The Eighth Circuit loosens the grip of the bankruptcy gag rule, but holds attorneys to advertising disclosure requirement: Milavetz, Gallop & Milavetz, P.A. v. United States.

• Author: Findley, Bethany R.

1. INTRODUCTION

   The Court of Appeals for the Eighth Circuit, in a case of first impression, struck down a provision of the 2005 bankruptcy reform law that prohibits attorneys from advising their clients to incur more debt in contemplation of filing for bankruptcy. (2) At the same time, the court upheld a provision of the Bankruptcy Code that compels attorneys to include a specified disclosure within their bankruptcy-related advertisements. (3)

   The court's rationale for striking down the Code's restriction on attorney advice was that its broad application restricted attorneys from rendering advice that in some situations would be entirely lawful and beneficial to their clients. (4) This decision protects an attorney's First Amendment right to free speech and rightfully allows consumer debtors the opportunity to be represented by counsel who may freely advise them of all their legal alternatives.

   On the other hand, the court reasoned that the Code's advertising disclosure requirement does not constitutionally infringe on attorneys' rights. (5) Because it only mandates that attorneys include an additional two lines of factual information in their bankruptcy-related advertising materials, it does not overly burden attorneys' interests and may help prevent deception on the part of the consumer. Whether this requirement truly provides beneficial information to consumers, or alternatively lends confusion, is questionable, and attorneys bound by this ruling are likely to face ongoing frustrations.

2. FACTS AND HOLDING

   In April of 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the BAPCPA), which amended and added multiple sections to the Bankruptcy Code (the Code), was signed into law. (6) The purpose of this Act was to "'improve bankruptcy law and practice by restoring personal responsibility and integrity in the bankruptcy system and ensure that the system is fair for both debtors and creditors.'" (7) A primary underlying goal of the Act was to curb perceived abusive or fraudulent uses of the bankruptcy system. (8)

   One of the more striking BAPCPA amendments added the term "debt relief agency" to the Code, defined to include "any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer." (9) Further amendments either restricted the actions of, or required certain actions of, debt relief agencies. (10)

   For example, debt relief agencies are barred from advising a client "to incur more debt in contemplation of ... [a bankruptcy] filing," as codified in section 526(a)(4). (11) Additionally, section 528 requires that all debt relief agencies must "clearly and conspicuously" include the following statement in their bankruptcy-related advertisements: "'We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code[,]' or a substantially similar statement." (12) It thus became necessary for attorneys, such as the plaintiffs in this case, to determine whether the provisions applicable to debt relief agencies affected them professionally. The issue revolved around whether the definition of a debt relief agency was interpreted to include attorneys.

   In response to these concerns, suit was initiated by Milavetz, Gallop & Milavetz, P.A., a Minnesota law firm that practices bankruptcy law, as well as the firm's president, a bankruptcy attorney within the firm, and two clients who sought bankruptcy advice from the firm. (13) These plaintiffs collectively brought suit against the United States seeking a declaratory judgment that the "debt relief agency" provisions of the BAPCPA were not applicable to attorneys and law firms. (14) The plaintiffs first requested the court to declare that attorneys did not fall within the definition of "debt relief agency" as provided within the Bankruptcy Code. (15) In the alternative, the plaintiffs specifically challenged the constitutionality of section 526(a)(4) and sections 528(a)(4) and (b)(2) of the Code as applied to attorneys. (16)

   The plaintiffs contended that it was Congress's intent to exclude attorneys from the definition of debt relief agencies because the definition does not directly reference attorneys, but does specifically include a "bankruptcy petition preparer," (17) and the definition of a bankruptcy petition preparer expressly excludes the debtor's attorneys and their staff. (18) The plaintiffs also argued that "the doctrine of constitutional avoidance should be used to interpret 'debt relief agency' to exclude attorneys and thus avoid the potential constitutional issues." (19) The District Court for the District of Minnesota agreed with the plaintiffs, granting summary judgment in their favor and issuing an order excluding attorneys practicing in the District of Minnesota from the definition of a "debt relief agency" as defined by the BAPCPA. (20)

