Wednesday, May 19, 2010

FYI: 2nd Cir Applies Milavetz, Holds Bankruptcy Code s. 536(a)(4) is Constitutional

The United States Court of Appeals for the Second Circuit recently confirmed that Bankruptcy Code provision 11 U.S.C. § 526(a)(4) is not unconstitutionally overbroad in violation of the First Amendment, overturning a contrary lower court decision.  A copy of the opinion is attached.


Section 536(a)(4) prohibits a debt counselor from advising a client to incur more debt in contemplation of bankruptcy.  After the district court found § 526(a)(4) unconstitutional, the Supreme Court interpreted the section in Milavetz, Gallop & Milavetz, P.A. v. U.S..  The Appellate Court's ruling in this case was largely based on the Supreme Court's decision in Milavetz.


In Milavetz, the Supreme Court determined that § 526(a)(4) should not be read as prohibiting "any discussion of the advantages, disadvantages, or legality of incurring more debt."  Rather, the Supreme Court interpreted the section more narrowly to only prohibit, "a specific type of misconduct designed to manipulate the protections of the bankruptcy system." 


Specifically, the Supreme Court determined that § 526(a)(4) exists to prevent debt counselors from advising clients to load up on debt with the intent of having that debt discharged in bankruptcy.  The Court found that the statute leaves bankruptcy advisors "free to talk about the incurrence of debt, so long as they are not affirmatively advising a client to commit this type of abusive prefiling conduct."  Therefore, in light of the Supreme Court's decision in Milavetz, the Appellate Court determined that § 526(a)(4) was not unconstitutionally overbroad and remanded the case to the district court.

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
Direct:  (312) 551-9320 

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