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May lawyers in tne 8th recommend clients incur debt prior to filing bk?

Attorneys Satisfy Definition of "Debt Relief Agency"

Attorneys who provide bankruptcy assistance to assisted persons are unambiguously included within the Bankruptcy Code's definition of "debt relief agency," the Eighth Circuit Court of Appeals has ruled as an issue of first impression at the circuit level. Accordingly, such attorneys are subject to those sections of the Code governing restrictions on debt relief agencies, mandating that debt relief agencies provide certain disclosures, and setting forth other requirements for debt relief agencies, including advertising disclosure requirements.

A law firm that practiced bankruptcy law, the firm's president, a bankruptcy attorney practicing with the firm, and two of the firm's clients who sought bankruptcy advice brought a declaratory judgment action against the United States, seeking a declaration that certain provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which amended the Bankruptcy Code, did not apply to attorneys and law firms and were unconstitutional as applied to attorneys. The challenged provisions, 11 U.S.C.A. §§ 526(a)(4), 528(a)(4), and 528(B)(2), pertained to debt relief agencies. Section 526(a)(4) bars a debt relief agency from advising a client "to incur more debt in contemplation" of a bankruptcy filing. The other two provisions, §§ 528(a)(4) and (B)(2), require a debt relief agency to include in its bankruptcy-related advertisements a disclosure directed to the general public, declaring "'We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code[,]' or a substantially similar statement."

The district court granted summary judgment for the plaintiffs. Its order declared that attorneys in the District of Minnesota were excluded from the definition of "debt relief agency," as defined by the BAPCPA, and the challenged provisions were unconstitutional as applied to attorneys in the District of Minnesota. The United States appealed.

The Court of Appeals turned first to the question of whether the Code's definition of "debt relief agency" applied to attorneys, since a resolution of that issue in the plaintiffs' favor would obviate the need to consider the constitutional questions. Under 11 U.S.C.A. § 101(12A), "debt relief agency" is defined generally to mean "any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer under section 110." The statute also provides a number of exclusions. These apply to persons who are officers, directors, employees, or agents of a person who provides the defined assistance or of a bankruptcy petition preparer; certain non-profit organizations; creditors of assisted persons, when assisting the restructuring of debt owed to the creditor by the assisted persons; qualifying depository institutions and federal and state credit unions, and their affiliates or subsidiaries; and qualifying copyright holders. "Bankruptcy assistance" is defined, under § 101(4A), to mean "any goods or services sold or otherwise provided to an assisted person with the express or implied purpose of providing information, advice, counsel, document preparation, or filing, or attendance at a creditors' meeting or appearing in a case or proceeding on behalf of another or providing legal representation with respect to a case or proceeding under this title." The term "assisted person," finally, is defined in § 101(3) to mean "any person whose debts consist primarily of consumer debts and the value of whose nonexempt property is less than $164,250."

In arguing that attorneys were not "debt relief agencies," the plaintiffs relied on the absence of a direct reference to attorneys in the term's definition, in contrast to the inclusion of bankruptcy petition preparers, noting that the definition of that term, in 11 U.S.C.A. § 110(a)(1), excludes debtor's attorneys and their staff. The plaintiffs also urged the court to use the doctrine of constitutional avoidance to interpret "debt relief agency" to exclude attorneys, thereby avoiding the issue of whether the challenged provisions were constitutional. The government, on the other hand, contended that the broad definition of "debt relief agency" plainly included attorneys, and noted that providing legal representation was included in the definition of "bankruptcy assistance."

The Eighth Circuit acknowledged that despite the apparent plain language of the definition of "debt relief agency," lower courts had split on the issue. A majority had, however, ruled that compensated bankruptcy attorneys were debt relief agencies under the Code's definition. In the case at bar, the district court had applied the doctrine of constitutional avoidance to conclude that attorneys were not debt relief agencies. Under this doctrine, a court is to construe a statute to avoid constitutional problems, when an otherwise acceptable construction would raise serious constitutional problems, unless such a construction is plainly contrary to congressional intent. "Thus," the Eight Circuit summarized, "if interpreting 'debt relief agency' to include attorneys 'would raise serious constitutional problems,' then we should look for another interpretation 'that may fairly be ascribed' to the definition that does not raise these concerns." The Court of Appeals emphasized, however, that it would not adopt an interpretation 'plainly contrary to the intent of Congress.'"

Looking to the plain language of the definition of "debt relief agency" and the associated terms, the Court of Appeals concluded that attorneys providing "bankruptcy assistance" to "assisted persons" are unambiguously included in that definition. The statutory language was broad, clearly applying to legal services that were provided by attorneys to debtors in bankruptcy, and none of the five exclusions set forth in the statute covered attorneys. Moreover, a statute expressly indicating that provisions covering debt relief agencies were not intended to limit or curtail the authority of the states and federal courts to determine and enforce qualifications for the practice of law in their respective arenas was unnecessary if attorneys did not fall within the definition of "debt relief agency." The legislative history, the court noted further, likewise indicated that attorneys fell within the definition.

