Milavetz, Gallop & Milavetz v. United States (08-1119); United States v. Milavetz, Gallop & Milavetz (08-1225)

Oral argument: Dec. 1, 2009

Appealed from: United States Court of Appeals for the Eighth Circuit (Sept. 4, 2008)

BANKRUPTCY, FIRST AMENDMENT, FREEDOM OF SPEECH, DUE PROCESS

This case concerns the application and constitutionality of three Bankruptcy Code provisions applicable to debt relief agencies: 11 U.S.C. §§ 526(a), 528(a)(4), and 528(b)(2)(B). Minnesota law firm Milavetz, Gallop & Milavetz, P.A. claims exemption from the provisions, arguing that an attorney is not a “debt relief agency.” Furthermore, it claims that 11 U.S.C. § 526(a), which prevents a “debt relief agency” from counseling a client to incur additional debt in contemplation of bankruptcy, is an unconstitutionally overbroad restriction of free speech. Finally, Milavetz argues that 11 U.S.C. §§ 528(a)(4) and 528(b)(2)(B), which require a “debt relief agency” to make certain disclosures in their advertisements, violate the First Amendment. The United States argues that the statutes apply to attorneys and that they are reasonable and specific restrictions on speech. This case’s outcome will potentially affect bankruptcy laws, disclosure laws, and the legal advice that a lawyer may provide a client. 

  1. [Question(s) presented]  
  2. [Issue(s)]
  3. [Facts]
  4. [Discussion]
  5. [Analysis] 

Questions presented

Milavetz, Gallop & Milavetz v. United States  

1. Whether the appellate court's interpretation of attorneys as "debt relief agencies" is contrary to the plain meaning of 11 U.S.C. § 101(12A).

2. Whether 11 U.S.C. § 528, which as applied to attorneys, restrains commercial speech by requiring mandatory deceptive disclosures in their advertisements, violates the First Amendment free speech guarantee of the United States Constitution.

3. Whether 11 U.S.C. § 528, requiring deceptive disclosures in advertisements for consumers and attorneys, violates Fifth Amendment Due Process.

United States v. Milavetz, Gallop & Milavetz  

1. Whether Section 526(a)(4) precludes only advice to incur more debt with a purpose to abuse the bankruptcy system. 

2. Whether Section 526(a)(4), construed with due regard for the principle of constitutional avoidance, violates the First Amendment.

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Issues

Whether attorneys are considered “debt relief agencies” under 11 U.S.C. § 101(12A), and if so, whether the requirements of 11 U.S.C. §§ 526 and 528 violate the First Amendment of the United States Constitution. 

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Facts

On April 20, 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). See Milavetz, Gallop & Milavetz, P.A. v. United States, 541 F.3d 785, 788 (8th Cir. 2008). The BAPCPA amended the Bankruptcy Code in three important ways. See id. First, it added a new term to the Code: “debt relief agency.” See 11 U.S.C. § 101(12A). Second, it restricted a “debt relief agency” from advising clients to take on more debt in contemplation of a bankruptcy filing. See 11 U.S.C. § 526(a)(4). Third, it required a “debt relief agency” to place a disclosure on its bankruptcy-related advertisements identical or substantially similar to the following: “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.” See 11 U.S.C. §§ 528(a)(4), 528(b)(2)(B).

Milavetz, Gallop & Milavetz, P.A. is a Minnesota law firm that practices bankruptcy law. See Milavetz v. United States, 541 F.3d at 788. The firm, its president, and two of its clients filed a suit against the United States in the District Court for the District of Minnesota, seeking a declaratory judgment that 11 U.S.C. §§ 526(a), 528(a)(4), and 528(b)(2)(B) do not apply to attorneys or law firms and are unconstitutional if applied thereto. See id. The district court ruled in favor of Milavetz, finding that attorneys in the District of Minnesota are excluded from the phrase “debt relief agency” and that §§ 526(a)(4), 528(a)(4), and 528(b)(2) are unconstitutional as applied to attorneys in the District of Minnesota. See id.  

