Friday, December 19, 2008

Fifth Circuit Relies on Constitutional Avoidance to Uphold Sec. 526(a)(4)

In a departure from rulings by the Eighth Circuit and several lower courts, the Fifth Circuit has held that Sec. 526(a)(4), which limits the advice debt relief agencies can give potential debtors "in contemplation of" bankruptcy, passes constitutional scrutiny. Susan B. Hersh v. United States of America, No. 07-10226 (5th Cir. 12/18/08). The Fifth Circuit also found that attorneys were "debt relief agencies" and upheld the constitutionality of Sec. 527.

Section 526(a)(4) is found amongst three sections regulating the activities of "debt relief agencies." It states that a debt relief agency shall not "advise an assisted person or prospective 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." Several courts, including the Eighth Circuit, have held that this statute is an overly broad restriction on protected speech because it prohibits beneficial speech as well as abusive advice. Milavetz, Gallop & Milavetz, P.A. v. United States, 541 F.3d 785 (8th Cir. 2008).

The Fifth Circuit acknowledged that if the statute were interpreted literally, it could be problematic.

If interpreted literally and broadly, section 526(a)(4) would raise serious consitutional problems because, as Hersh suggests, it would restrict some speech that is protected by the First Amendment. The statute does not expressly qualify its restriction on advice to situations in which incurring more debt would be an abuse of the bankruptcy system. Thus, if interpreted literally, section 526(a)(4) creates a blanket restriction on attorneys advising clients to incur any debt when intending, or contemplating whether to, file for bankruptcy under any circumstances. It would prohibit some attorney advice that would not be abusive to the bankruptcy system, harmful to creditors, or harmful to debtors. Thus, interpreted literally, section 526(a)(4) may apply to speech that is protected by the First Amendment.

Slip op. at 15.

However, at this point, the Fifth Circuit took a cue from the dissent in Milavetz and noted that the constitional problem could be avoided through a narrow construction. While section 526(a)(4) could prohibit some permissible speech, it also restricts malignant speech as well. Under the doctrine of constitutional avoidance, courts will decline to hold an act unconstitutional when another legitimate construction is available. The court concluded that this was possible in the case of speech in contemplation of bankruptcy.

To avoid potential constitutional questions regarding section 526(a)(4)'s restrictions on speech, this court construes the statute to prevent only a debt relief agency's advice to a debtor to incur debt in contemplation of bankruptcy when doing so would be an abuse of the bankruptcy system. In so interpreting the statute, we avoid the constitutionality questions raised by Hersh (and those relied on by the Milavetz majority) and conclude that the statute only affects unprotected speech.


Slip op. at 19.

Having decided to avoid the constitutional issue, the Fifth Circuit took some pains to explain why its construction was plausible, noting that constitutional avoidance "is not a license for the judiciary to rewrite language enacted by the legislature." The court pointed out that the "in contemplation" phrase is frequently used to connote bad intent. The court also stated that the civil remedies for violation of the section, which include recovering damages for the benefit of the debtor and enjoining bad conduct, indicate a purpose to protect debtors from abusive advice rather than to shield them from good counsel. Finally, the court found that curbing abusive attorney practices was a major concern of BAPCPA, so that such an intent could be used to inform the statute's construction.

Milavetz and Hersh represent two different approaches to the issue of regulating attorney speech. The Milavetz decision focuses primarily on not chilling protected speech. On the other hand, the Hersh opinion seeks to protect regulation of abusive speech. With a split within the Eighth Circuit and between the Fifth and Eighth Circuits, this issue may be heading for the Supreme Court.

2 comments:

David Sergi said...

I don’t think the sky is falling, the case limits 526 a 4 as follows:

“To avoid potential constitutional questions regarding section 526(a)(4)’s restrictions on speech, this court construes the statute to prevent only a debt relief agency’s advice to a debtor to incur debt in contemplation of bankruptcy when doing so would be an abuse of the bankruptcy system. In so interpreting the statute, we avoid the constitutionality questions raised by Hersh (and those relied on by the Milavetz majority), and conclude that the statute only affects unprotected speech.”

I see this as a pyrrhic victory for the Government because as long as you re affirm any debt that you counsel a client to incur you are working with in the Hersh. What the 5th Cir. has done is to simply carve out abusive tactics that would not withstand an adversary proceeding anyway. You can’t tell someone to put your fee on a credit card then file. We have never done that unless were affirm that transaction. With the various look backs and provisions related to cars and houses, the Honest lawyer can take succor from this opinion.

Anonymous said...

The court must rely on the text of the statute and may not interpret the statute's term new "debt" to mean "abusive debts." Our federal court's do not have legislative powers. They interpret laws, not write them. congress says what it means and means what it says. Even if the court could construe the law to mean "abusive debt" it still would not pass first ammendment muster. "abusive debt" is not sufficiently precise for a lawyer to not be chilled from discussing a new debt with her client. Is cosigning a large student loan to an expensive private college an abusive debt? Is signing for a relative into a hospital an abusive debt? Lawyers and members of the public are entitled to exchange information about incurring new debt without the chill that the debt may be later be determined abusive.