US Supreme Court to Consider Bankruptcy Attorney and Legal Advice Rules

The U.S. Supreme Court will be considering a bankruptcy case that has wide implications for practicing bankruptcy attonreys.  The issue was summarized nicely by reporter Thomas Scheffey in the following article. 

Thomas B. Scheffey

The Connecticut Law Tribune

10-09-2009

Robert Milavetz, the founder of an 11-lawyer bankruptcy firm in the suburbs of Minneapolis, wasn't pleased when Congress started telling bankruptcy lawyers what they could and could not say to clients.

Specifically, he -- along with attorneys from Connecticut and elsewhere -- didn't like a 2005 law that seemed to forbid lawyers from advising bankruptcy clients to incur any more debt. Another part of the new law apparently required bankruptcy lawyers to include in their advertisements that "we are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code."

Milavetz made a federal case of it, seeking declaratory relief in a Minnesota federal court.

The U.S. government argued that Congress' orders were not a violation of the First Amendment right to free speech, or commercial free speech law.

The 8th U.S. Circuit Court of Appeals rendered a split decision, holding that the directive to not advise taking on debt was unconstitutional, but that the advertising requirement had a rational basis in a legitimate governmental purpose.

Both the government and Milavetz wanted to go to the U.S. Supreme Court and appeal the parts they lost. To handle the petition for certiorari, Milavetz sought out bankruptcy scholar D. Eric Brunstad, a partner in the Hartford, Conn., office of Dechert and a veteran of more than 40 U.S. Supreme Court cases, including 10 oral arguments.

Both the Justice Department and Brunstad beat steep odds and won their petitions for certiorari, and the combined cases have a total of six issues. Arguments are set for December.

For Brunstad, arguing a First Amendment case on lawyers' rights to advertise truthfully and to advise clients freely and honestly is a dream case.

"You know, when you go to law school, and you study constitutional law, the thing that always gripped me was the First Amendment," he said. "These noble and meaningful concepts about freedom of speech and expression and how we protect them."

Many of Brunstad's earlier Supreme Court arguments involved arcane and abstruse details of the Bankruptcy Code, far removed from the broad First Amendment questions of this case. He's unabashedly excited about this First Amendment assignment.

"[T]o actually be involved in one, and be writing about it and arguing about it, is just absolutely thrilling," he said. It's like arguing, he said, for "truth, justice and the American way."

ENCOURAGING DEBT?

Congress clearly didn't want people digging themselves into a deeper financial hole when it wrote that bankruptcy counselors must not encourage clients to incur additional debt.

In the petition by the Justice Department seeking certiorari, Solicitor General Elena Kagan said that both sides agree on the basic problem being addressed by the new code sections: "misleading lawyer advertising that touts debt relief without making it clear that a bankruptcy filing would be involved."

Kagan disputes the idea that the problem would be better handled by state law changes. "Bankruptcy is a subject of particular federal concern," the Justice Department argued. "Congress has the power to address attorney misconduct that specifically affects the bankruptcy area." It urged upholding the 8th Circuit conclusion that there was a reasonable relationship between Congress's remedy and the underlying problem.

So why is it necessary -- or a good idea in some cases -- to counsel a bankrupt client to take on new debt?

Brunstad explained: "Lawyers have to be able to give unfettered, candid advice to their clients. This sort of restriction is really overbroad. It prohibits things such as counseling debtors about incurring debt, or paying attorneys in a way that's entirely beneficial" to all involved.

He gives the example of a client whose circumstances make it advisable to sell a house and rent an apartment. Under the new code restriction, Brunstad said, "the lawyer can't advise [you to] sell your house and rent an apartment, because renting an apartment means incurring lease debt... . The statute sort of muzzles the lawyer from giving even that sort of helpful advice, that doesn't hurt anyone -- so that can't be right."

