The decision is unanimous on all points that matter. Justice Scalia writes a concurring opinion to quibble over the inclusion of a legislative history footnote of the opinion of the court that is dicta. Justice Thomas offers a concurring opinion with a different analysis of the reason the court should rule in a particular way on a secondary point in the case.
In essence, the change relegates advice to take on more debt solely because the cilent is filing for bankruptcy to the some realm as the prohibition of attorney participation in crimes, frauds and frivolous lawsuits.
Lower courts had invalidated the law as an infringement on free speech which deserved special protection in an attorney-client relationship that was fundamental to providing a client with due process.
The trouble with the case is that it has indirectly rendered improper client conduct in bankruptcy that was not clearly improper before this case went to the court in a way that is far that leaves the boundaries of proper conduct far less clear than the court suggests.
The Holding
The U.S. Supreme Court explains in its synopsis of the case (which is for ease of use only; the opinion itself is what counts):
Section 526(a)(4) 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. The statute’s language, toether with its purpose, makes a narrow reading of §526(a)(4) the natural one. . . . [T]he controlling question [is] . . . whether the impelling reason for “advis[ing] an assisted person . . . to incur more debt” was the prospect of filing for bankruptcy. In practice, advice impelled by the prospect of filing will generally consist ofadvice to “load up” on debt with the expectation of obtaining its discharge. The statutory context supports the conclusion that §526(a)(4)’s prohibition primarily targets this type of conduct. The Court rejects . . . arguments for a more expansive view of §526(a)(4) and its claim that the provision, narrowly construed, is impermissibly vague. Pp. 9–18.
The devil, of course, is in the details. How broad is broad? Reading from the opinion itself (citations omitted, paragraph breaks added):
The Court of Appeals concluded that “§526(a)(4) broadly prohibits a debt relief agency from advising an assisted person . . . to incur anyadditional debt when the assisted person is contemplating bankruptcy.” Under that reading, an attorney is prohibited from providing all manner of “beneficialadvice—even if the advice could help the assisted person avoid filing for bankruptcy altogether.” . . .The Government contends that §526(a)(4)’s re-striction on advice to incur more debt “in contemplation of” bankruptcy is most naturally read to forbid only advice toundertake actions to abuse the bankruptcy system. Focus-ing first on the provision’s text, the Government points tosources indicating that the phrase “in contemplation of”bankruptcy has long been, and continues to be, associated with abusive conduct. . . .
[W]e are persuaded that a narrower reading of §526(a)(4) is sounder,although we do not adopt precisely the view the Govern-ment advocates. The Government’s sources show that the phrase “in contemplation of” bankruptcy has so commonly been associated with abusive conduct that it may readily be understood to prefigure abuse. As used in §526(a)(4), however, we think the phrase refers to a specific type of misconduct designed to manipulate the protections of the bankruptcy system. . . . [W]e conclude that §526(a)(4) 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. . . .
[A]dvice to incur more debt because of bankruptcy, as pro-hibited by §526(a)(4), will generally consist of advice to “load up” on debt with the expectation of obtaining itsdischarge—i.e., conduct that is abusive per se. . . .
Code provisions predating the BAPCPA already sought to prevent the practice of loading up on debt prior to filing. Section 523(a)(2), for instance, addressed the attendant risk of manipulation by preventing the discharge of debts obtained by false pretenses and making debts for purchases of luxury goods or services presumptively nondischargeable. See §§523(a)(2)(A) and (C) (2000 ed.).
The BAPCPA increased the risk of such abuse, however, by providing a new mechanism for determining adebtor’s ability to repay. Pursuant to the “means tes[t],”§707(b)(2)(D) (2006 ed.), a debtor’s petition for Chapter 7 relief is presumed abusive (and may therefore be dismissed or converted to a structured repayment plan under Chapter 13) if the debtor’s current monthly income exceeds his statutorily allowed expenses, including payments for secured debt, by more than a prescribed amount. See §§707(b)(2)(A)(i)–(iv). The test promotes debtor accountability but also enhances incentives to incur additional debt prior to filing, as Unlike the reasonable financial advice the Eighth Circuit’s broad reading would proscribe, advice to incur more debt because of bankruptcy presents a sub-stantial risk of injury to both debtors and creditors. See Hersh, 553 F. 3d, at 760–761. Specifically, the incurrenceof such debt stands to harm a debtor if his prepetitionconduct leads a court to hold his debts nondischargable, see §523(a)(2), convert his case to another chapter, ordismiss it altogether, see §707(b), thereby defeating his effort to obtain bankruptcy relief. If a debt, althoughmanipulatively incurred, is not timely identified as abu-sive and therefore is discharged, creditors will suffer harm as a result of the discharge and the consequent dilution of the bankruptcy estate. By contrast, the prudent advicethat the Eighth Circuit’s view of the statute forbids would likely benefit both debtors and creditors and at the very least should cause no harm. See id., at 760; 541 F. 3d, at 800 (Colloton, J., concurring in part and dissenting inpart). For all of these reasons, we conclude that §526(a)(4) prohibits a debt relief agency only from advising an as-sisted person to incur more debt when the impelling rea-son for the advice is the anticipation of bankruptcy.payments on secured debts offset a debtor’s monthly income under the formula.
