Monday, July 31, 2006

BAPCPA Found to Unconstitutionally Limit Attorney Speech

In one of the first decisions construing the Debt Relief Agency provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the U.S. District Court for the Northern District of Texas has held that one specific provision of the statute is unconstitutional but denied relief on several other claims. No. 3:05-CV-2330-N, Susan B. Hersch vs. United States of America, et al (N.D. Tex. 7/26/06).

Attorney Susan B. Hersch of Dallas filed suit seeking a determination that attorneys did not fall within the definition of Debt Relief Agencies and that several provisions of BAPCPA were facially unconstitutional. On July 26, 2006, District Judge David C. Godbey released a 15 page Memorandum Opinion and Order. The Court’s ruling was a mixed bag for debtor’s attorneys. On the one hand, the Court found that Sec. 526(a)(4), which prohibits attorneys from advising clients to incur debt in contemplation of bankruptcy, was unconstitutional. However, the court rejected a challenge to the compelled disclosures required by Sec. 527 and held that attorneys were clearly within the scope of Debt Relief Agencies.

Attorneys Are Debt Relief Agencies

The Court found that the plain meaning of Sec. 101(4A) and 101(12A) provided that attorneys were included within the meaning of debt relief agencies. Debt relief agencies were defined as persons providing “bankruptcy assistance” in return for money, while bankruptcy assistance was defined as including “providing legal representation with respect to a case or proceeding under this title.” The court stated:

“A reading of the text for plain meaning indicates that the term ‘debt relief agency’ includes bankruptcy attorneys such as Hersch. Plain meaning is the preferred method for interpreting statutory language (citation omitted). Here, as only attorneys are authorized to provide legal advice and ‘providing legal advice’ is part of the definition of bankruptcy assistance, it seems clear that bankruptcy attorneys such as Hersch fit within the definition of ‘persons providing bankruptcy assistance.’ Attorneys also provide most of the other functions defined as ‘bankruptcy assistance.’”

It is hard to argue with the judge’s plain meaning analysis. While some courts have tortured the language into a conclusion that attorneys are not covered, In re Attorneys at Law and Debt Relief Agencies, 332 B.R. 66 (Bankr. S.D. Ga. 2005), this argument is probably a dead letter.

Section 526(a)(4) Impermissibly Limits Free Speech

Section 526(a)(4) was found unconstitutional under the First Amendment. However, this part of the opinion was a little procedurally confused. The plaintiff apparently did not plead that Sec. 526(a)(4) was unconstitutional. However, both parties briefed this issue extensively. As a result, the court ruled on the substantive issue subject to the plaintiff amending her pleadings to raise the issue which had already been decided.

Section 526(a)(4) states that a debt relief agency shall not “advise an assisted person . . . to incur more debt in contemplation of such person filing a case under this title or to pay an attorney or bankruptcy petition preparer fee or charge for services performed as part of preparing for or representing a debtor in a case under this title.” The plaintiff argued that the statute should be subject to strict scrutiny, which is the standard generally applied to content based restrictions on speech. The government, on the other hand, argued that Sec. 526(a)(4) was an ethical restriction and should be reviewed under the more lenient standard contained in Gentile v. State Bar of Nevada, 501 U.S. 1030 (1991). The District Court noted that there was nothing in Sec. 526(a)(4) which would indicate that it was an ethical prohibition. However, it noted that even under the more lenient standard, that the statute was not constitutional.

Under the Gentile standard, the statute must (1) serve “the State’s legitimate interest in regulating the activity in question” and (2) “impose only narrow and necessary limitations on lawyer’s speech.” The Court noted that both the strict and lenient standards require that the restriction be narrowly tailored. Here, the court found that Sec. 526(a)(4) was not “narrow and necessary.” In this respect, the government was hoist on its own petard. The government argued that taking on additional debt “may” harm a debtor in some cases. As a result, the Court concluded that in other cases, it may not. The Court stated: “Section 526(a)(4), therefore, is overinclusive in at least two respects: (1) it prevents lawyers from advising clients to take lawful actions; and (2) it extends beyond abuse to prevent advice to take prudent actions.”

Section 527 Is Constitutional

Section 527 requires attorneys to give mandatory discloses to clients. The Plaintiff argued that this section unconstitutionally compelled speech. The court dismissed this argument finding that it was permissible to require the disclosure of accurate information. In this case, the court noted that even though the disclosures could be misleading in certain specific circumstances, the attorney was allowed to tailor the disclosure so long as it contained the required substance.

Final Thoughts

This appears to be a cogent and well-reasoned opinion. The court rejected weak arguments from both parties and cut to the heart of the issues. Judge Godbey was appointed by the current President Bush so that he cannot easily be dismissed as a liberal activist. This opinion is merely persuasive authority rather than binding precedent. However, until the circuit courts weigh in, Hersch is likely to be very persuasive.

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