October 11, 2006

BAPCPA Unconstitutionally Restricts Attorneys' Free Speech

Holland & Knight Newsletter
Trisha M. Rich

According to the United States District Court for the Northern District of Texas, attorneys are “debt relief agencies” as defined under 11 U.S.C. § 101 (12A) as enacted under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) amendments to the Bankruptcy Code last year. Hersh v. United States, 347 B.R. 19 (N.D. Tex. 2006). Even more significantly, the District Court held that BAPCPA unconstitutionally restricts an attorney’s free speech as a debt relief agent. Under BAPCPA, persons who are debt relief agencies are barred from advising “an assisted person or a prospective assisted person to incur more debt in contemplation of such person filing” a bankruptcy case. 11 U.S.C. § 526(a)(4).

Susan B. Hersh is an attorney in Dallas, Texas, who practices in the area of bankruptcy law. As part of her practice, Hersh would, for a fee, counsel clients regarding federal bankruptcy law. Hersh brought suit against Alberto Gonzales, Attorney General of the United States, and Greg Abbot, Attorney General of Texas, seeking a declaratory judgment that as a bankruptcy attorney, Hersh did not fall under the definition of “debt relief agency.” Paragraph (12A) of Section 101 of BAPCPA defines a “debt relief agency” as “any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer under Section 110.” The paragraph provides five exceptions to the definition of debt relief agency, including nonprofit organizations, creditors engaging in debt restructuring, and depository institutions, but not including attorneys or providers of legal services.

The Hersh Court soundly disagreed with Hersh on this issue, pointing out that Congress had explicitly included exceptions to the term, and did not include an exception for bankruptcy attorneys. Moreover, the District Court cited the legislative history of the statute in explaining that there were clear indications that “Congress had attorneys in mind with this statute; the House Report on BAPCPA mentions ‘attorney’ 164 times.” In rejecting Hersh’s claims, the District Court reasoned that the plain language of the statute, coupled with the statute’s legislative history and the fact that Congress failed to include attorneys in the listed exceptions, outweighed any minor inconsistencies that Hersh argued the statute contained.1

Even more significantly, however, the District Court did side with Hersh on the issue of whether her right to free speech had been improperly restricted and refused to grant the government’s motion to dismiss. In finding BAPCPA to be partially unconstitutional, the District Court ruled that Section 526(a)(4) was not sufficiently narrow to meet the “narrowly tailored” limitations on free speech, acknowledging that there are situations where it would be both legal and advisable for someone considering bankruptcy to incur additional debt in contemplation of bankruptcy. Consequently, Section 526(a)(4) effectually prevented lawyers from giving clients their best advice. In sum, the District Court found that the restrictions imposed by Section 526(a)(4) violated Hersh’s First Amendment rights because the statute 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.” As a result of these factors, the District Court held that Section 526(a)(4) of the BAPCPA imposes limitations beyond what is “narrow and necessary.”

The District Court, however, dismissed Hersh’s claim that 11 U.S.C. § 527 unconstitutionally compelled speech because it requires attorneys to provide assisted persons with written notice of certain mandatory disclosures, including a statement that advised potential claimants that they could represent themselves in bankruptcy. The District Court stated that “Section 527 advances a sufficiently compelling government interest and does not unduly burden either the attorney-client relationship or the ability of a client to seek bankruptcy. The government clearly has a legitimate interest in attempting to ensure that a client is informed of certain basic information before he or she commences a case in bankruptcy.” Given these considerations, the District Court held that the compelled speech that Section 527 requires is a reasonable burden.

Additionally, the District Court dismissed Hersh’s claim that BAPCPA unconstitutionally thwarted a person’s right to counsel in violation of the Fifth Amendment, reasoning that Hersh lacked standing to bring such a claim.

More recently, a second court has adopted the Hersh Court’s reasoning and also held Section 526(a)(2) to unconstitutionally restrict attorneys’ First Amendment rights. Olsen v. Gonzales, 2006 WL 2345503 (D. Or. August 11, 2006). In a case very similar to Hersh, the United States District Court for the District of Oregon also determined that attorneys were “debt relief agencies” and then agreed with the Hersh Court that Section 526(a)(4) “is overly restrictive in violation of the First Amendment.” Id. at *7. 2

For more information, e-mail Trisha M. Rich at trisha.rich@hklaw.com or call toll free, 1.888.688.8500.

1 In finding that attorneys fall under the definition of “debt relief agencies,” the Hersh court takes an opposing view from that of Judge Lamar Davis, a Georgia bankruptcy judge who issued a sua sponte ruling in October 2005, holding that attorneys are not “debt relief agenc[ies]” as the term is defined in BAPCPA. In re Attorneys At Law and Debt Relief Agencies, 332 B.R. 66 (Bankr. S.D. Ga. 2005). Judge Davis premised his holding on essentially the same grounds that Hersh presented to the District Court, and cited what Judge Davis believed to be inconsistencies in the statute. For instance, Judge Davis – and later Hersh – pointed out that one provision of the statute requires debt relief agencies to advise assisted persons that they have the right to hire an attorney, presumably something an attorney herself would not do. Judge Davis also found that interpreting “debt relief agenc[ies]” to include attorneys would be an inappropriate preemption of the traditional right of states to regulate the practice of law, in absence of a clearly expressed legislative intent to do so. As a result, Judge Davis held that the more logical interpretation of “debt relief agency” excludes attorneys from the definition.

2 In another decision, the United States District Court for the Eastern District of Pennsylvania recently ruled that a bankruptcy attorney lacks standing to challenge provisions imposing certain obligations and restrictions on attorneys who fall within the definition of “debt relief agencies,” thereby dismissing that complaint. Geisenberger v. Gonzales, 346 B.R. 678 (E.D. Pa. 2006). The provisions challenged by the bankruptcy attorney included the same one determined to be unconstitutional by the Hersh and Olsen courts as well as provisions under sections 524 (reaffirmation of a dischargeable debt), 527 (disclosures regarding valuation of assets at “replacement value”) and 528 (advertising requirements for debt relief agencies). The Geisenberger court held that the bankruptcy attorney failed to establish sufficient injury in order to establish the existence of a “case or controversy.” This holding is in contrast to that of the Hersh court which determined that section 526(a)(4)’s chilling affect on a bankruptcy attorney’s First Amendment right to free speech conferred standing on the attorney to challenge the constitutionality of the law.

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