The Supreme Court Rejects a First Amendment Challenge to a Federal Statute Limiting the Advice That Attorneys Can Give to Clients Contemplating Bankruptcy
By JULIE HILDEN
|Wednesday, March 17, 2010|
On March 8, the Supreme Court decided an interesting First Amendment case – and one that is of special importance in light of the recession and the rising number of personal bankruptcies it has triggered.
The case – Milavetz, Gallop & Milavetz v. United States – raised the question whether a federal statute violated the First Amendment by limiting the advice that attorneys can give to their clients. More specifically, the statute barred attorneys from advising clients who are planning to declare bankruptcy to incur additional debt, under certain circumstances.
The Court – in an opinion by Justice Sotomayor – upheld the relevant statutory provision, but construed its meaning more narrowly than the Court of Appeals had, as I will explain.
Moreover, the Court limited its holding to the as-applied challenge that had been brought by the Milavetz law firm – leaving the possibility of a future facial challenge still open. (An as-applied challenge questions the constitutionality of a law as it has been – or, in this case, could be – applied to the person, firm or other entity that is directly before the Court. A facial challenge targets the broad scope of possible applications of a given law, and typically focuses upon the "chilling effect" the law could have.)
However, I will argue that even these two narrowing strategies cannot cure the serious First Amendment problems this case raised. I believe that the Court grossly underestimated the gravity of the First Amendment harm that occurs when a law interferes with the advice that an attorney may give to his or her client – and especially to clients possibly facing a desperate situation such as bankruptcy. It was also, in my view, a mistake for the Court to leave the important constitutional issues here for some undetermined future day.
This situation seems especially unfortunate when, in light of the recession, many personal bankruptcies may be more the fault of the economy or unethical mortgage practices, than of the individual debtor. Thus, in many cases, the person who is losing the right to full and candid attorney advice, thanks to this decision, may be someone who never would have been contemplating bankruptcy but for, say, the loss of a job followed by a long and fruitless job search. But that honest, hard-working person could still be denied accurate and complete attorney advice in his or her darkest hour.
Obviously, some people's bankruptcies, such as those simply arising from overspending, may still be deemed to be wholly their own fault. But the unemployment statistics show that that simply cannot be the full story for all the bankruptcies we are seeing now.
Generally, I've been somewhat unsympathetic to the calls for judges and Justices with real-life experience – such as people from the political sphere who constantly hear from constituents. Former politicians have seemed to me to be out of place on a court, especially the Supreme Court. But Court decisions such as this one give me pause. I think that, here, having, say, a former Governor on the Court would have resulted in a different and better Court opinion – or, perhaps, a strong dissent. A sense of how this decision could affect actual people is completely missing from the opinion.
The Court's Decision, and the Test It Applied
The statute's language bars attorneys (among others) from "advis[ing] an assisted person . . . to incur more debt in contemplation of such person filing a [bankruptcy] case."
But what, exactly, does "in contemplation of" mean here?
The U.S. Court of Appeals for the Eighth Circuit interpreted this language to "broadly prohibit" an attorney "from advising an assisted person . . . to incur any additional debt when the assisted person is contemplating bankruptcy. . ." – even if such advice would count as prudent pre-bankruptcy planning. Accordingly, the Eighth Circuit ruled that the statute was unconstitutional, a violation of the First Amendment.
In contrast, the Supreme Court read the provision much more narrowly – to prohibit an attorney "only from advising a debtor to incur more debt because the debtor is filing for bankruptcy, rather than for a valid purpose." (Emphasis added.)
The Court also put the issue another way: The question is whether the "impelling reason" for the attorney's advising the client "to incur more debt" was the prospect of the client's filing for bankruptcy.
But what, exactly, does an "impelling reason" mean?
A more useful opinion might have scripted templates, giving examples of what lawyers can and cannot say when advising clients. Yet this opinion stayed in the ether, refusing to give any useful guidance for practitioners.
Ironically, the Court may have refrained from offering concrete guidance precisely because to do so would only underline how much this statute unconstitutionally interferes with the attorney-client relationship.
