Tuesday, September 7, 2010

Second Circuit Upholds Bankruptcy Reform Act, Extends Milavetz

The Second Circuit today upheld sections of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) against a free speech challenge by the Connecticut Bar and bankruptcy attorneys.  The ruling applied and extended the Supreme Court's March 2010 ruling in Milavetz, Gallop & Milavetz, P.A. v. United States, which construed sections of the Act to avoid First Amendment problems and held that other sections did not violate the First Amendment.

The BAPCPA was designed to curb abuses and ensure fairness in the bankruptcy system.  It requires certain disclosures and bans certain advice by "debt relief agenc[ies]," which, under the Act, includes attorneys. At issue in Connecticut Bar Association v. U.S., the Second Circuit case released today:

  • Section 526(a)(4) of the Act prohibits debt relief agencies from advising their clients "to incur more debt in contemplation of [bankruptcy] or to pay an attorney or bankruptcy petition preparer fee or charge for services performed as part of preparing for or representing a debtor" in a bankruptcy case;
  • Section 527(a) and (b) require a debt relief agency to provide an assisted person with certain notices;
  • Section 528(a)(1)-(2) require a debt relief agency to execute a written contract with an assisted person;
  • Section 528(a)(3)-(4) and (b)(2) require certain language to be included in debt relief agency advertisements.

The Court in Milavetz upheld some of these sections of the BAPCPA against a First Amendment challenge.  In particular, the Court construed the advice ban in Section 526(a)(4) to apply only to advice to load up on debt in order to have it discharged, not advice for a valid purpose.  By so limiting the section, the Court ruled that it also avoided overbreadth and vagueness problems.  The Court also rejected the First Amendment challenge to the advertising requirements in Section 528(a)(3)-(4) and (b)(2), ruling that these satisfied the rational basis test that applies under Zauderer v. Office of Disciplinary Counsel to regulations of commercial speech that merely compel disclosures (and do not restrict speech).  The Court also limited the definition of "debt relief agency" to an attorney providing services to a consumer debtor.

The Second Circuit applied Milavetz to the sections also at issue in Connecticut Bar and extended it to the new sections raised in the case.  Thus the Second Circuit ruled that the requirements in Sections 527(a) and (b) and 528(a)(1)-(2)--like Sections 528(a)(3)-(4) and (b)(2) at issue in Milavetz--were also compelled disclosures pertaining to commercial speech and that they were therefore subject to rational basis review.  The court upheld them.

The court also rejected the plaintiffs' claim that the contract requirement in Sections 528(a)(1)-(2) violate the Fifth Amendment Due Process Clause because it imposes strict liability on debt relief agencies whenever a client fails to sign a contract.  The court observed that strict liability may be a due process problem in the criminal system, but not the civil system.

SDS

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Comments

Under the new bankruptcy laws that were approved in 2005, you may find it more difficult to find a bankruptcy lawyer. This is due to the fact that the new bankruptcy laws make it more complicated to file bankruptcy. Many lawyers have chosen to no longer offer this service.

Posted by: Dom | Sep 9, 2010 10:45:16 AM

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