U.S. Supreme Court

Supreme Court Rules 2005 Law Applies to Lawyer Bankruptcy Advice

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Updated: The U.S. Supreme Court has ruled that lawyers qualify as debt-relief agencies under a 2005 law that bars such agencies from advising clients to “incur more debt” in contemplation of bankruptcy.

Justice Sonia Sotomayor wrote for the majority, SCOTUSblog reports. Her opinion (PDF) reads the law narrowly, saying the statute bars lawyers and other debt relief agencies from advising a debtor to incur more debt “because the debtor is filing for bankruptcy, rather than for a valid purpose.”

“It would make scant sense to prevent attorneys and other debt relief agencies from advising individuals thinking of filing for bankruptcy about options that would be beneficial to both those individuals and their creditors,” Sotomayor wrote.

Narrowly construed, the statute is not so vague as to violate the First Amendment, Sotomayor wrote.

The 8th U.S. Circuit Court of Appeals had read the law more broadly and ruled it violated the free speech rights of lawyers. The St. Louis-based court said the law could restrict lawyers from advising a debtor to buy a car to get to work or to refinance a mortgage at a lower rate.

The ABA had filed an amicus brief in the case, Milavetz, Gallop & Milavetz v. United States, arguing that applying the bankruptcy law provision to lawyers would restrict their ability to provide appropriate advice to clients and risk subjecting privileged communications to discovery. (The brief is available here.)

ABA President Carolyn Lamm said the court took seriously ABA warnings about the dangers involved in undermining the confidential attorney-client relationship.

“The court went to great pains to point out several times that the decision allows lawyers to speak candidly with their clients about the incurrence of debt, and that the law only prohibits professionals from improperly instructing or encouraging clients to load up on debt in bad faith prior to filing bankruptcy,” Lamm said in a statement released Thursday (PNG).

She noted that that the high court cited ABA Model Rule of Professional Conduct 1.2(d), which bars an attorney from counseling a client to engage in criminal or fraudulent conduct, as instructive with respect to the limits of permitted advice.

The Supreme Court also upheld disclosure provisions of the law, including a requirement that debt-relief agencies make a disclosure in their ads along the lines of, “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.”

All of the justices joined in the judgment. Justice Antonin Scalia noted his exception to a footnote citing legislative history, including a House Judiciary Committee report that Scalia doubted had been read by any lawmakers other than the committee members. Justice Clarence Thomas wrote separately to say he disagreed with the relaxed scrutiny standard used by the court to review the disclosure requirements.

Prior coverage:

ABAJournal.com: “Scalia in Lawyer Free Speech Case: Constitution Doesn’t Ban Stupid Laws”

ABA Journal: “A Debt-Defying Act”

ABAJournal.com: “ABA Brief Says Lawyer Advice Shouldn’t Be Restricted by Bankruptcy Law”

ABAJournal.com: “Supreme Court to Consider Bankruptcy Law Restriction on Legal Advice”

ABAJournal.com: “8th Circuit: Bankruptcy Provision Violates Lawyer Free Speech Rights”

Last updated on 3/11/10 to add Lamm’s statement.

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