Some Problems with the "Impelling Reason" Test
The "impelling reason" test, moreover, isn't just intrusive; it may also be frequently misapplied. Presumably, the client has gone to the bankruptcy lawyer precisely because the client thinks bankruptcy is very likely. Surely, the lawyer will advise him or her that it is okay to continue to incur debt if doing so will benefit creditors once bankruptcy is filed – for instance, if the new debt generates money that is needed to maintain or increase the client's assets' value. Indeed, the Supreme Court itself conceded, in its decision, that this kind of pro-creditor debt is okay. And it was the need to protect debt like this that led the Eighth Circuit to strike down the statute, before the Supreme Court revived it.
But even with such new, pro-creditor debt, one could argue that the bankruptcy itself was the "impelling reason" for the lawyer to give the advice to incur such debt – which shows how poor the Court's "impelling reason" test really is. Once bankruptcy is contemplated, everything occurs in its shadow.
It's easy to imagine other cases, too, where the application of the Court's "impelling reason" test would become very unclear. Such cases include those where the debt at issue might be pro-creditor, but also might not.
Here is an example: What if a laid-off worker, contemplating likely bankruptcy, wants to buy two or three expensive suits – hoping to a make a better impression in job interviews, secure a good job, and fend off bankruptcy at the last minute? He asks his lawyer if he'll have to pay for the suits if he doesn't get a job, or if the new debt will be discharged in bankruptcy. The lawyer advise him the debt will be discharged. Indeed, the lawyer says, "Go ahead, buy the suits."
This simply doesn't seem to me like the kind of attorney advice that ought to be off-limits. The client is not yet in bankruptcy, and with this purchase, he is trying to avoid it, not to harm his creditors.
Yet the Court's test still might apply. Was the "impelling reason" for the lawyer's advice to buy the suits the lawyer's knowledge that the suit debt could likely be discharged? Or was it the hope that the client could avoid bankruptcy? Reasonable minds will differ.
Generally, the law is careful about causation, discriminating among but-for cause, proximate cause, and the like. But which kind of causation equates with an "impelling reason"? With this wording, lawyers are not sufficiently apprised regarding the advice they can and cannot give.
Close calls like this one regarding the new suits are the very calls where clients most need lawyers' advice, but the Court's test may well scare some lawyers away from providing it. Moreover, a rule like the Court's effectively deputizes lawyers as pre-bankruptcy police – a role that is directly at odds with the loyalty and confidentiality obligations that ethics rules rightly say that lawyers owe their clients.
The basic problem with the Court's opinion is that it wants to treat people as if they have already filed for bankruptcy when, in fact, they are still only contemplating it. But there's a good reason to treat these two situations differently: Once the client has filed, there is a neutral third party who can protect his or her interests, as well as the debtors': the bankruptcy judge. Before that, the client has only his or her lawyer for protection. Gagging that lawyer during the time when he is the client's only ally is a terrible idea.
With Safeguards Already in Place, Interfering with Attorney-Client Advice Is Not Only Unconstitutional, But Unnecessary
Readers may still wonder, What about the true grifters? What is to prevent a lawyer from advising all his bankrutpcy clients – with no question pending, the moment the client walks into the lawyer's office – "As soon as you know you're definitely filing, go crazy with those credit cards!"
The answer is that there are other laws in place to prevent this – laws that are substantial and effective enough that they caused the Supreme Court to describe the provision at issue in this case as simply "an additional safeguard against the practice of loading up on debt prior to filing." (Emphasis added.)
Other statutes set a threshold for how much debt a person can acquire prior to bankruptcy before the filing is deemed "abusive." The law mandates that an attorney's signature on a bankruptcy filing legally certifies that it is not an abusive filing. And a bankruptcy court can refuse to discharge fraudulent debts. (It seems very likely, too, that the bankruptcy court will look with a jaundiced eye at debts that are incurred shortly before filing, when it decides whether certain debts will be discharged.)
The Court sees all these safeguards as a reason that its "impelling reason" test is acceptable. But in my view, the existence of these safeguards only makes that test all the more troubling. That's because none of these other laws or rules tells attorneys what they can and cannot say to their clients. For this reason, the attorney gag rule is not just an "additional safeguard," it is a uniquely troubling one.