   The government, at trial and on appeal, conversely argued that the term "debt relief agency" clearly encompasses attorneys, since the term is broadly defined to apply to "'any person who provides any bankruptcy assistance to an assisted person in return for ... payment.'" (21) Thus, the government contended that providing legal representation to a client filing for bankruptcy is synonymous with providing bankruptcy assistance. (22)

   The plaintiffs claimed that if the court held, on appeal, that attorneys are included within the Code's definition of debt relief agencies, then section 526(a)(4) would unconstitutionally restrict their free speech by limiting their ability to properly advise their clients. (23) Further, they contended that sections 528(a)(4) and (b)(2) unconstitutionally compelled them to disclose a predetermined message in their bankruptcy-related advertisements, thereby violating their First Amendment rights. (24)

   With regard to the claim that section 526(a)(4) restricts their free speech, the plaintiffs argued that the court should apply the strict scrutiny standard of review, because the restriction on an attorney's ability to render advice to a client is content-based. (25) on the other hand, the government urged the court to apply the more lenient standard outlined in Gentile v. State Bar of Nevada (26)--"the Gentile standard" - reasoning that the provision's restriction is an ethical standard that prevents abuse of the bankruptcy system. (27) Moreover, in response to the plaintiffs' claims that the advertising disclosure requirement within section 528 of the Code violates the First Amendment rights of bankruptcy attorneys through compelled speech, the government contended that the disclosure requirement serves Congress's purpose to prevent deceitful and fraudulent advertising by debt relief agencies. (28)

   The district court found that the BAPCPA's debt relief agency provisions did not apply to attorneys. (29) Chief Judge Rosenbaum, writing for the majority, was of the opinion that including attorneys within the definition of a debt relief agency would conflict with the state's traditional authority "'to determine and enforce qualifications for the practice of law under the laws of that State.'" (30) Furthermore, the court found the statute to be ambiguous enough that the doctrine of constitutional avoidance should be applied, such that the statutory language should be constructed so as to avoid serious constitutional questions such as those raised by the plaintiffs' challenges in this case. (31)

   Even though it held attorneys exempt from the debt relief agency provisions of the Act, the district court went on to evaluate the plaintiffs' claims concerning the constitutionality of section 526(a)(4) and sections 528(a)(4) and (b)(2) and determined that both of these provisions were unconstitutional as applied to attorneys. (32) After applying the strict scrutiny standard, the court held that section 526(a)(4), barring a debt relief agency from advising a client to incur additional debt in contemplation of bankruptcy, has the potential to prevent attorneys from "adequately and competently advising their clients," such that it "unconstitutionally impinges on expressions protected by the First Amendment." (33) Furthermore, the court determined that the advertising disclosure requirement of sections 528(a)(4) and (b)(2) failed to directly advance a substantial government interest and was not narrowly drawn to prevent deception. Therefore, it did not pass constitutional scrutiny. (34)

   In the instant decision, the Court of Appeals for the Eighth Circuit affirmed the district court's decision in part and reversed it in part. (35) The appellate court reversed the district court's ruling on the inclusiveness of the debt relief agency definition and held that attorneys are debt relief agencies within the Bankruptcy Code, finding the plain language of the definition to unambiguously include attorneys who provide bankruptcy assistance, especially in light of the fact that Congress specifically listed five exclusions from the definition and attorneys were not one of them. (36)

   The appellate court then held, in line with the district court, that the provision restricting an attorney's ability to advise a client to take on debt in contemplation of bankruptcy was unconstitutionally overbroad, as such a "blanket prohibition" restricts speech beyond that which the government has an interest in restricting. (37) The court noted that, in an attempt to prevent attorneys from promoting abusive prebankruptcy practices, this provision was drafted so that it also prevented attorneys from rendering prudent, lawful advice to clients contemplating bankruptcy. (38) However, in contrast with the lower court, the appellate court held that the advertising disclosure requirement was constitutional as applied to all debt relief agencies, including attorneys, because it was "reasonably related to the government's interest in protecting consumer debtors from...