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Friday, April 9, 2010

THE SUPREME COURT UPHOLDS CONGRESS TELLING ATTORNEYS WHAT WE CAN AND MUST TELL CLIENTS

THE SUPREME COURT UPHOLDS CONGRESS TELLING ATTORNEYS WHAT WE CAN AND MUST TELL CLIENTS
"Our law firm is a debt relief agency. We help people file for relief under the Bankruptcy Code."

You see this odd disclaimer on various documents, websites and advertisements. Where does it come from and why?

It comes from section 528(a)(4) of the Bankruptcy Code.

Congress decided a few years back to get in the business of regulating what attorneys can tell potential and actual clients. There are two bits of this regulation that I deal with pretty much every day.

The first is the odd disclaimer above. I put it on advertisements and various documents that I provide to clients. Section 528(a) requires that a "debt relief agency" make some version of that disclosure on advertisements. Until the last few days, we weren't completely sure whether law firms that represent debtors in bankruptcy fell within the definition.

The second is the prohibition on advising clients to incur debt "in contemplation of bankruptcy" contained in section 526(a)(4) of the Bankruptcy Code. Clients routinely ask me how to handle their finances between the time that they first consult with me and when we file their bankruptcy case. I very often start my answers with explaining that the Bankruptcy Code prohibits me from advising clients to incur additional debt in contemplation of bankruptcy.

Both of these provisions were subject to court challenge on the ground that they violate the First Amendment. On March 8, 2010, the Supreme Court upheld both provisions and ruled that law firms that represent debtors are debt relief agencies. A copy of the decision is available here.

Not many restructuring attorneys are going to say many positive things about these provisions. We have a natural bias against laws that inhibit our ability to serve our clients. I will leave to the constitutional law scholars whether the Supreme Court got the decision correct as a matter of jurisprudence.

I will however point out a couple practical issues arising from these provisions and the decision upholding them.

First, although some attorneys and law firms limit their practice to individuals who need to file bankruptcy cases, many of us practicing in this area do not. I for example have a broad restructuring practice. I represent both debtors and creditors, both inside and outside of bankruptcy.

At what point do I start being a "debt relief agency" for the purpose of section 528(a)? Is it when it becomes clear that a bankruptcy filing is the best option for a particular client? Is it whenever I advertise bankruptcy services? Is it whenever I advertise bankruptcy services to individuals? I really don't know.

Because those of us who work in the law tend to try to follow it, it would have been nice to get a little guidance from the Supreme Court on this issue.

Second, as little guidance as the Supreme Court gave us with respect to when we become "debt relief agencies," the Court was pretty clear that we can talk at length about the legal effects of incurring debt shortly before bankruptcy. Therefore, although we cannot "advise" clients to incur more debt in contemplation of bankruptcy, we can explain the likely effects of doing so. The Court essentially limited the provision to prevent attorneys from advising clients to commit fraud by incurring new debt that they never intended to repay.

Not that we ever would have advised that in the first place.

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