Milavetz, Gallop & Milavetz v. United States
United States Supreme Court docket 08-1119 and 08-1225
Oral arguments December 1, 2009
When the Bankruptcy Code was amended in 2005, “debt relief agencies” were forbidden to advise clients “to incur more debt in contemplation of” filing bankruptcy (11 USC Sect. 526(a)(4). Did this prohibition applies to lawyers, and did it limited the freedom-of-speech rights of attorneys to advise their clients? The United States Supreme Court heard oral arguments on this question December 1, 2009.
The term “debt relief agency” was used in the 2005 amendments to apply to people who advise people concerning their debts. The concern was that many shady operations were ripping people off or were encouraging people to defraud their creditors. The new statute implied that attorneys would be considered debt relief agencies, and most attorneys in western New York have acted under the assumption that the provisions apply to them.
Shortly after the 2005 amendments went into effect, a law firm in Minnesota, Milavetz, Gallop & Milavetz, filed a lawsuit in District Court (not bankruptcy court) seeking a declaratory judgment that attorneys were not debt relief agencies and that the prohibition against advising clients regarding debts was unconstitutional.
In retrospect, I am not so sure this was a great idea. The petitioners were not arguing that these provisions were being applied to them specifically, or that they had been caused harm in a specific case. Rather, they were complaining that they could be harmed in the future. Hypothetical cases are problematic; they may encourage courts to make rulings on issues that are not actually being contested. The ruling may create problems where no real world problem existed before. The extensive hypotheticals thrown at the parties at oral arguments (see articles below) my reflect the inability to argue the actual facts of this case, as there were none.
In any case, the District Court ruled that the prohibition against advising clients concerning debts was an impermissible violation of the attorney’s constitutional rights.The district court also ruled that attorneys are not debt relief agencies. Milavetz v. U.S. 355 B.R. 758 (Minn. 2006). The United States Court of Appeals for the Eighth Circuit upheld that the District Court on the free speech issue, but ruled that attorneys clearly are debt relief agencies, as that term is defined in the statute. Milavetz v. U.S., 541 F.3d 785 (8th Cir. 2008). The Fifth Circuit had reached a contrary result, upholding the statute. Hersh v. U.S., 553 F.3d 743 (5th Cir. 2008).
In oral argument, the Supreme Court justices appear to agree that attorneys are debt relief agencies, but the prohibition against advising clients was sharply criticized. It would appear that the court will limit or eliminate that provision, at least in relation to attorneys, but how narrow that limitation will be remains to be seen.
For legal analysis and links to briefs: SCOTUS WIKI