Wednesday, March 24, 2010

FYI: Supreme Court Says BK Attorneys Are "Debt Relief Agencies" Under BAPCPA

The United States Supreme Court recently held that: 1) attorneys who provide bankruptcy assistance to assisted persons are "debt relief agenc[ies]" under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"); 2) Section 526(a)(4) of the BAPCPA, which prohibits a debt relief agency from, among other things, advising an assisted person to incur more debt in contemplation of filing for bankruptcy, should be narrowly read; and 3) the disclosure provisions of Section 528 of the BAPCPA are valid as applied to the plaintiffs in this case.  A copy of the opinion is attached. 

Plaintiffs, a bankruptcy firm, a bankruptcy attorney and two of the bankruptcy firm's clients (collectively, "Milavetz"), filed a preenforcement suit in the district court seeking declaratory relief with respect to the BAPCPA's debt-relief-agency provisions.  More specifically, Milavetz asked the court to hold that it is not a "debt relief agency" as that term is defined in the BAPCPA, and therefore is not bound by a number of restrictions and requirements that apply to debt relief agencies under the BAPCPA, such as the advice (§ 526(a)(4)) and disclosure (§ 528) requirements of the BAPCPA.  In the alternative, Milavetz sought a judgment that the advice and disclosure requirements under the BAPCPA are unconstitutional as applied to attorneys.

The district court found that "debt relief agency" does not include attorneys and that §§ 526 and 528 are unconstitutional as applied to attorneys. The Eighth Circuit rejected the district court's conclusion that attorneys are not "debt relief agenc[ies]"; upheld application of § 528's disclosure requirements to attorneys; and found § 526(a)(4) unconstitutional because it broadly prohibits debt relief agencies from advising assisted persons to incur any additional debt in contemplation of bankruptcy.  The Supreme Court granted certiorari in light of a split among the Courts of Appeal as to § 526(a)(4)'s scope, and also agreed to consider the other threshold issues.

The Supreme Court agreed with the Eighth Circuit's holdings that attorneys are debt relief agenices when they provide qualifying services and accordingly that § 528's disclosure requirements apply to attorneys, but reversed its judgment that the advice provision in § 526(a)(4) is unconstitutionally overbroad.  Justice Sotomayor delivered the opinion of the Court, joined by Justices Roberts, Stevens, Kennedy, Ginsburg, Breyer and Alito and Justices Thomas and Scalia filed opinions concurring in part and concurring in the judgment.

As to whether the term "debt relief agency" includes attorneys, the Court found that "the statutory text clearly indicates that attorneys are debt relief agencies when they provide qualifying services to assisted persons," noting that a debt relief agency is "any person who provides any bankruptcy assistance to an assisted person" in return for payment, and by definition, "bankruptcy assistance" includes several services commonly performed by attorneys, such as providing legal representation with respect to a case or proceeding.  The Court also pointed to the fact that, while Congress did enumerate specific exceptions to the definition of debt relief agency, it gave no indication that it intended to exclude attorneys.  The Court rejected all of Milavetz's arguments that the term "debt relief agency" should be read to exclude attorneys, including his reliance on the fact that the definition of the term "debt relief agency" does not expressly include attorneys and his claim that reading "debt relief agency" as defined in the BAPCPA to include attorneys impermissibly impedes on an area of traditional state regulation.

In addressing the scope and validity of § 526(a)(4), which prohibits a debt relief agency from, among other things, advising an assisted person to incur more debt in contemplation of filing for bankruptcy, the Court rejected Milavetz's broad reading of the provision, noting that Milavetz's interpretation rested primarily on the incorrect view that the ordinary meaning of the phrase "in contemplation of" bankruptcy encompasses any advice given to a debtor with the awareness that he might soon file for bankruptcy, even if the advice seeks to eliminate the need to file.  Alternatively, the Government advocated a narrower construction of the statute, which rested on reading the phrase "in contemplation of" to forbid only advice to undertake actions to abuse the bankruptcy system. 
Ultimately, the Court held that the phrase "in contemplation of" refers to a specific type of misconduct, concluding that the section "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," such that the prohibition primarily targets advising a client to "load up" on debt in anticipation of bankruptcy, with the expectation of obtaining its discharge.  Under this reading of the provision, the Court looked to specific situations and noted in a footnote that "advice to refinance a mortgage or purchase a reliable car prior to filing because doing so will reduce the debtor's interest rates or improve his ability to repay is not prohibited, as the promise of enhanced financial prospects, rather than the anticipated filing, is the impelling cause" and "[a]dvice to incur additional debt to buy groceries, pay medical bills, or make other certain other purchases is also permissible"

Finally, the Court addressed the validity of § 528's challenged disclosure requirements, which requires debt relief agencies to identify themselves as such and to disclose in their advertisements for certain services that the services are with respect to or may involve bankruptcy relief.  Noting that the challenged provision regulates only commercial speech, the Court identified the standard for reviewing such requirements is intermediate scrutiny, meaning that "they must directly advance a substantial governmental interest and be no more extensive than is necessary to serve that interest."  Relying on this standard, the Court found that the disclosure requirements in § 528 both a) directly advance a substantial government interest - specifically, the deception of consumers with promise of debt relief without any reference to the possibility of filing for bankruptcy and b) are no more extensive than necessary to serve that interest given that the requirements only require a debt relief agency to give an accurate statement of the advertiser's legal status and the character of assistance provided, and do not prevent debt relief agencies from conveying any additional information.
Let me know if you have any questions.  Thanks.


Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
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