The Court of Appeals for the Eighth Circuit affirmed in part and reversed in part. See Milavetz v. United States, 541 F.3d  at 797. The court of appeals held that attorneys who provide bankruptcy assistance to assisted persons are “debt relief agencies” under the Bankruptcy Code and, thus, subject to §§ 528(a)(4) and 528(b)(2). See id. at 792. Additionally, the court of appeals held that § 526(a)(4) is unconstitutional as applied to these attorneys, but that §§ 528(a)(4) and 528(b)(2) are constitutional.  See id. at 797. In ruling that § 526(a)(4) is unconstitutional, the court of appeals reasoned that § 526(a)(4) is neither narrowly tailored nor necessarily limited to prevent only the speech that the government has an interest in restricting. See id. at 794. It found § 526(a)(4)’s prohibition of “advising an assisted person to incur any additional debt when the assisted person is contemplating bankruptcy” to be overly broad, because it encompasses situations in which an assisted person would lack any intent to “manipulate the bankruptcy system . . . or take unfair advantage of the bankruptcy discharge.” See id. at 793. In ruling that §§ 528(a)(4) and 528(b)(2) are constitutional, the court reasoned that their disclosure requirements are reasonably and rationally related to the government’s interest in preventing the deception of consumer debtors. See id. at 797. 

Both parties petitioned the Supreme Court for writ of certiorari. The Court granted both writs on June 8, 2009 and consolidated the cases. See Docket No. 08-1119; Docket No. 08-1225.

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Discussion

Both parties agree that Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) to combat abuse of the bankruptcy system. See Brief of Amicus Curiae American Bar Association (“ABA”) in Support of Petitioner at 6. The parties do not agree, however, as to whether the phrase “debt relief agency” encompasses attorneys and whether §§ 526(a)(4), 528(a)(4), and 528(b)(2) are constitutional as applied to attorneys. See Brief for Petitioner, Milavetz, Gallop & Milavetz, P.A. at 7; Brief for Respondent, United States of America at 11–16. A decision favoring either party will greatly affect how lawyers counsel bankruptcy clients. 

One of Milavetz’s supporters is the Commercial Law League of America (“CLLA”), an organization comprised of credit and finance experts. See Brief of Amicus Curiae Commercial Law League of America (“CLLA”) in Support of Petitioner at 1. CLLA believes that inclusion of attorneys in the definition of “debt relief agency” will severely limit attorneys’ ability to adequately represent their clients. See id. at 2. They assert that not all behavior banned by § 526(a)(4) is illegal and that incurring debt before filing for bankruptcy in some cases may be beneficial to both the debtor and creditor. See id. at 20. For example, they argue that it may be beneficial for a debtor to refinance an existing mortgage in order to get a lower interest rate. See id. at 21. 

The United States does not believe that § 526(a)(4) is that inclusive. It believes that § 526(a)(4) only restricts the incurrence of new debt with the intent of defrauding creditors prior to bankruptcy. See Brief for Respondent at 28. It asserts that the BAPCPA is necessary to restore personal integrity and responsibility in the bankruptcy system. See id. at 3. The United States emphasizes that Congress passed the BAPCPA after determining that bankruptcy professionals, attorneys included, were engaging in misleading and abusive practices, filing unnecessary bankruptcy petitions and jeopardizing debtors’ ability to obtain discharge of their debt. See id. The United States argues that Congress designed the BAPCPA to ameliorate these abusive practices and to ensure fairness for both creditors and debtors. See id.

The American Bar Association (“ABA”), one of Milavetz’ supporters, does not dispute that Congress intended to curb abusive practices. See Brief of ABA at 6. The ABA does, however, express concern that application of the BAPCPA to attorneys will “significantly undermine attorney-client privilege.” See id. Particularly, it is concerned that the BAPCPA will restrict communications between attorneys and their clients, and makes those communications discoverable. See id. The ABA states that enforcement of § 526(a)(4) will require inquiries into the attorney-client discussions, to determine whether the attorney, in fact, advised the client to incur debt in contemplation of bankruptcy. See id. at 16–17

The United States does not find the ABA’s concerns compelling and counters that “[a] licensed attorney’s ethical obligations to the bench and the profession sometimes require her to exercise a degree of restraint in what she advocates and how.” Brief for Respondent at 46. The United States notes that the government has a responsibility to maintain high standards in licensed professions. See id. at 48. From its point of view, because attorneys are licensed members of the court, they should be subject to speech restrictions that the ordinary citizen is not. See id. at 47.

Milavetz’s supporters emphasize that, as licensed members of the court, attorneys are already subject to speech restrictions. See Brief of ABA at 11. For example, they note that the ABA Model Rules of Professional Conduct already prohibit attorneys from counseling a client to commit fraud in a bankruptcy court. See id. at 11. They fear that if attorneys are “debt relief agencies,” they may be subject to conflicting obligations under the BAPCPA and state ethics rules. See Brief of CLLA at 10. 

