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March 11, 2010

Some Thoughts on Milavetz - Disappointing Decision and Opinion

As I have said, the issue of whether attorneys are DRAs was really a no brainer.  Congress makes the laws and bankruptcy assistance is defined in section 101(4A) as "providing legal representation with respect to a case or proceeding..."  A DRA is someone who provides bankruptcy assistance.  The real issue was the part of section 526(a)(4) which says a DRA cannot "advise an assisted person to incur more debt in contemplation of” filing bankruptcy.  As Justice Roberts pointed out at oral argument, there is all kinds of advise relating to incurring debt in contemplation of bankruptcy which might be perfectly appropriate but there is also all kinds which is inappropriate.  So where is that line and if the attorney is worrying about where the line is, doesn't that chill speech between the client and attorney? 

Before I complain about the opinion, I would point out that I long ago stopped worrying about whether I can tell the prospective client that it is okay to rent a different apartment or buy a new car or borrow money from mother to pay the fees "in contemplation of filing bankruptcy."  It is just too clear that that that is appropriate advice.  But I am aware of attorneys who are afraid and wobble giving that kind of advice.


So the Supreme Court ruled that the restriction only prohibits bad stuff and there are good reasons for Congress to do that so it's okay.  But Sotomayor really sort of wanders in the opinion trying to tell us what "bad advice is" which is good but then makes broad statement which resurrect the fears.  For example, "we conclude that §526(a)(4) prohibits a debt relief agency only from advising a debtor to incur more debt because the debtor is filing forbankruptcy, rather than for a valid purpose."  I tease my students regularly about words I hate and tell them don't utter those words in my classroom or on the test.  I do that to emphasize that words are important and because they look up from their laptops and blackberrys when I say something funny.  The worst is "bad faith."  The second worst is "valid."  What does that mean?  I can give my client advice as long as it is for a valid purpose? 

Sotomayor writes, "advice to incur more debt because of bankruptcy, as prohibited by §526(a)(4), will generally consist of advice to 'load up' on debt with the expectation of obtaining its discharge—i.e., conduct that is abusive per se."  That's good to hear and helps a lot - it does. "[W]e conclude that §526(a)(4) prohibits a debt relief agency only from advising an assisted person to incur more debt when the impelling reason for the advice is the anticipation of bankruptcy."  "Impelling"?  Some definitions from google, "To urge to action through moral pressure; drive"  "markedly effective as if by emotional pressure" "to urge or drive forward or on by or as if by the exertion of strong moral pressure."  Huh?   

She helps us understand impelling by saying, "Covered professionals remain free to 'tal[k] fully and candidly about the incurrence of debt in contemplation of filing a bankruptcy case.'”  "Section 526(a)(4) requires professionals only to avoid instructing or encouraging assisted persons to take on more debt in that circumstance."  So I can tell them the consequences of various alternatives, just don't impell them to do one or the other - don't instruct or encourage the conduct.  "Under our reading of the statute, of course, the prohibited advice is not defined in terms of abusive prefiling conduct but rather the incurrence of additional debt when the impelling reason is the anticipation of bankruptcy."  "It would make scant sense to prevent attorneys and other debt relief agencies from advising individuals thinking of filing for bankruptcy about options that would be beneficial to both those individuals and their creditors."  "Section 526(a)(4) by its terms prevents debt relief agencies only from 'advis[ing]' assisted persons 'to incur' more debt.  Covered professionals remain free to 'tal[k] fully and candidly about the incurrence of debt in contemplation of filing a bankruptcy case.” 

"Our construction of §526(a)(4) to prevent only advice principally motivated by the prospect of bankruptcy further ensures that professionals cannot unknowingly run afoul of its proscription.  Because the scope of the prohibition is adequately defined, both on its own terms and by reference to the Code’s other provisions, we reject Milavetz’s vagueness claim."  In footnote 5 there is a helpful comment, "Reiterating the significance of such dialogue, we note that §526(a)(4), as narrowly construed, presents no impediment to “ ‘full and frank’ ”
discussions."  But don't give advice "principally motivated by the prospect of bankruptcy"?  What do you think I do all day?

So we have lots of sound bites to show the court in the event the UST or a client comes after us - something I'm not sure has ever happened.  But what about advice designed to help the client pass the means test, i.e., stop paying your taxes which will be a priority debt and deductible on the means test.  Buy a new car which will be deductible on the means test so you can pass.  Is that "valid."  I guess if you say, "Mr. Client, if you buy a new car whether you need it or not, you will pass the means test," that is only "frank discussion" or it is impelling the debtor to incur debt only because the debtor wants to file and cannot otherwise file.  Someone who files when they could not otherwise file would hurt creditors I assume.  That makes it not a valid purpose?

I better get to my office.  Let me know what you think.     

March 11, 2010 in Supreme Court | Permalink


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The Milivetz case makes the gag rule a lot less threatening. You can frankly discuss anything, so long as you don't recommend that your client do it.

But, it also probably changes substantive law and makes signing pleadings a lot riskier.

I do not believe that pre-Milivetz law defined any debt incurred in anticipation of bankruptcy for the sole purpose of responding to bankruptcy law incentives in a way that favors a debtor over a creditor as per se abusive. But, the U.S. Supreme Court, in Milivetz appears to do precisely that. (In contrast, the U.S. Supreme Court has repeatedly taken the opposite stance with regard to transactions taken for the sole or primary purpose of responding to a tax incentive.)

And, if this kind of activity is per se abusive, then the lawyer who signs the pleadings will often have a problem. A lawyer's signature on the pleadings is a warranty that the petitioner is not engaged in abusive bankruptcy conduct. But, if you know that a client has incurred debt for the sole purpose of responding to bankruptcy law incentives, even if you didn't recommend that action, how can you sign those pleadings and not expose yourself to liability?

Posted by: ohwilleke | Mar 16, 2010 2:51:52 PM

Does it even apply to Chapter 13? I mean they say that the means test itself created the temptation I guess of incurring debt for the purpose of passing the means test.

OK.. so you can't advise a debtor (assisted person) in incur debt in contemplation of filing or not to load up... right? @ fn 6....this blew me away.... "Advice to incur additional debt to buy groceries, pay medical bills, or make other purchases "reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor" $ 523(a)(2)(C)(ii), is SIMILARLY PERMISSIBLE".....?????

So if a debtor does not have "limited nonexempt property" and say its all exempt and it is consumer debt we are talking about...Is that person an "assisted person"? If so, then the definition of an "assisted person" would vary State to State....right?

This also had my head scratching.... So they basically said that because of the means test we have to have that language about debt relief agencies and incurring debt. "The test promotes debt or accountability but also enhances incentives to incur additional debt prior to filing, as payments on secured debts offset a debtor's monthly income under the formula"

Posted by: Patches | Mar 30, 2010 12:38:31 PM

Debt free to loan sharks and doorstep money lenders instead of legitimate sources of finance...................
Debt Free

Posted by: sanjeev | Jan 4, 2011 12:00:11 AM

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