Wednesday, March 10, 2010

Milavetz: bankruptcy lawyers can give practical advice without running afoul of statute




Back in June I discussed the Milavetz case which challenged the 2005 Bankruptcy Reform Act amendments:



11 U.S.C. 526 (a) (4) forbids advising someone to take on more debt in contemplation of bankruptcy. But that could bar advice to a client to prudently buy a reliable car - to get to work, or to refinance a mortgage at a lower rate to pay off credit card debt. Such considerations led the 8th Circuit to find a constitutional violation, citing Erwin Chemerinsky, Constitutional Issues Posed in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 79 Am. Bankr. L.J. 571, 579 (Summer 2005).



The United States Supreme Court has now  decided the Milavetz case, which presented this question:
(1) Do provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act regulating attorneys’ advice to clients and mandating certain advertisement disclosures violate the First Amendment? Milavetz, Gallop & Milavetz, P.A., et al. v. United States, 541 F.3d 785 (8th Cir. 2008)
 I am pleased to report that the decision is pretty close to my prediction, which was 
1) NO.  11 U.S.C. 526 (a) (4) prohibits only pre-filing borrowing that is intended to defraud creditors, not, for example, refinancing a loan in order to reduce interest rates on debt preparatory to filing a plan of reorganization under Chapters 13 or 11. 


As Renee Knake observed at Legal Ethics Forum, the key passage in Justice Sotomayor's majority opinion is:

After reviewing these competing claims, we are persuaded that a narrower reading … 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. …[W]e think the phrase refers to a specific type of misconduct designed to manipulate the protections of the bankruptcy system … [and] conclude that [it] prohibits [an attorney] only from advising a debtor to incur more debt because the debtor is filing for bankruptcy, rather than for a valid purpose..

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