An additional concern for supporters of the United States is that a victory for the petitioners would detrimentally change the standard of review for disclosure laws. See Brief of Amici Curiae Public Good, et al in Support of Respondent at 1. They fear that adopting the higher level of scrutiny that Milavetz proposes would threaten the federal, state, and local disclosure laws, including laws that regulate warnings concerning mercury in light bulbs and calorie disclosures in fast food restaurants. See id. at 5. They argue that important disclosure laws that protect consumers from dangerous products may not survive under the proposed heightened scrutiny standard. See id. at 29. From their point of view, the current standard allows for the free flow of commercial information. See id. at 30. 

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Analysis

The Eighth Circuit made three key holdings in the lower court. See Milavetz, Gallop & Milavetz, P.A. v. United States, 541 F.3d 785, 797 (8th Cir. 2008). First, it held that attorneys are “debt relief agencies.” See id. at 792. Second, it held that 18 U.S.C. § 526(a)(4) is unconstitutionally overbroad. See id. at 797. Third, it held that 18 U.S.C. §§ 528(a)(4) and (b)(2) are reasonably related to a government interest and thus constitutional. See id. Milavetz appeals the Eight Circuit’s first and third holdings, while the United States challenges the second holding. See Brief for Petitioner, Milavetz, Gallop & Milavetz, P.A. at 96; Brief for Respondent, United States of America at 71.

Is an Attorney a “Debt Relief Agency?” 

The bankruptcy statutes at issue in this case, 11 U.S.C. §§ 526(a), 528(a)(4), and 528(b)(2)(B), apply to “debt relief agencies.” See 11 U.S.C. §§ 526(a), 528(a)(4), and 528(b)(2)(B). The bankruptcy statute defines a “debt relief agency” as “any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration.” 11 U.S.C. § 101(12A).  The statute includes five exceptions to this definition, none of which lists “attorney” or a variation thereof. See 11 U.S.C. § 101(12A)(A)-(E). 

Milavetz argues that an attorney is not a “debt relief agency.” See Brief for Petitioner at 13. It states that if Congress intended to include attorneys within the definition, it would have done so expressly by mentioning the term “attorney” at least somewhere in 11 U.S.C. § 101(12A). See id. at 16–17. It notes that Congress specifically included a “bankruptcy petition preparer” as a “debt relief agency,” even though it is intuitive that such a person provides “bankruptcy assistance.” See id. at 17–18. Thus, it argues, since Congress was careful to include a “bankruptcy petition provider,” as a “debt relief agency,” it, too, would have been just as careful to specifically include “attorney” had it intended for the statute to cover attorneys. See id. at 18–19. 

In response, the United States claims that an attorney is clearly a “debt relief agency.” See Brief for Respondent at 16. First, it argues that attorneys are people who provide “bankruptcy assistance.” See Brief for Respondent at 17–18. The statutory definition of “bankruptcy assistance” is “providing…advice [or] counsel…or appearing in a case or proceeding on behalf of another, or providing legal representation.” See 11 U.S.C. § 101(4A). Next, it emphasizes the fact that “attorney” is not among the list of enumerated exceptions to “debt relief agency.” See id. at 19. Finally, it contends that legislative history, particular two House Reports and hearings on the issue, shows that Congress intended for these statutes to address abuses by attorneys. See id. at 20–21.

Is 11 U.S.C. § 526(a)(4) constitutional?

Under 11 U.S.C. § 526(a)(4), “a debt relief agency shall not…advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing” for bankruptcy protection. See 11 U.S.C. § 526(a)(4).

Milavetz argues that § 526(a)(4) is unconstitutional, because it prohibits speech protected by the First Amendment. See Brief for Petitioner at 35. For example, Milavetz contends, the law prevents an attorney from answering simple financial advice questions such as “May I co-sign a student loan for my child’s education?” because this activity, although legal, would incur debt. See id. at 51.  Milavetz asserts that prohibiting an attorney from answering such a question is unconstitutional because, in Legal Services Corp. v. Velasquez, the Supreme Court held that private legal advice to a client is protected speech. See id. at 35.  

The United States argues that the statute is not overbroad because it targets the accumulation of debt with the specific intent to abuse bankruptcy laws. See Brief for Respondent at 32. It contends that the key restricting language in the statute is “in contemplation of [bankruptcy].” See 11 U.S.C. § 526(a)(4). It states that this specific legal phrase “has been construed in the bankruptcy context to mean actions taken with the intent to abuse the protections of the bankruptcy system.” See Brief for Respondent at 29. Also, it quotes Black’s Law Dictionary, which defines “contemplation of bankruptcy” as being “often coupled with action designed to thwart the distribution of assets in a bankruptcy proceeding.” See id. 

