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Wednesday, July 17, 2024 | Back issues
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Attorney Duty on Debt Advice Debated in Supreme Court

WASHINGTON (CN) - The Supreme Court heard arguments Tuesday on whether lawyers should be allowed to advise bankruptcy clients to pile on more debt before filing. "Is there a difference between unethical and illegal advice?" Justice Sonia Sotomayor asked.

Currently, debt relief agencies are not allowed to advise clients to incur more debt in contemplating bankruptcy.

"It may be a stupid law, but I don't see why it's unconstitutional" Justice Antonin Scalia said to the lawyer arguing against the restrictions. "Where is the prohibition of stupid laws in the constitution?' he asked to laughter.

G. Eric Brunstad Jr. from Dechert represented the two people who sued over the restrictions. He claimed the rules violate the First Amendment, and said the restrictions intervened between lawyers and their clients even when lawyers give ethical advice.

He argued that lawyers should be exempt from laws governing debt relief agencies.

As an example of an acceptable time for a client to take on more debt, Brunstad put forward the scenario of a debtor signing a lease to an apartment while selling his house.

Assistant Solicitor General William Jay, on the other hand, argued on behalf of the government in saying lawyers should be barred from advising their clients to intentionally defraud their debtors by incurring more debt and held that bankruptcy lawyers are debt relief agencies, suggesting that the same restrictions apply to them.

Jay mentioned a case where a bankruptcy lawyer told his client to apply for a new credit card to get cash advances before filing, and told his client that she wouldn't have to repay a penny of it.

Chief Justice John Roberts challenged the government's argument on the necessity of the restrictions in limiting bankruptcy abuse. "What if a state thinks that there are too many punitive damage awards and so it passes a law saying lawyers may not tell their clients that they can seek punitive damages?" he asked.

Sotomayor probed the implications of the government's argument, asking whether a bankruptcy lawyer who demands that his client pay his fee would be guilty of incurring more debt for his client.

Jay replied essentially that the lawyer would be guilty.

Justice Ruth Bader Ginsberg asked whether a lawyer could advise a cancer patient on the brink of bankruptcy to take on more debt in seeking care.

But it was Justice Samuel Alito who seemed to answer the question more directly.

"Isn't something done in contemplation of bankruptcy only if it is done because of the anticipation of filing a bankruptcy petition?" he asked. "If a person takes on additional debt in order to obtain life-saving treatment, it's not done because of the bankruptcy. It's done because there is an emergency that requires immediate expenditures."

Brunstad, arguing against the restrictions, offered the justices an easy way out, telling them they wouldn't have to decide the 1st Amendment question if they simply decide that lawyers are not debt relief agencies.

But the justices appeared largely critical of this argument. Justice Stephen Breyer read Congress's definition of a debt relief agency, that it is "any person who provides any bankruptcy assistance," noting that "bankruptcy assistance" includes legal representation. "Doesn't a lawyer provide legal representation?" he asked.

The district court ruled in favor of the plaintiffs, deciding that restricting lawyers from advising their broke clients to incur more debt violated the First Amendment, adding that "debt relief agency" does not include lawyers.

The 8th Circuit agreed with the district court that the restriction on lawyer advice violated the Constitution, but disagreed on the other matter, saying lawyers can count as debt relief agencies.

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