Following a U.S. Supreme Court decision, the 2nd Circuit Court of Appeals has overturned a ruling for a bankruptcy lawyer who claimed a federal bankruptcy law violated his First Amendment free-speech rights by prohibiting him from advising clients to take on more debt before filing for bankruptcy (âBankruptcy Lawyer Loses Free-Speech Challenge,â Courthouse News Service, May 25, 2010).
Attorney Zenas Zelotes, who offers consumer bankruptcy services in Connecticut and Nevada, challenged the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) in Connecticut federal court, arguing that the law stopped him from exercising his First Amendment right to freely advise clients in areas such as bankruptcy, debt consolidation, debt management, and debt relief.
The federal judge in Connecticut agreed, finding BAPCPA to be unconstitutional because it prevents attorneys from âadvising clients to take lawful, prudent actions as well as abusive ones.â
But while the Zelotes decision was on appeal with the 2nd Circuit Court, the U.S. Supreme Court in March handed down a ruling in another case, Milavetz, Gallop & Milavetz v. United States, which upheld an 8th Circuit Courtâs ruling that bankruptcy attorneys are âdebt relief agenciesâ under federal law.
The Supreme Courtâs decision narrowly interprets BAPCPA as a safeguard against debt relief attorneys and agencies from advising clients to âload upâ on debt before declaring bankruptcy, in expectation of having those debts discharged.
The high courtâs decision reinstated a ban on legal advisories that attempt to exploit bankruptcy protections, prohibiting attorneys from advising consumers to take on additional debt before filing for bankruptcy. The ruling also requires bankruptcy attorneys to identify themselves as âdebt relief agencies.â
Justice Sonia Sotomayor, writing for the court, explained, âIt is hard to see how a rule that narrowly prohibits an attorney from affirmatively advising a client to commit this type of abusive prefiling conduct could chill attorney speech or inhibit the attorney-client relationshipâ (âJustices Revive Rule on Firmsâ Bankruptcy Advice,â Courthouse News Service, March 8, 2010).
The Supreme Court opinion specified that the type of abuse banned by the bankruptcy provision âwill generally consist of advice to ‘load up’ on debt with the expectation of obtaining its discharge.â
In following the Supreme Court decision, the 2nd Circuit Court noted that âthe statute does not prohibit attorneys or other debt relief agencies from advising clients to incur more debt in advance of bankruptcy when doing so serves legitimate purposes, nor does BAPCPA restrict âfrank discussionâ between attorney and client about incurring debt.â
Read the court decisions:
United States v. Zelotes. Opinion, U.S. Court of Appeals for the Second Circuit. Docket no. 07-1853-cv. Decided May 18, 2010.
Zelotes v. United States. Ruling on motion to dismiss, U.S. District Court for the District of Connecticut. Case no. 3:05cv1591 (PCD). Filed November 7, 2006.
Milavetz, Gallop & Milavetz et al. v. United States. Opinion, U.S. Supreme Court. Docket no. 08-1119. Decided March 8, 2010.
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