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June 3, 2010

Advising on Bankruptcy? What the US Supreme Court Says

From YourABA, May 2010

For lawyers providing bankruptcy assistance to consumers and small businesses, the U.S. Supreme Court’s ruling in Milavetz, Gallop & Milavetz v. United States in March provided some much-needed clarification on their obligations under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. A recent CLE, “Are you a Debt Relief Agency? The Consequences of Milavetz, Gallop & Milavetz v. U.S.,” brought together a panel of experts to discuss the Court’s ruling and its implications.

Panelist Alan S. Milavetz of Milavetz, Gallop & Milavetz, who litigated the case, fought against the inclusion of lawyers in the debt relief agency provisions of the law. “We were concerned about how we would be able to provide the advice to our clients that they would need,” he recalled, saying that Section 526(a) forbids “debt relief agencies” such as his law firm from advising consumers to incur more debt in contemplation of bankruptcy.

In its March ruling, the Court held that those provisions applied to lawyers, and construed them to preserve the ability of lawyers to talk freely with their clients about incurring debt. The Court clarified that the law only limits lawyers from improperly advising clients to load up on debt in bad faith prior to bankruptcy, according to panelists.

In its reading of the statute, the Court simply prohibited what was already prohibited, said panelist Craig Goldblatt of WilmerHale, who was an author of the ABA amicus brief on the Milavetz case. He explained that the Court cited Model Rule 1.2(d), which prohibits lawyers from advising clients to engage in fraudulent activities, while it also acknowledged the importance of the attorney-client relationship, and the need for fostering robust, frank discussions between clients and their attorneys.

The Court also made clear that the provisions apply only to certain debtor’s lawyers. This was important because the statute, as written, could have been construed to apply to lawyers representing creditors in bankruptcy, if the clients met the statutory definition of an “assisted person,” even though they were not, themselves, filing bankruptcy.

Milavetz also discussed how the advertising and disclosure requirements of Section 528, which were upheld in the Court’s decision, were also troubling. In regard to advertising, Section 528 requires that “debt relief agencies” clearly and conspicuously disclose that they provide bankruptcy assistance services. “We were unsure about what kind of firm uses the term ‘debt relief agency’ and specifically, what kind of language you have to use in your advertising,” said Milavetz.

Pointing out that a “debt relief agency” refers to anyone who provides bankruptcy advice to clients, panelists debated the extent of the advertising disclosures in relation to Yellow Pages advertisements and websites as well as business cards and firm signage.

In regard to websites, Milavetz said, “From my perspective, I see them as a form of advertising. The distinction starts to dissolve when you talk about some of the other items that your firm’s name might be on, like stationary, and even the sign on the side of your building.”

“Is it just information or are you looking for business?” he asked, explaining his test for whether an item needs the required disclosures. “I think it’s advertising if you’re looking for business. You have to say that you are a debt relief agency in that case.”

In addition to Milavitz and Goldblatt, the session featured Larry B. Feinstein of Vortman & Feinstein. Solo practitioner Marc S. Stern moderated the panel.

“Are you a Debt Relief Agency? The Consequences of Milavetz, Gallop & Milavetz v. U.S.” was sponsored by the General Practice, Solo & Small Firm Division and the ABA Center for CLE.

For guidance on the definitions used by the FTC, read “Who Is a Debt Relief Agency Under the Bankruptcy Reform Act,” from the GP Solo newsletter Law Trends & News.

Additional resources on bankruptcy are available at the ABA Webstore.

“Advising on Bankruptcy? What the US Supreme Court Says” is from the May 2010 issue of YourABA, an e-newsletter for ABA members.