Are Lawyers “Debt Relief Agencies”?

By Anna Christensen
on Nov 27, 2009 at 5:20 pm

Below, Stanford Law School’s Keisha Stanford previews Milavetz, Gallop & Milavetz, P.A. v. United States and United States v. Milavetz, Gallop, & Milavetz, P.A, consolidated cases which will be heard by the Supreme Court on Tuesday, December 1.  Check the Milavetz v. United States and United States v. Milavetz (08-1119 and 08-1225) SCOTUSwiki page for additional updates.

On Tuesday, four years after Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the Supreme Court will consider whether certain provisions of the Act apply to one group with whom the Court is very familiar: attorneys.  Milavetz, Gallop & Milavetz, P.A. v. United States and United States v. Milavetz, Gallop, & Milavetz, P.A. pose the questions of whether attorneys are “debt relief agencies” as defined by Act, and, if so, whether the challenged sections of the Act are unconstitutional.

Background:

The petitioners in No. 08-1119 (who are also the respondents in No. 08-1225) are a law firm, two of the firm’s attorneys, and two prospective clients (collectively, “Milavetz”).  They filed a suit against the United States seeking a declaratory judgment that attorneys are not required to comply with several provisions of the BAPCPA, including Section 526(a)(4) – which precludes a “debt relief agency” (DRA) from advising a debtor to incur more debt in contemplation of bankruptcy – and Section 528, which imposes various advertising disclosure requirements on DRAs.  Alternatively, Milavetz contended, if these provisions do apply to attorneys, they are unconstitutional under the First Amendment.

The district court agreed with each of Milavetz’s contentions and granted summary judgment in their favor.  On appeal, the Eighth Circuit affirmed in part and reversed in part.  The court unanimously held that, because they were not specifically excluded from the definition of DRAs, attorneys that provide “bankruptcy assistance” are DRAs for purposes of the Code.  Moreover, the court agreed with the United States that Section 528’s advertising disclosure requirements are not unconstitutional because they only required attorneys to “disclose factually correct statements on their advertising,” which does not violate the First Amendment.  However, the court further held, over a dissent by Judge Colloton, that Section 526(a)(4) is unconstitutionally overbroad as applied to these attorneys and under any level of scrutiny.  .

The court of appeals denied the Government’s petition for rehearing en banc.  Both sides filed petitions for certiorari.

Petitions for Certiorari:

No. 08-1125: In its petition, the Government argued that certiorari was warranted to resolve the conflict between the Eighth and Fifth Circuits regarding whether Section 526(a)(4) precludes – as Milavetz contends – attorneys from ever advising a client to incur any debt when that client is on the brink of bankruptcy, or whether it instead only prohibits attorneys from advising clients to incur more debt with a purpose to abuse the bankruptcy system.  The Government also emphasizes the importance of Section 526(a)(4), which it characterizes as providing both a uniform nationwide rule regarding attorneys’ unethical advice and a set of additional remedies for debtors.

No. 08-1119: Milavetz’s petition urged the Court to grant certiorari to resolve the conflict regarding whether attorneys are “DRAs.”  If they are, Milavetz continued, then Section 528’s disclosure requirements interfere with state regulation of attorney conduct and burden attorney commercial speech guaranteed by the First Amendment.  In this vein, Milavetz argued, the requirements do not withstand intermediate scrutiny because they are not supported by a substantial government interest and are not narrowly drawn.

On June 8, 2009, the Court granted certiorari in both cases, which it then consolidated for briefing and oral argument.

In its brief on the merits, Milavetz argues that attorneys are not “DRAs” within the meaning of the statutes.  It asserts that the phrase “DRA” does not unambiguously include attorney, and that treating attorneys as DRAs would lead to absurd results.  Moreover, it explains, as a general rule Congress expressly indicates when it intends to include attorneys within the scope of a particular statute, and the doctrine of constitutional avoidance counsels against including attorneys within the definition of DRAs.  If, however, “DRA” does include attorneys, Section 526(a)(4) is facially overbroad because it proscribes a substantial amount of protected speech and constitutes an invalid content-based restriction.  As applied to attorneys, Section 528’s disclosure requirements also violate the First Amendment.  The requirements fail the intermediate scrutiny test because petitioners’ advertisements are protected, non-misleading commercial speech, the Government has failed to demonstrate a substantial interest in regulating such truthful advertising, and the regulation is not narrowly drawn.  And even if the more relaxed standard of Gentile v. State Bar of Nevada (1991) applies to this case, the disclosure requirements are still unconstitutional because they are not “reasonably related to the State’s interest in preventing deception of consumers” and impose an undue burden.

In its brief on the merits, the Government counters that attorneys unambiguously fall within the definition of “DRA” because none of the enumerated exceptions to the definition of “DRA” include attorneys, and only attorneys can perform certain services that constitute “bankruptcy assistance.”  The Government also urges the Court to rely on the doctrine of constitutional avoidance in construing the phrase “DRA”:  specifically, it contends, the statute’s requirement that a DRA not advise a debtor to incur new debt “in contemplation of bankruptcy” should be read to incorporate an intent to abuse the bankruptcy laws – a reading that it characterizes as being supported by the statute’s structure, legislative history, and remedial focus.  The Government also disputes Milavetz’s argument that Section 528’s disclosure requirements should be subject to intermediate scrutiny.  Instead, it argues, the First Amendment interests implicated by disclosure requirements are substantially weaker than in other contexts, and Section 528 passes constitutional muster because it is reasonably and rationally related to the important government interest in preventing the deception of consumer debtors.