Other amendments effected by the BAPCPA reflect a concern with this practice. For instance, Congress amended §523(a)(2) to expand the exceptions to discharge by lowering the threshold amount of new debt a debtormust assume to trigger the presumption of abuse under §523(a)(2)(C), and it extended the relevant prefiling win-dow. See §310, 119 Stat. 84. In context, §526(a)(4) is best understood to provide an additional safeguard against the practice of loading up on debt prior to filing. . . .
Unlike the reasonable financial advice the Eighth Circuit’s broad reading would proscribe, advice to incur more debt because of bankruptcy presents a substantial risk of injury to both debtors and creditors. Specifically, the incurrence of such debt stands to harm a debtor if his prepetition conduct leads a court to hold his debts nondischargable, see §523(a)(2), convert his case to another chapter, or dismiss it altogether, see §707(b), thereby defeating his effort to obtain bankruptcy relief.
If a debt, although manipulatively incurred, is not timely identified as abusive and therefore is discharged, creditors will suffer harm as a result of the discharge and the consequent dilution of the bankruptcy estate. By contrast, the prudent advice that the Eighth Circuit’s view of the statute forbids would likely benefit both debtors and creditors and at the very least should cause no harm. . . . For all of these reasons, we conclude that §526(a)(4) prohibits a debt relief agency only from advising an assisted person to incur more debt when the impelling reason for the advice is the anticipation of bankruptcy. . . .
Section 526(a)(4) by its terms prevents debt relief agencies only from “advis[ing]” assisted persons “to incur” more debt. Covered professionals remain free to “tal[k] fully and candidly about the incurrence of debt in contemplation of filing a bankruptcy case.”
Section 526(a)(4) requires professionals only to avoid instructing or encouraging assisted persons to take on more debt in that circumstance. Cf. ABA Model Rule of Professional Conduct 1.2(d) (2009) (“A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but alawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law”). Even if the statute were not clear in this regard, we would reach the same conclusion about its scope because the inhibition of frank discussion serves no conceivable purpose within the statutory scheme. . . .
Under our reading of the statute, of course, the prohibited advice is not defined in terms of abusive prefiling conduct but rather the incurrence of additional debt when the impelling reason is the anticipation of bankruptcy. Even if the test depended upon the notion of abuse, however, Milavetz’s claim would be fatally undermined byother provisions of the Bankruptcy Code, to which that concept is no stranger. As discussed above, the Code authorizes a bankruptcy court to decline to discharge fraudulent debts, see §523(a)(2), or to dismiss a case orconvert it to a case under another chapter if it finds thatgranting relief would constitute abuse, see §707(b)(1). Attorneys and other professionals who give debtors bank-ruptcy advice must know of these provisions and their consequences for a debtor who in bad faith incurs addi-tional debt prior to filing. Indeed, §707(b)(4)(C) states that an attorney’s signature on bankruptcy filings “shall constitute a certification that the attorney has” determined thatthe filing “does not constitute an abuse under [§707(b)(1)].” Against this backdrop, it is hard to see how a rule thatnarrowly prohibits an attorney from affirmatively advising a client to commit this type of abusive prefiling conduct could chill attorney speech or inhibit the attorney-clientrelationship. Our construction of §526(a)(4) to prevent only advice principally motivated by the prospect of bankruptcy. . . .
6 The hypothetical questions Milavetz posits regarding the permissibility of advice to incur debt in certain circumstances, see Brief for Milavetz 48–51, are easily answered by reference to whether the expectation of filing for bankruptcy (and obtaining a discharge) impelled the advice.
We emphasize that awareness of the possibility of bankruptcy is insufficient to trigger §526(a)(4)’s prohibition. 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,” §523(a)(2)(C)(ii)(II), is similarly permissible.
The Problem With The New Rule
This isn't the ruling I would have liked, but it is better than it might have been.