The Court of Appeals was thus faced with the question of the constitutionality of the challenged provisions regulating debt relief agencies. It first considered § 526(a)(4), which precludes a debt relief agency from advising an assisted or prospective assisted person to incur more debt in contemplation of filing for bankruptcy protection. The plaintiffs argued that this provision violated the First Amendment. The parties disputed the appropriate level of scrutiny to be applied in analyzing the statute's constitutionality, but the Court of Appeals concluded that the provision was unconstitutionally overbroad, as applied to attorneys who provided bankruptcy assistance to assisted persons, regardless of whether strict scrutiny or a lower standard applied. The Court of Appeals explained that the broad statutory language did not support the government's argument that the statutory prohibition should be read merely to prevent attorneys from recommending the taking on of additional debt in contemplation of bankruptcy when incurring debt is done with the intent to manipulate the bankruptcy system, engage in abusive conduct, or take unfair advantage of the bankruptcy discharge; the statute barred advising assisted persons, or prospective assisted persons, to incur any additional debt when contemplating bankruptcy. The statute, the court concluded, was not narrowly tailored, nor narrowly and necessarily limited, to restrict only that speech which the government had an interest in restricting, and instead would operate to prohibit "advice constituting prudent prebankruptcy planning that is not an attempt to circumvent, abuse, or undermine the bankruptcy laws. Section 526(a)(4), as written, prevents attorneys from fulfilling their duty to clients to give them appropriate and beneficial advice not otherwise prohibited by the Bankruptcy Code or other applicable law."

The Court of Appeals identified several situations in which it could be in the best interest of an assisted person, and even creditors, for the assisted person to incur additional debt in contemplation of bankruptcy, including refinancing a mortgage and buying a reliable automobile for work transportation purposes. Such advice, the court noted, could even help an assisted person avoid bankruptcy altogether. The statute as written, however, foreclosed advice along these lines.

In challenging the constitutionality of §§ 528(a)(4) and (B)(2), the plaintiffs claimed the advertising disclosure requirements violated the First Amendment by compelling speech by bankruptcy attorneys. The Court of Appeals reasoned that, by requiring debt relief agencies, including attorneys falling within that term, to make the mandated disclosure in their advertising, the statute compelled speech protected by the First Amendment. Contrary to the district court, however, it concluded that rational basis review applied, rather than the intermediate scrutiny standard used to review restrictions on non-deceptive advertising, explaining that the disclosure requirements were intended to avoid potentially deceptive advertising. Under this standard, the Eighth Circuit found that debt relief agencies had only a minimal protected interest in not providing, in their advertisements of bankruptcy assistance services directed to the general public, the factual information that their services were in fact related to bankruptcy and that they assisted people in filing for bankruptcy. The disclosure requirements were, furthermore, reasonably and rationally related to the government's interest in preventing the deception of consumer debtors. "[T]he disclosure requirements," the court said, "are directed precisely at the problem targeted by Congress: ensuring that persons who advertise bankruptcy-related services to the general public make clear that their services do in fact involve filing for bankruptcy."

The Court of Appeals noted, moreover, that attorneys satisfying the definition of "debt relief agency" were not prevented by the disclosure requirements from conveying information to the public; instead, they were being required to present more information than they otherwise might have. Attorneys also were not precluded from identifying themselves in their advertisements as both attorneys and debt relief agencies, if they were concerned about confusing the public. "Simply put, attorneys that provide bankruptcy assistance to assisted persons are debt relief agencies under the Code, and the disclosure requirements of § 528 only require those attorneys to disclose factually correct statements on their advertising," said the Court of Appeals. "This does not violate the First Amendment."

Thus, the Court of Appeals ruled, attorneys who provide bankruptcy assistance to assisted persons are debt relief agencies under the Code.Section 526(a)(4), prohibiting advice advocating the incurrence of additional debt by persons contemplating bankruptcy, is unconstitutional as applied to such attorneys, but §§ 528(a)(4) and (B)(2), mandating advertising disclosures by attorneys, are constitutional. A dissenting circuit judge would also have found § 526(a)(4) constitutional. Milavetz, Gallop & Milavetz, P.A. v. U.S. , 2008 WL 4068448 (C.A.8-Minn.).

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  • 2 weeks later...

Yes. Milavetz was attacking three different issues and was successful on only one point. Basically, the court felt that the purpose of the statute was to prevent abuse and not all credit obtained prior to bankruptcy would be abuse. Thus, 526(a)(4) is unconstitutional as written. Attorneys can therefore advise clients to take on debt if it suits them.

This is being tested in other circuits as well. My guess is that Milavetz is STRONGLY persuasive authority.

This decision made big waves within the BK community.

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