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March 8, 2010

Supreme Court Rules on Milavetz

We are debt relief agencies as I predicted but the Supreme Court refused to rule that the speech restrictions in section 526(a)(4) are overbroad, for which I am shocked given the tenor of the oral argument. "[W]e conclude that §526(a)(4) prohibits a debt relief agency only from advising a debtor to incur more debt because the debtor is filing for bankruptcy, rather than for a valid purpose."  It is essentally a unanimous decision with Scalia and Thomas writing concurring opinions.  You can access the opinion here. 

March 8, 2010 in Supreme Court | Permalink

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The core problem with the decision is that prior to Milavetz, Gallop & Milvetz, P. A. v. United States, it was not at all clear (contrary to what the court concludes) that incurring debt solely in response to an incentive created by the bankruptcy code itself would be a abuse of the bankruptcy process that would genuinely cause a court to hold a debtor's debts nondischargable, convert the case to another chapter, or dismiss it altogether, thereby defeating the effort to obtain bankruptcy relief. Now, there is a fair argument that this is an abuse.

The case effectively concludes that clients and their attorneys have a legal duty of some kind in their pre-bankruptcy transactions to protect creditors who have made bad credit decisions.

An attorney can avoid violating the gag order rule simply by not making a recommendation after laying out legal options for a client. But, an attorney who does so risks legal liability in connection with signing pleadings in the bankruptcy that certify that the bankruptcy is not abusive, if that attorney goes onto represent the client. It encourages a separation of insolvency counsel and bankruptcy counsel, an increases Rule 11 type risk for bankruptcy counsel by creating a new class of per se abusive transaction.

Posted by: ohwilleke | Mar 8, 2010 12:56:50 PM

The central problem in Milavetz is that there is not a standard analytical method for examining the constitutionality of restrictions on attorney speech. Thus, once the Court determined that attorneys were debt relief agencies, it had to find the regulations permissible or impermissible as to everyone. The traditional “check” on regulations of attorney speech is relegating regulation to state judiciaries. However, there are many areas (including bankruptcy) where having non-uniform regulation is problematic and where Congress or other governing entities have valid reasons and power to regulate attorney speech. I am currently developing a new access-to-justice theory of the First Amendment to be used specifically in examining the constitutionality of restrictions on attorney speech. Attorneys play a key role in access to and in the administration of justice; consequently, they need protection for their speech commensurate to fulfilling that role. The access-to-justice theory proposes that where attorney speech is key to providing or ensuring access to justice and the fair administration of the laws, it needs special protection under the First Amendment, akin to political speech. Under this theory, “access to justice” includes more than just access to the court systems and ability to raise colorable arguments in judicial proceedings (although it certainly includes that), but also preserving the attorney-client relationship and the consequent ability of clients to obtain legal advice—particularly where unauthorized practice of law rules prohibit other non-licensed individuals from providing that advice.

Posted by: Margaret Tarkington | Mar 8, 2010 1:34:34 PM

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