Portion of BAPCPA "Debt Relief Agency" Provisions Held Unconstitutional

Almost immediately after BAPCPA was passed, questions arose over the application of certain provisions governing the conduct of "debt relief agencies" to attorneys. As described in prior posts (see "Georgia Judge Says Attorneys Not 'Debt Relief Agencies'", "Court Refuses Advisory Opinion on Lawyers as 'Debt Relief Agencies'"), these provisions, among other things, require any person or entity which falls within the BAPCPA definition of a "debt relief agency" to make certain disclosures to potential debtors, and also prohibits them from counseling potential debtors to take certain actions. In Hersch v. United States, Case No. 3:05-CV-2330-N (N.D. Tex. 7/26/06) a court has now squarely addressed the constitutionality of portions of these BAPCPA provisions, and found that they violate the First Amendment. But before we get there, it's worth discussing how the case got to the point of a decision, and what the court did not hold.

Attorney Susan Hersh (misspelled in the case cite), a Texas attorney whose practice includes counseling clients regarding potential bankruptcies, filed an action in District Court seeking a declaratory judgment that BAPCPA does not apply to attorneys, and that several of its provisions are unconstitutional. Specifically, the provisions at issue were 11 U.S.C. 526(a)(4), which prohibits "debt relief agencies" from giving certain advice; and 527, which requires "debt relief agencies" to make certain disclosures. The Government initially contested Ms. Hersh's standing, on the basis that nobody had taken any action against her to enforce the BAPCPA provisions against her. The court rejected this argument, finding that the alleged suppression of her speech under BAPCPA was sufficient to give standing.

Addressing the merits, the court first considered Hersh's assertion that attorneys should not be included within the definition of "debt relief agency" under BAPCPA. Under the plain language of the definitions of "debt relief agency" and "bankruptcy assistance", however, the court found this argument untenable. There certainly is nothing which expressly excludes attorneys, even though there are five specified exceptions; and some of the provisions (for instance, the inclusion of "providing legal advice" within the meaning of "bankruptcy assistance") could only meaningfully apply to attorneys. Despite possible inconsistencies with other portions of the statute as applied to attorneys (for instance, the requirement in 527(b) that a "debt relief agency" disclose that an assisted person can hire an attorney and that only an attorney can provide legal advice), the court found that "any inferences possibly created by imprecise drafting are surely overwhelmed by the plain language." Looking at the legislative history as well, the court found that Congress clearly had attorneys in mind -- "the House Report on the BAPCPA mentions 'attorney' 164 times."

The court then moved on to consider Hersh's contention that 526(a)(4) was an unconstitutional restriction on speech. That section prohibits a "debt relief agency" from advising a client or prospective client "to incur more debt in contemplation of such person filing a case" 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." As an initial matter, the court considered the standard to be applied. Hersh argued that 426(a)(4) was a content-based restriction subject to strict scrutiny, which requires that any such regulation on speech be (i) narrowly tailored to promote (ii) a compelling government interest. Citing United States v. Playboy Entm't Group, Inc., 529 U.S. 803 (2000). The Government, contrarily, argued that it was an "ethical regulation" subject to a lesser standard of review. Under that lesser standard, the regulation must (i) serve a state's "legitimate interest in regulating the activity in question," and (ii) impose only "narrow and necessary limitations" on lawyers' speech. Gentile v. State Bar of Nev., 501 U.S. 1030 (1991). Although skeptical of this claim that 526(a)(4) is an "ethical regulation," the court found it didn't matter because the statute didn't pass either test because it was not sufficiently narrow.

The court recognized that Congress passed BAPCPA to remedy abuse of the bankruptcy system, including debtors who improperly take on additional debt prior to filing with the intent of discharging it. Rather than closing loopholes or imposing sanctions for such conduct, however, Congress passed 526(a)(4) as a "prophylactic rule" banning attorneys from advising clients to take on additional debt in contemplation of bankruptcy. The court found this restriction overbroad, in that it prevents lawyers from advising clients to take actions that are lawful, and even in some instances, financially prudent. For instance, a client might be well advised to refinance a mortgage at a lower rate to reduce payments or forestall, even prevent bankruptcy. A client also might be well advised to take on a secured debt, such as a car loan, that would survive bankruptcy, if it enabled the debtor to have transportation for work which would provide additional income. 526(a)(4) "prevents lawyers from giving clients their best advice." Indeed, the court found that such restrictions could also deprive the courts, as well as clients, of good counsel, by preventing lawyers from presenting options to their clients and ultimately the court. Thus, 526(a)(4) was overinclusive in that (1) it prevents lawyers from advising clients to take lawful actions; and (2) it extends beyond abuse to prevent advice to take prudent actions, and was held facially unconstitutional.

The court rejected, however, Hersh's assertion that the 527 disclosure requirements were unconstitutional. Looking to Supreme Court case law on compelled disclosures by professionals of factual information regarding services provided, the court found that requirements which advance a substantial government interest, and which did not unduly burden the relationship, were permissible. See Planned Parenthood of Southeast Penn. v. Casey, 505 U.S. 833 (1992). Under this standard, 527 advances a sufficiently compelling government interest (ensuring that clients are informed of certain basic information before filing a bankruptcy) and impose a reasonable burden. The court was not convinced by Hersh's argument that the provision compels disclosure of false or misleading information (for instance, requiring a disclosure that a client "will have to pay a filing fee" when there are provisions for waiver or deferral of filing fees), finding that such generalized statements may be further explained or clarified by an attorney. The required disclosures did not act as a barrier to potential clients seeking relief and were a "sufficiently benign and narrow" means of ensuring client awareness that they passed constitutional muster.

Finally, the court refused to consider Hersh's assertion that the provisions violate the Fifth Amendment right to counsel on the basis that she did not have standing to assert that right on behalf of her prospective clients.

The court has invited Hersh to move for summary judgment on the 526(a)(4) issue after amending her complaint to more specifically assert that claim.