In support of its challenge, Milavetz argues that § 526(a) fails the constitutional test of strict scrutiny. See Brief for Petitioner at 66. To pass strict scrutiny, a law must (1) concern a compelling state interest and (2) be narrowly tailored to address that interest. See Wex: Law about Strict ScrutinyMilavetz argues that § 526(a) does not address a compelling state interest. See Brief for Petitioner at 67. Furthermore, Milavetz claims that the law is not narrowly tailored because it does not use the least restrictive means to address the issue of abusive conduct. See id. at 66. For example, it states, Congress could have specifically rendered abusive conduct illegal, rather than broadly prohibiting any and all advice on incurring more debt. See id. at 71.

In response, the United States argues that strict scrutiny does not apply in this case because the Supreme Court, in Gentile v. State Bar, held that attorneys are subject to heightened restrictions on speech. See Brief for Respondent at 47. The United States argues that this different First Amendment standard applies in all legal contexts, including bankruptcy representation. See id. at 49. Under the United States’ reading of §526(a) to include only abuse of the bankruptcy laws, § 526(a) is constitutional because courts have upheld a state’s right to sanction an attorney for counseling a client to engage in illegal activity. See id. at 50. 

Are 11 U.S.C. §§ 528(a)(4) and 528(b)(2)(B) constitutional?

11 U.S.C. §§ 528(a)(4) and 528(b)(2)(B) require that a “debt relief agency” conspicuously include the following sentence or one substantially similar thereto, in all advertisements: “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.” 11 U.S.C. §§ 528(a)(4), 528(b)(2)(B).

Milavetz argues that §§ 528(a)(4) and 528(b)(2)(B) are unconstitutional restrictions on free speech. See Brief for Petitioner at 76–77. Milavetz notes that the government’s stated goal in enacting §§ 528(a)(4) and 528(b)(2)(B) was to regulate deceptive advertising, yet the statute is so broad that it encompasses truthful and non-deceptive advertising. See id. at 85. 

Milavetz argues that, to regulate its truthful, non-deceptive advertising, the government must meet the three-pronged standard of intermediate scrutiny: the law must (1) concern a substantial government interest, (2) directly advance that interest, and (3) be narrowly drawn. See id. at 90–91. Milavetz argues that the government fails to satisfy any of the three requirements. See id. 

First, Milavetz argues that the government has no substantial governmental interest in regulating attorneys’ advertisements. See Brief for Petitioner at 91–92. Next, Milavetz contends that the government fails to establish how §§ 528(a)(4) and 528(b)(2)(B) directly advance any substantial interest in preventing deceptive advertising in the field of bankruptcy. See id. at 94. Finally, Milavetz argues that the law is not narrowly drawn, as evidenced by the fact that Milavetz has to make these disclosures despite its truthful advertising. See id. 

The United States argues that intermediate scrutiny does not apply because the Supreme Court, in Zauderer v. Office of Disc. Counsel, held that the lower reasonable relationship to a valid state interest test applied to public disclosure laws like §§ 528(a)(4) and 528(b)(2)(B). See Brief for Respondent at 59. In applying the Zauderer standard, the United States argues that the disclosure requirement bears a reasonable relationship to governmental interest in preventing false advertising. See id. at 64.

The United States notes that Milavetz’s lawsuit was a facial challenge and not an as-applied challenge, meaning that Milavetz challenged the law itself as opposed to the application of the law to Milavetz’s own disclosures. See Brief for Respondent at 6970. The United States argues that because of its attack on the law itself, Milavetz’s claim that its own advertising is non-deceptive is irrelevant because that issue is not before the Court. See id. In addition, the United States emphasizes that the statute allows “debt relief agencies” to alter the specific disclosure language. See id. at 68. Therefore, it argues, the law does not require misleading disclosures because each attorney could alter the language as needed.  See id. 

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Conclusion

This case chiefly addresses the way in which lawyers may counsel their clients on bankruptcy matters. More specifically, this case determines whether, under the Bankruptcy Abuse Prevention and Consumer Protection Act, attorneys are included in the phrase “debt relief agencies,” and if so, whether the Act violates the First Amendment of the United States Constitution as applied to attorneys. While the Court’s analysis will focus on statutory language such as “debt relief agency” and “in contemplation of bankruptcy,” the Court will also address Congress’s ability to address deceptive attorney activity without overly restricting free speech.

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Authors

Prepared by: Michelle Lynn and Chris Maier 

Edited by: Lucienne Pierre

Additional Sources

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Edited by: