Sorry for the length of this post, but rather than attempt to summarize this case I am posting lengthy excerpts from the opinion.  Scroll to the bottom of the post for links to the briefs filed in the case. Thanks to Katie Porter at Credit Slips for notice of the case.

Milavetz, Gallop & Milavetz v. United States, Case No. 05-cv-2626 (D. Minn. December 7, 2006) (Click here for a copy of the opinion.

In a case filed by a law firm and "unnamed members of the public," the United States District Court for the District of Minnesota struck down, in an Order denying the United States’ Motion to Dismiss, Sections 526(a)(4) and 528(a)(4) as unconstitutional as applied to attorneys.

 11 U.S.C. § 526 provides as follows –

A debt relief agency shall not . . . advise 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 first issue was the appropriate standard to apply to the analysis.  Plaintiffs contended that the Court should apply a "strict scrutiny" standard, while the US argued for a more lenient standard that balanced the First Amendment rights of lawyers with the government’s legitimate interest in regulating the activity in question. 

When fairly viewed, the Court finds § 526(a)(4) to be a content-based regulation of attorney speech –it restricts attorneys from giving particular information and advice to their clients. Attorneys are forbidden to advise their clients concerning an entire subject – incurring more debt in contemplation of filing for bankruptcy. This is a plain regulation of speech.
Beyond this, the forbidden speech trenches on two other important areas of concern.

First, the lawyer’s advice to take on certain additional financial obligations in contemplation of bankruptcy may well be in the client’s best interest. A lawyer’s highest duty is to the client, and the statute’s forbidden advice may indeed be helpful to the client. Secondly, this statute does not restrict false statements – arguably implicating some “ethical” precept – it forbids truthful and possibly efficacious advice. If this is the government’s view of legal ethics, it is a form of ethics unfamiliar to the Court.

As the United States Supreme Court has explained, “[g]overnment action that stifles speech on account of its message, or that requires the utterance of a particular message favored by the Government, contravenes th[e] essential [First Amendment] right[s]” of private citizens. Turner Broad. Sys. v. FCC, 512 U.S. 622, 641 (1994). For this reason, “governmental control over the content of messages expressed by private individuals” is unconstitutional except in narrow circumstances. Id.

As the Court finds § 526(a)(4) to be a content-based restriction on protected speech, it is subject to strict scrutiny. Id. Such a restriction can only survive if (1) narrowly tailored to achieve (2) a compelling state interest. United States v. Playboy Entm’t Group, Inc., 529 U.S. 803, 813 (2000). The Court finds the government has failed to meet its burden on the first point – § 526(a)(4) is not narrowly tailored.

Having determined that the statute is subject to a "strict scrutiny" standard, the Court analyzed the substance of the statute —

The government suggests § 526(a)(4) advances two compelling interests. First, it asserts an interest in protecting creditors. According to the government, § 526(a)(4)’s prohibition discourages prospective bankrupts from accumulating debt in a particular fashion, thus deterring debtors from “gaming” the means test by improperly enlarging pre-existing debt, thereby diluting the assets of the bankruptcy estate otherwise available to creditors. Second, it claims § 526(a)(4) protects debtors from attorneys who might lead them to abusive practices which could ultimately result in a denial of discharge of debts under § 523(a)(2)(c). Finally, the government argues that § 523(a)(2)(c) protects the integrity of the bankruptcy system.

 Even if the Court assumes the asserted interests are compelling, the restriction is not narrowly-tailored. The government claims the section is narrowly tailored because “it does not limit more speech than is necessary to accomplish this purpose.” (Def.’s Brief 25.) The government is mistaken.

Attorneys have a First Amendment right – let alone an established professional ethical duty – to advise and zealously represent their clients. Legal Serv. Corp. v. Velazquez, 531 U.S. 533, 548-549 (2001). Section 526(a)(4) bars an attorney from advising a client to incur any kind of debt, including legitimate debt, in contemplation of bankruptcy. The lawyer has no duty to assist creditors – who are scarcely without their own resources, and may indeed have contributed to the potential-bankrupt’s straits by making credit easy to obtain. The attorney’s only duty is to the client, and to the law.

Incurring debt on the eve of bankruptcy can scarcely be considered malum in se. To the contrary, for some individuals incurring further obligations, even those which must be adjusted or set aside in the bankruptcy, may be financially prudent. “For example, there may be instances where it is advisable for a client to obtain a mortgage, to refinance an existing mortgage to obtain a lower interest rate, or to buy a new car” before filing for bankruptcy. Erwin Chemerinksy, Constitutional Issues Posed in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 79 AM. BANKR. L.J. 571, 578 (2005). If a client intends to reaffirm the debt after filing bankruptcy, there is no prejudice to the bankruptcy process. BAPCPA’s § 526(a)(4) limitation on speech extends beyond any need to protect the bankruptcy process.3 A lawyer who represents consumers contemplating bankruptcy bears the duty of zealous representation. Conversely, Congress does not have the power “to effect [a] serious and fundamental restriction on advocacy of attorneys.” See Velazquez, 531 U.S. at 534. If upheld, this law would prevent lawyers from adequately and competently advising their clients. As such, it unconstitutionally impinges on expressions protected by the First Amendment of the Constitution

The Court then addressed 11 U.S.C. § 528(a)(4), (b)(2), which states the following —

A debt relief agency shall–

(a)(4) clearly and conspicuously use the following statement in such advertisement: "We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code." or a substantially similar statement.

