Two Bankruptcy Cases Set To Come Before The U.S. Supreme Court

Article by Rudolph J. Di Massa, Jr., and Laura D. Bonner

Originally published by The Legal Intelligencer

During its current term, the U.S. Supreme Court will hear argument in two critical bankruptcy cases. The first, Milavetz v. United States, includes a challenge to the constitutionality of the debt relief agency provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, or BAPCPA. This Supreme Court decision may finally resolve whether attorneys are included within the definition of a "debt relief agency" and, if so, whether the requirements imposed upon debt relief agencies are constitutional as applied to attorneys.

The second, Schwab v. Reilly, calls on the court to decide whether a trustee waives any objection to a debtor's exemption if the trustee fails to object within the 30-day limitation provided by Federal Rule of Bankruptcy Procedure 4003. This case should clarify the holding of an earlier U.S. Supreme Court case on a related issue.

Background Of Milavetz In drafting the BAPCPA, Congress added the term "debt relief agency" to the Bankruptcy Code. The term is defined in Section 101(12A) as "any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer. . . ." There are various restrictions and requirements for debt relief agencies, such as those found in Section 526(a)(4), which prohibits debt relief agencies from advising a client to "incur more debt in contemplation" of a bankruptcy filing, and Sections 528(a)(4) and (b)(2), which require debt relief agencies to include a statement in all bankruptcy-related advertisements disclosing their debt relief agency status.

These provisions came under fire in Milavetz, which challenged both the inclusion of attorneys within the definition of "debt relief agency" and the constitutionality of Sections 526(a)(4) and 528(a)(4) and (b)(2). The U.S. Supreme Court granted certiorari in Milavetz June 8.

Milavetz In The District Court In Milavetz, two of the attorneys in the Milavetz Gallop & Milavetz law firm and two clients of the law firm brought suit against the United States seeking a declaratory judgment that Sections 526(a)(4) and 528(a)(4) and (b)(2) of BAPCPA either don't apply to attorneys or are unconstitutional as applied to attorneys. The plaintiffs argued that Section 526(a)(4) has a chilling effect on attorneys' speech in violation of the First Amendment; Sections 528(a)(4) and (b)(2) unconstitutionally mandate speech in violation of the First Amendment and attorneys are not "debt relief agencies." The district court agreed with all three arguments.

First, in reviewing Section 526(a)(4), the court applied a "strict scrutiny" standard, requiring that the government show that the provision was narrowly tailored to achieve a compelling state interest. The court held that even if the government's asserted interests of protecting debtors, creditors and the bankruptcy system were...