to withstand constitutional scrutiny.

A U.S. District Court ruled in favor of the attorneys on all claims, but the 8th Circuit reversed in part, holding that attorneys are “debt relief agencies” under the statute.

However, the 8th Circuit also found that the “incur more debt” provision of the law violated the First Amendment because it could prevent lawyers from giving clients perfectly legal advice in some situations.

Both the plaintiffs and the government appealed the ruling to the Supreme Court, which granted certiorari.

The Court’s ruling could have implications beyond its effect on bankruptcy attorneys. The question of whether lawyers fall within the provisions of the law could bear on the American Bar Association’s suit against the Federal Trade Commission challenging the application of the agency’s “Red Flags” rules to attorneys.

The ABA won the suit on summary judgment in October, but the FTC could appeal. In the meantime it has delayed the enforcement of the “Red Flags” regulations until June 2010.

‘Stupid law’?

At oral arguments Tuesday, G. Eric Brunstad, a partner in the Hartford office of Dechert LLP, argued on behalf of the Milavetz plaintiffs that that statute was not meant to apply to attorneys or interfere with the advice attorneys can give their clients.

“There is no evidence in the legislative history or otherwise that Congress intended [the Act] to apply to lawyers,” Brunstad said.

But Justice Stephen Breyer said the plain language of the statute presented a problem for the plaintiffs, because it states that it applies to those “appearing in a case or proceeding on behalf of another or providing legal representation with respect to a case or proceeding under this title.”

“Doesn’t that mean lawyers?” Breyer asked.

On the First Amendment issue, Justice Sonia Sotomayor asked if there was a constitutional problem with prohibiting only illegal or unethical advice, as the government contents the law does.

“Why would the First Amendment protect your right to give unethical advice?” Sotomayor asked.

“The First Amendment doesn’t protect unethical advice,” Brunstad replied. “The problem is that the terms [are] so inherently vague” that they shouldn’t pass constitutional scrutiny.

Brunstad explained that, under the law, an attorney would be barred from advising a client preparing to file for bankruptcy to sell his house and rent an apartment to cut expenses.

“The signing of the lease would be incurring more debt,” he explained.

“That’s not unconstitutional,” interjected Justice Antonin Scalia. “It may be a stupid law, but I don’t see how it’s unconstitutional.  …Where is the prohibition of stupid laws in the Constitution?”

William M. Jay, assistant to the solicitor general, argued on the government’s behalf that the law was designed to prevent fraudulent conduct before bankruptcy filings, including those involving attorneys.

But Chief Justice John G. Roberts, Jr. wondered if that interpretation hamstrings attorneys.

“A lawyer trying to give correct legal advise has to pause [and] think, ‘Am I violating [the law],’” Roberts said.

Jay said the law does not bar permissible advice. It only prevents lawyers from aiding clients’ attempts to spend assets that otherwise would go to a creditor in bankruptcy.

“It prevents fraud [and] the fraud turns on the defrauder’s intent,” Jay said.

Scalia jumped in to help Jay out with his argument, pointing out that the Constitution doesn’t protect speech advising someone to break the law.

“But the point is you don’t know” if it breaks the law, Roberts said. “You yourself said it depends on the client’s intent” whether certain advice would be deemed improper under the law.

A decision from the Court is expected later this term.

Questions or comments can be directed to the writer at: kimberly.atkins@lawyersusaonline.com

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