(b) (2) An advertisement, directed to the general public, indicating that the debt relief agency provides assistance with respect to credit defaults, mortgage foreclosures, eviction proceedings, excessive debt, debt collection pressure, or inability to pay any consumer debt shall– (A) disclose clearly and conspicuously in such advertisement that the assistance may involve bankruptcy relief under this title; and (B) include the following statement: "We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code." or a substantially similar statement.

 The Court determined to apply an "intermediate" standard of review —

Here again, the Court must determine the appropriate standard of review. The choice turns on whether the statute regulates deceptive or truthful advertising. Statutes regulating deceptive commercial speech need only withstand rational basis review. …The government argues that BAPCPA regulates deceptive advertising, citing evidence adduced before Congress showing “some bankruptcy lawyers did not mention in their advertisements that their ability to make ‘debts disappear’ derived from the use of the bankruptcy process.” Plaintiffs respond that, when Congress imposed these requirements on all advertisements of bankruptcy assistance, it mandated a blunderbuss which strikes truthful, as well as false or deceptive advertising. The Court agrees

With very few exceptions, any party advertising debt relief services must include § 528′s statutory statement. The present lawyer-plaintiffs advertise themselves as bankruptcy attorneys in newspapers, telephone directories, television, radio, and the internet. There is no evidence, however, suggesting their bankruptcy assistance advertisements are deceptive in any regard. Even assuming some debt relief agencies advertise an ability to make “debts disappear,” there is no showing such a statement is deceptive. Under these circumstances, the Court finds it appropriate to analyze this question by applying intermediate scrutiny.

 The Court continued the analysis of the Code section –

The government contends advertising, absent the compulsory statements, may mislead the lay community into thinking debts can be erased without payment or filing for bankruptcy. The government claims §§ 528(a)(4) and (b)(2) protect against consumer deception “by alerting [them] that a lawyer may use bankruptcy as a means to help them.”  Setting aside the implausibility of anyone actually believing in a magic wand capable of making debt go away, it is most unlikely that the insertion of the statement “We are a debt relief agency, we help people file for bankruptcy relief under the Bankruptcy Code” prevents consumer deception; it may well increase it. The term “debt relief agency” is simply a legislative contrivance. The public is more likely to be confused by an advertisement containing this Congressionally-invented term than one which advertises the services of a bankruptcy attorney.

Beyond this, however, the term “debt relief agency” is almost all-encompassing. It instantly swallows all persons who engage in “bankruptcy assistance,” attorneys and non-attorneys alike. Congress’s merger of both attorneys and non-attorneys is, itself, likely to confuse the public. There are many non-trivial differences between an attorney’s services to his or her clients, and services non-lawyers are permitted to offer. Unlike those who only restructure debt, or perhaps provide bankruptcy forms, attorneys give legal advice and actually represent debtors in bankruptcy proceedings. The requirement that parties so dissimilarly-placed must use the same mandated disclosure statement is likely to cause consumer confusion. In this respect, § 528 fails to directly advance the government’s stated interest in clarifying bankruptcy service advertisements.

Section 528′s advertising requirement is also not narrowly drawn. The narrowly drawn standard is “something short of a least-restrictive means standard.” Bd. of Tr. of the State Univ. of New York v. Fox, 492 U.S. 469, 477 (1989). A narrowly drawn regulation designed to prevent deception “may be no broader than reasonably necessary to prevent the ‘perceived evil.’” In re R.M.J., 455 U.S. 191, 203 (1992). Section 528′s language not only regulates misleading advertisements – those suggesting debts can disappear – it binds all who advertise bankruptcy services. This sweeping regulation goes beyond whatever problem it was designed to address. It broadly regulates absolutely truthful advertisements throughout an entire field of legal practice. The government has failed to show that this restriction on attorneys’ commercial speech is justified. As applied to attorneys, this section of BAPCPA fails constitutional scrutiny.

Finally, the Court addressed § 101(4A) (definition of "bankruptcy assistance") –

At first glance, this language might include attorneys. But the glance is deceiving: the statute contains a rule of construction for the term “debt relief agency.” The statute provides that nothing in §§ 526, 527, and 528 – those sections imposing requirements on debt relief agencies – shall:

be deemed to limit or curtail the authority or ability . . . of a State or subdivision or instrumentality thereof, to determine and enforce qualifications for the practice of law under the laws of that State.

11 U.S.C. § 526(d)(2)(A).

If lawyers are placed within the ambit of § 101(4A), the placement conflicts with § 526(d)(2)(A). The conflict would exist because states would be deprived of their ability “to determine and enforce qualifications for the practice of law.” If BAPCPA’s debt relief agency sections apply to attorneys, it means Congress has taken upon itself the authority to determine the advice attorneys can give their clients and what attorney advertisements must say, thereby infringing on the state’s traditional role of regulating attorneys. See Leis v. Flynt, 439 U.S. 438, 442 (1979) (“Since the founding of the Republic, the licensing and regulation of lawyers has been left exclusively to the States.”)

This view is supported by the doctrine of constitutional avoidance. This doctrine counsels that, in construing a statute for ambiguity, the Court must opt for a construction which avoids grave constitutional questions. Edward J. DeBartolo Corp. v. Florida Gulf Coast Bldg. & Constr. Trades Council, 485 U.S. 568, 575 (1988). The Court perceives a clear ambiguity in this statute – on one hand it appears to regulate a lawyer’s practice; on the other, such regulation is specifically reserved to the states. As outlined above, these sections would be unconstitutional if applied to attorneys. For these reasons, the Court finds §§ 526, 527 and 528 do not apply to attorneys.

(bold emphasis added)

Briefs:

United States’ Brief in Support of Motion to Dismiss

Plaintiff’s Response to Motion to Dismiss

United States’ Reply Brief