Here's the real issue:
1. The bankruptcy system, particularly the means test, often makes it beneficial to a client to incur more debt prior to bankruptcy. This can make the difference for example, between not qualifying for the means test and having to engage in a five year payment plan under Chapter 13, and being permitted to file under Chapter 7 and making no payments into the estate out of post-petition income.
2. It is exceedingly rare that lawyers are prohibited from recommending to a client that a client take action that is lawful which would benefit the client. Generally, an attorney does not have a duty to prevent his client from causing financial harm to adverse parties in a lawsuit through pre-suit financial planning.
Instead, generally, in bankruptcy, creditors have a duty to look out for themselves knowning that they could lose the ability to be repaid if they make a bad credit decision. Debtors have a duty to be truthful in the face of a creditor's inquiry about present facts, but not a duty to affirmatively disclosure opinions about what the debtor will do in the future, or to refrain from acts that could cause a creditor future financial harm. Debtors and creditors are not generally fiduciaries for each other.
There reason that there are so many mechanical rules in bankruptcy about how claims are handled is to let everyone know precisely how far they can go without having to think about their actions in a big picture sense.
3. Prior to Milavetz, Gallop & Milvetz, P. A. v. United States, it is not at all clear that incurring debt in response to an incentive created by the bankruptcy code itself would be a abuse of the bankruptcy process that would genuinely cause a court to hold a debtor's debts nondischargable, convert the case to another chapter, or dismiss it altogether, thereby defeating the effort to obtain bankruptcy relief.
4. This concern is mitigated by the holding that covered professionals remain free to talk fully and candidly about the incurrence of debt in contemplation of filing a bankruptcy case. Thus, presumably, a lawyer can lay out for a client all of the client's options and the consequences of doing so, so long as the option to incur more debt solely for a bankruptcy case related benefit is not recommended by the lawyer.
5. But, the fact that a lawyer can be sanctioned for certifying that conduct is not abusive, and the fact that the U.S. Supreme Court has defined incurring more debt to take advantage of Congressionally created incentives in the bankruptcy code to incur more debt prior to bankruptcy as abusive removes much of the comfort that I lawyer might otherwise have had in laying out a client's options.
6. It is also not at all clear how this issue comes up procedurally, because the very fact specific and language specific inquiry necessary to determine if an attorney has violated the provisions have to be presented to someone in position to take action in the context of a waiver of attorney-client privilege or a permission to make inquiries notwithstanding the existence of an attorney-client privilege.
The former creates an incentive for a client to use accurate advice given to a client that would cause the client to be better off to be used against the lawyer. The latter creates an opportunity for others to ask about otherwise privileged communications in a situation where publicly available information makes it impossible to know with any certainty what an attorney recommended or discussed that produced an action by a client.
The core issue is really point 3 above. The conduct that lawyers were prohibited from talking about was not likely to be considered abusive prior to this case, and the situations when it is legal for a client to incur more debt in advance of a bankruptcy, without it constituting abuse, is now much less clear than it was before this case was decided.
Under prior law, a "pigs get fat, hogs get slaughtered" concept prevailed. If incurring a small amount of additional debt could provide a client with a significant bankruptcy advantage, it would generally not be considered abusive. If a client incurred a large amount of additional debt simply so that it could be discharged, that would generally be considered abusive.
The prior law was particularly muddy in cases where the debtor hurt was not the one to whom additional debt was incurred.
For example, taking out new secured debt prior to bankruptcy may be unlikely to harm the secured creditor (who has the collateral to insure total repayment), but could harm other creditors, by allowing a debtor to file under Chapter 7 rather than Chapter 13. The harm from incurring more debt is thus quite indirect.
Indeed, as a general rule, incurring more debt will often be better for one creditor and worse for another, and frequently the debt who will be better off is not the one to whom new debt will be owed.
The good news, is that the benefits to a debtor of incurring more debt are often modest in a typical bankruptcy case, and often a debtor contemplating bankruptcy won't be able to incur more credit in an case, or can offer at least a mix of bankruptcy and non-bankruptcy reasons for incurring more debt.
Moreover, the clients for whom the rule is a problem tend to be sophisticated enough too draw their own conclusions without having their attorney spell the issue out for them.
If the U.S. Supreme Court had found the provision unconstitutional, Congress would have been free to put better incentives into the law, rather than asking attorneys' who are in the business of being vigorous advocates from their clients best interests, to cease to use legal rights for fear that they could be abusive.
As it is, counseling all clients facing financial distress who have to consider the possibility of bankruptcy is materially less easy in a significant subclass of cases, although usually the burden will not be insurmountable if an attorney is clever about it.
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