March 8, 2010 / 4:14 PM / 9 years ago

US top court upholds lawyer bankruptcy advice law

* At issue: incurring more debt before bankruptcy filing

* Law challenged for violating free-speech rights

* Government lawyers say law only targeted abuses

By James Vicini

WASHINGTON, March 8 (Reuters) - The Supreme Court on Monday unanimously upheld part of the U.S. bankruptcy law that bars attorneys from advising clients to take on more debt while considering a bankruptcy filing.

The opinion by Justice Sonia Sotomayor reverses a ruling by a U.S. appeals court that a provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was unconstitutionally broad and violated free-speech rights.

The provision prohibits bankruptcy professionals like attorneys from advising their clients to incur more debt, such as mortgages or student loans, before filing for creditor protection.

The ruling is a victory for the U.S. Justice Department, which defended the provision. It said Congress adopted the law fight abuse of the bankruptcy system encouraged by lawyers.

Department attorneys also argued that the law can be interpreted narrowly to prohibit only advice that a client take new debt with the intent of abusing the bankruptcy system. Sotomayor agreed with that interpretation.

The Minneapolis-based bankruptcy law firm Milavetz, Gallop & Milavetz PA, two of its attorneys and two prospective clients sued in 2007, saying the law violated constitutional free-speech rights under the First Amendment.

A U.S. appeals court based in St. Louis agreed, ruling that the law prevented lawyers from fulfilling their duty to clients to give them appropriate financial advice.

Sotomayor agreed with the government’s interpretation of the law, saying it was aimed at misleading commercial speech. She rejected the argument that the law was vague.

She also upheld the law’s requirement that attorneys make certain disclosures in their advertisements and ruled that attorneys who provide bankruptcy assistance to certain persons are debt relief agencies within the meaning of the law. (Reporting by James Vicini. Editing by Robert MacMillan)

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