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Professional-Client Speech and the First Amendment:

The U.S. Court of Appeals for the Eighth Circuit handed down Milavetz, Gallop & Milavetz v. United States yesterday, in which the majority held unconstitutional a provision that barred debt relief agencies — including lawyers — from

advis[ing] an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title 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 case under this title.

The court concluded that:

[R]egardless of whether the government's interest in prohibiting the speech was legitimate (Gentile standard) or compelling (strict scrutiny standard), § 526(a)(4) is unconstitutionally overbroad as applied to attorneys falling within the definition of debt relief agencies because it is not narrowly tailored, nor narrowly and necessarily limited, to restrict only that speech that the government has an interest in restricting. Instead, § 526(a)(4) prohibits attorneys classified as debt relief agencies from advising any assisted person to incur any additional debt in contemplation of bankruptcy; this prohibition would include advice constituting prudent prebankruptcy planning that is not an attempt to circumvent, abuse, or undermine the bankruptcy laws. Section 526(a)(4), as written, prevents attorneys from fulfilling their duty to clients to give them appropriate and beneficial advice not otherwise prohibited by the Bankruptcy Code or other applicable law.

The decision seems quite right to me. Thanks to How Appealing for the pointer.

Kazinski:
Seems like prior restraint to me. After the advisor recommends increasing the debt load before declaring bankruptcy they should be charged with conspiricy to commit fraud.
9.5.2008 8:13pm
Greg Q (mail) (www):
If not fraud, then theft.

Perhaps I'm not understanding this case, but it seems that the law is saying that on one can say someone about to go into bankruptcy "hey, why don't you rob your debtors and give me the money?"

Would that be an accurate restatement of what the law is banning?

Why should lawyers be allowed to adise their clients to commit this theft?
9.5.2008 10:46pm
therut:
Agree with above. At least the ABA should make lying unethical. Oh I forget it is lawyers. One of the reasons I have almost no respect for such critters. I had a nurse that pulled this fraud. She and her husband filed bankruptcy and she bought a very expensive diamond ring before. Told everyone at the clinic that is what her lawyer told her to do. She no longer works for me. Wonder how the store felt to get stolen from? Doubt anyone cares.
9.5.2008 11:50pm
Eugene Volokh (www):
Actually, it turns out the opinion spends a bit of time explaining how some speech suggesting that clients incur extra debt indeed "constitut[es] prudent prebankruptcy planning that is not an attempt to circumvent, abuse, or undermine the bankruptcy laws." What do you folks think of the examples that the court gives to support its position?
9.6.2008 5:48am
one of many:
I'm not certain about the car but mortgage refinancing should certainly be a valid pre-bankruptcy option. I'll go even further and say that mortgage refinancing should be discussed in ALL pre-bankruptcy cases.

The car (reliable transportation) bothers me, I think it is too open for abuse, but I have to concede that there are cases where it could be in the best interests of the creditors to have the person going into bankruptcy assume a car debt before declaring bankruptcy. The problem would be to ensure that car debt is constructed in such a way that the creditor (for the car) is not harmed by the bankruptcy or is fully aware of the pending bankruptcy before the loan is made.
9.6.2008 12:50pm
Patrick216:

After the advisor recommends increasing the debt load before declaring bankruptcy they should be charged with conspiricy to commit fraud.

I do a lot of commercial creditor's rights work and have gotten over outrage at the very aggressive positions taken by debtors with the advice and participation of counsel. It would not surprise me in the least if debtors' counsel tell debtors to run up huge credit card debt right before they file. That kind of stuff is immoral and abusive--but the law allows you to get away with it.

More galling is the stuff I encounter -- debtors and their attorneys using blatantly frivolous legal proceedings to cause delay and increased legal fees by the creditor. The courts are NOT willing to sanction counsel for participating in that nonsense. It's really galling.
9.6.2008 3:06pm
Greg Q (mail) (www):
What do you folks think of the examples that the court gives to support its position?

I think that if that's the best they can do, then their case is really weak.

If the Court had made the case that that kind of advise was what was routinely being blocked by this law, that would be one thing. But the Court didn't try, for the good reason that such a claim is obviously false.

"Here are the limits on what you can keep. Max out your credit cards getting things under these limits, and paying bills of businesses you like / what to have a continuing relationship with, then declare bankruptcy."

That's what the laws is designed to block. Anyone want to try to seriously claim that bankruptcy lawyers / "advisers" aren't saying those things? Anyone want to claim that people going into bankruptcy protection should be doing those things?
9.8.2008 7:09pm