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Bankruptcy Act Violates Lawyers' Speech Rights

Separate rulings in the span of a week from a federal appeals court and a federal district judge found that a provision of U.S. bankruptcy law violates the free-speech rights of lawyers by barring them from advising clients to incur additional debt before filing bankruptcy. In both cases, bankruptcy lawyers challenged the constitutionality of bankruptcy law amendments enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. One provision, codified as 11 U.S.C. section 526(a)(4), prohibits anyone considered to be a "debt relief agency" from advising clients "to incur more debt in contemplation" of filing a bankruptcy petition.

On Sept. 4, the 8th U.S. Circuit Court of Appeals, in Milavetz, Gallop & Milavetz v. United States, ruled that this prohibition applies to attorneys and, as such, is unconstitutional. Then on Wednesday, U.S. District Judge Christopher Droney in Hartford, Conn., reached the same conclusion, ruling that this provision unconstitutionally restricts the advice lawyers can give their clients ("Judge Says Part of Bankruptcy Law Unconstitutional"). The 8th Circuit explained in its ruling:

[T]his 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.

Judge Droney put it this way:

A lawyer who represents consumers contemplating bankruptcy bears the duty of zealous representation and the prohibition on giving legal advice unnecessarily interferes with this duty. If the government seeks to prevent manipulation of the bankruptcy system, a more narrowly tailored approach would be to penalize those who take on certain types of debts.

The 8th Circuit decision partially affirmed summary judgment entered in Minnesota on behalf of a law firm that practices bankruptcy law there. The Connecticut case resulted in a preliminary injunction barring enforcement of the provision against attorneys who sued from that state. No word from the Justice Department on whether it will appeal either case.

Posted by Robert J. Ambrogi on September 12, 2008 at 01:04 PM | Permalink | Comments (5)

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