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Bankruptcy attorneys are “debt relief agencies” under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, and are therefore subject to its regulations, the U.S. Supreme Court has ruled.

The case involved two attorneys at a Minnesota small firm who filed suit in federal court challenging several provisions of the statute. They argued that lawyers were not meant to be included in the law’s definition of “debt relief agency.”

They also argued that the law’s prohibition against advising clients “to incur more debt in contemplation of such person filing” for bankruptcy, and its requirements that debt relief agencies make disclosures such as, “We are a debt relief agency. We help people file for bankruptcy under the Bankruptcy Code,” violated the Constitution.

The 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 and that the disclosure requirement was valid.

The court did hold 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 affirmed in part and reversed in part, holding that bankruptcy attorneys are debt relief agencies, and that the advice and disclosure provisions of the Act are not unconstitutional.

“By definition, ‘bankruptcy assistance’ includes several services commonly performed by attorneys,” stated the opinion by Justice Sonia Sotomayor. “Indeed, some forms of bankruptcy assistance, including the ‘provi[sion of] legal representation with respect to a case or proceeding’ may be provided only by attorneys.”

As for the client advice provision, the Court held that it “prohibits a debt relief agency only from advising a debtor to incur more debt because the debtor is filing for bankruptcy, rather than for a valid purpose,” and therefore is not unconstitutionally vague or overboard.

The justices also rejected the challenge to the disclosure requirement, noting that a law firm has “flexibility to tailor the disclosures to its individual circumstances, as long as the resulting statements are ‘substantially similar’ to the statutory examples.”

Justices Antonin Scalia and Clarence Thomas filed concurring opinions.

U.S. Supreme Court. Milavetz, Gallop & Milavetz, P. A. v. U.S., No. 08-1119.  March 8, 2010. Lawyers USA No. 993-1676.

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