At the Edina, Minn., offices of Milavetz, Gallop & Milavetz, associate Chad W. Schulze, who worked on the Supreme Court brief with Brunstad, explained why his firm bridled at the idea of having to use Congress's disclosure language about it being a "debt relief agency."

"It deceives the public, and it's compelled speech. Our advertising is not supposed to be misleading, ethically," he said. If a bankruptcy shop primarily advises creditors, the mandated advertising tagline gives a mistaken impression, Schulze said.

So-called debt relief agencies are given some leeway to change the wording, but they might do so at their peril, he said. Congress has instituted fraud penalties under the Bankruptcy Code so that a practitioner can be liable for "abuse" of the code. If a rewrite of the advertising was considered abuse of the code, a lawyer could be liable for penalties that include all of a client's debts that were not discharged in bankruptcy, Schulze said.

Hartford lawyer Myles Alderman, of the bankruptcy firm Alderman & Alderman, said he was "deeply troubled by the restrictions of attorney-client speech," that Brunstad will be challenging at the Supreme Court.

"The idea that a bankruptcy law would prohibit bankruptcy lawyers from honestly advising their clients about what they can and cannot legally do is abhorrent to the attorney-client relationship," said Alderman, a member of the professional discipline committee of the Connecticut Bar Association. The ultimate losers, if lawyers can't offer advice they think is best, "are not the lawyers -- it's the clients themselves," he said.

Brunstad has worked to streamline what might otherwise be an unwieldy case. Technically, both the U.S. and the Milavetz firm are petitioners, because each side is appealing its losses at the 8th Circuit. To simplify matters, Brunstad and the Justice Department lawyers agreed that the Milavetz side would be considered petitioners, and only one round of briefs would be necessary.

Simplification is part of Brunstad's strategizing to win the ultimate argument, as well. He doesn't need the high court to rule that Congress was enacting unconstitutional law that flies in the face of the First Amendment. Instead, he's asking the court to use the doctrine of Constitutional Avoidance to keep the matter from becoming a First Amendment showdown.

As he put it: "Congress's definition of debt relief agency does not include attorney, expressly, and there are lot of reasons why it doesn't and it shouldn't. Where there's room for doubt, the court will apply the canon of constitutional avoidance and avoid the constitutional question if it possibly can, and I think that should apply here."

In addition, he said he likes the argument against forcing "compelled speech" in the advertising language. As for the provision against not advising a client to incur any debt, a First Amendment prohibition-of-speech argument is also compelling, Brunstad said. "Lawyers have to be able to give unfettered, candid advice to their clients," he noted.

And in the end, Brunstad will be arguing to nine lawyers -- almost preaching to the choir on the topic of lawyers having the freedom to advise their clients as they see fit.

Brunstad concluded: "It sounds a bit Orwellian to say let's muzzle all the lawyers."


Warmest Regards,

Bob Schaller


Your Bankruptcy Advisor Blog
By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm

Bob is a member of the National Bankruptcy College Attorney Network, American Bankruptcy Institute and the National Association of Consumer Bankruptcy Attorneys.

I encourage you to SUBSCRIBE to this blog by completing the box to the right of this post so you will automatically receive future blog postings. Next, you can review past and future blogs at any time by clicking the "archive" link in the column to the right of this posting. Plus, you are invited to submit a question by utilizing the "question" box in the column to the right of this posting.


For information about Chapter 7 bankruptcy Click Here

For information about Chapter 13 bankruptcy Click Here

You are invited to contact Attorney Schaller at 630-655-1233 or visit his website at http://www.schallerlawfirm.com/to learn about how the bankruptcy laws can help you.

NOTE: Robert Schaller looks forward to the opportunity to talk with you about your legal issues. But please remember that all information on this blog is for advertising and general informational purposes only. Please read Bob's disclaimer.

I recommend that you review a few other blogs that may be of interest to you. These blogs are identified in the right column and are set forth below: bankruptcy issues blog; bankruptcy and family law issues blog; bankruptcy and employment issues blog; and bankruptcy and student loan issues blog.