Washington – Bankruptcy attorneys may be more careful about how they advise their clients after the U.S Supreme Court’s holding this week that the communication and disclosure rules that apply to debt relief agents also apply to them.

Some attorneys worry that the ruling in Milavetz, Gallop & Milavetz, P.a. v. U.S. will prevent consumer bankruptcy attorneys from giving clients the most zealous representation.

“It kind of chills the attorney-client relationship,” said Jay Jump, a bankruptcy attorney who practices out of the Kent, Wash. office of the Jump Law Firm. “You have to limit what you say.”

But others think the ruling simply underscores the ethics rules by which lawyers are already bound.

“It still gives lawyers the ability to enter into full and frank conversations with their clients while not going over the edge,” said Steve Jakubowski of the Coleman Law Firm in Chicago, who authors the Bankruptcy Litigation Blog.

Can’t advise to ‘incur more debt’

In the unanimous opinion, Justice Sonia Sotomayor wrote that bankruptcy attorneys fall within the meaning of “debt relief agencies” under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

The Court also held that the law’s prohibition against advising clients “to incur more debt in contemplation of such person filing” for bankruptcy is constitutional – and is binding on bankruptcy attorneys.

The plaintiffs in the case – lawyers from a Minnesota consumer bankruptcy law firm – argued that the law chills lawyers’ ability to give effective advice to their clients in preparation for bankruptcy because even advice to sell a house and rent an apartment to cut expenses is technically advice to “incur more debt.”

But the Supreme Court disagreed.

The law, Sotomayor wrote, “prohibits a debt relief agency only from advising a debtor to incur more debt because the debtor is filing for bankruptcy, rather than for a valid purpose.”

Jakubowski said the ruling benefits bankruptcy attorneys by clarifying a confusing rule that has baffled them for years.

“Nobody knew how to read that law,” Jakubowski said of the bankruptcy reform statute enacted five years ago. “That is why the case was brought. the district courts didn’t know what to do with it.”

He said that the Court made a ruling that protects against bankruptcy fraud while still respecting the role of the lawyer.

“Lawyers can still advise their clients on issues that would normally fall under the attorney-client relationship,” he said.

But Jump said that the decision puts bankruptcy lawyers between a rock and a hard place.

“My job is to represent my client zealously, and that means using the law to the full advantage of my client,” Jump said. “That’s not being unethical or acting frivolously. That’s being a good lawyer.”

After the ruling, attorneys may be afraid to give clients financial advice before they file for fear that it will be used against them later, Jump said.

“My fear is that this will be a way for the trustee to wedge [his or her] foot in the door and say, ‘this debtor shouldn’t be granted a discharge because [he or she] obtained this debt for the purpose of filing for bankruptcy,’” Jump said. “And when the lawyer asks the client about it, the client will say, ‘my attorney told me to do it,’” leading the trustee to seek sanctions against the attorney.

But Jakubowski said such fears are unwarranted.

“I don’t think the Court is telling lawyers that they can’t advise clients on the consequences of their actions, [such as] running up a debt in contemplation of its discharge,” Jakubowski said. “Lawyers can’t tell them to do so. But then can say, ‘If you do that, these are the consequences.’”

Jakubowski said that the Court addressed the law firm’s concerns about giving what would otherwise be permissible advice in Footnote 6 of the opinion.

“We emphasize that awareness of the possibility of bankruptcy is insufficient to trigger [the law's] prohibition,” Sotomayor wrote in the footnote. “Instead, that provision proscribes only advice to incur more debt that is principally motivated by that likelihood. Thus, advice to refinance a mortgage or purchase a reliable car prior to filing because doing so will reduce the debtor’s interest rates or improve his ability to repay is not prohibited, as the promise of enhanced financial prospects, rather than the anticipated filing, is the impelling cause. …

“Advice to incur additional debt to buy groceries, pay medical bills, or make other purchases ‘reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor’ [is] similarly permissible.”

Jakubowski said that the Court’s objective is weeding out abuse, not interfering with the attorney-client relationship.

“There is a line between advice and conspiracy,” Jakubowski said.

But Jump still worries that the overall impact of the ruling will be greater than the footnote’s limitation.

“To me, the ruling is particularly scary [because it was 9-0], so what happens to other areas of law?” Jump asked. “What might the court say about attorney communications in other areas of the law?”

Disclosure ruling no big deal

Neither Jump nor Jakubowski thought the portion of the ruling upholding the law’s disclosure requirement was worth any concern, despite the plaintiffs’ claim that it was confusing for potential clients and affected the law firm’s ability to advertise the way it wanted to.

The Court held that the law’s provision requiring debt relief agencies to make disclosures such as, “We are a debt relief agency. we help people file for bankruptcy under the Bankruptcy Code,” was not unconstitutional.

While the requirement may be a pain for lawyers, it’s not the end of the world, they say.

“So what?” Jakubowski said. “If I want to send out solicitation material, the [state] bar already tells me what I have to do and how I have to do it. we are regulated all the time in terms of how we communicate with clients and potential clients.”

“I’ve been using the disclaimer [since the law was passed], and in all truthfulness, I don’t think it’s made a big difference” to potential clients, Jump said. “I don’t like being called a ‘debt relief agency.’ But it’s not going to kill me.”

Questions or comments can be directed to the writer at: kimberly.atkins@lawyersusaonline.com

High Court ruling that lawyers are 'debt relief agents' gets mixed reaction