IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
December 18, 2008
No. 07-10226 Charles R. Fulbruge III
Clerk
SUSAN B. HERSH
Plaintiff-Appellee-Cross-Appellant
v.
UNITED STATES OF AMERICA, by and through Michael Mukasey in his
capacity as Attorney General of the United States
Defendant-Appellant-Cross-Appellee
Appeal from the United States District Court
for the Northern District of Texas
Before GARWOOD, CLEMENT, and ELROD, Circuit Judges.
GARWOOD, Circuit Judge:
Defendant-appellant-cross-appellee, the United States, by and through
Attorney General Michael Mukasey, appeals the decision of the United States
District Court for the Northern District of Texas holding a recently enacted
provision of the Bankruptcy Code, 11 U.S.C. § 526(a)(4), facially
unconstitutional. See Hersh v. United States, 347 B.R. 19 (N.D. Tex. 2006).
Plaintiff-appellee-cross-appellant, Susan B. Hersh, cross-appeals the district
court’s holding that attorneys qualify as “debt relief agencies” under 11 U.S.C.
§ 101(12A), and that 11 U.S.C. § 527(b) does not violate the First Amendment.
For the reasons stated below, we affirm the district court’s holdings that
No. 07-10226
attorneys qualify as debt relief agencies and that 11 U.S.C. § 527(b) is
constitutional, but reverse the court’s judgment as far as it holds 11 U.S.C. §
526(a)(4) facially unconstitutional.
FACTS AND PROCEEDINGS BELOW
In 2005, Congress enacted the Bankruptcy Abuse Prevention and
Consumer Protection Act (the BAPCPA), Pub. L. No. 109-8, 119 Stat. 23 (2005).
The BAPCPA is a “comprehensive package of reform measures” designed “to
improve bankruptcy law and practice by restoring personal responsibility and
integrity in the bankruptcy system and [to] ensure that the system is fair for
both debtors and creditors.” H.R. REP. NO. 109-31(I), 109th Cong. 1st Sess. pt.
1, at 2 (2005), reprinted in 2005 U.S.C.C.A.N. Vol. 4 at 88, 89 [hereinafter HOUSE
REPORT]. The act contains provisions that apply to “debt relief agencies” –
defined, as we hold, to include attorneys – that counsel consumer debtors, and
regulate the manner in which they provide services to their clients. See 11
U.S.C. §§ 526-528.
Hersh is an attorney who represents consumer debtors in bankruptcy
proceedings. For nineteen years, she has counseled her clients for a fee
regarding their eligibility for filing for bankruptcy, the acquisition and
disposition of property, and other legal rights and responsibilities relating to
financial difficulties. Soon after the BAPCPA took effect, on November 28, 2005,
Hersh filed this suit against the United States, then United States Attorney
General Alberto Gonzales,1 the State of Texas, and Texas Attorney General
Greg Abbot. The State of Texas and Greg Abbott did not in any way appear and
were not served with process and accordingly were dismissed from the case by
1
Michael Mukasey became Attorney General on November 9, 2007. Under Federal
Rule of Appellate Procedure 43(c)(2), when a public officer party to an appeal in an official
capacity ceases to hold office, his successor is automatically substituted as a party.
Proceedings that follow the substitution are made in the name of the substituted party, here
Michael Mukasey.
2
No. 07-10226
the district court, so the only named defendants below who are parties to this
appeal are the United States and United States Attorney General Michael
Mukasey (collectively, the Government).2
In her original complaint, Hersh sought declaratory and injunctive relief
to prohibit the Government from enforcing 11 U.S.C. §§ 526,3 527, and 528. She
then amended her complaint to allege that attorneys do not qualify as “debt
relief agencies” under the Bankruptcy Code. Hersh argued that sections
526(a)(4) and 527(b) violate the First Amendment right to free speech and her
clients’ Fifth Amendment right to counsel in a civil case.4 In this appeal,
Hersh challenges the applicability of the BAPCPA to bankruptcy attorneys by
arguing that attorneys do not qualify as “debt relief agencies” as that term is
defined in the act. She also argues that 11 U.S.C. §§ 526(a)(4) and 527(b) are
unconstitutional in violation of the First Amendment.
Sections 526(a)(4) and 527(b) govern the conduct of “debt relief agencies.”
Hersh argues that these statutes should not apply to her because, as an
2
In its Final Judgment of December 15, 2006, the district court stated that “unless
Plaintiff Hersh shows good cause within thirty (30) days of the date of this Order for her failure
to effect service on Defendant State of Texas, the Court will dismiss her claims against that
defendant without prejudice.” There is no indication in the record or briefs that Hersh ever
submitted such a statement of good cause. Thus, we presume that Hersh’s claims against the
State of Texas and the Attorney General have been dismissed, and neither is a party to this
appeal.
3
Though Hersh’s original and first amended complaints do not mention 11 U.S.C. § 526,
both Hersh and the Government argued the constitutionality of section 526 extensively in
proceedings below. See Hersh, 347 B.R. at 21 n.1. Thus, the district court addressed the
constitutionality of section 526(a)(4) in its Memorandum Opinion and Order of July 26, 2006,
and granted Hersh leave to amend her complaint to include an express claim for relief that
section 526(a)(4) violates the First Amendment. Hersh then asserted in her Second Amended
Complaint claims pertaining to § 526(a)(4). After this, she filed a motion for summary
judgment on the issue of the constitutionality of § 526(a)(4) on October 24, 2006, which the
district court granted in an order dated December 15, 2006.
4
She also made claims regarding the constitutionality of § 528, which were dismissed
by the district court and have not been raised on appeal. Hersh, 347 B.R. at 22 n2.
3
No. 07-10226
attorney, she does not qualify as a debt relief agency. “Debt relief agency” is
defined in the BAPCPA 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 . . . .”
11 U.S.C. § 101(12A). An “assisted person” is “any person whose debts consist
primarily of consumer debts and the value of whose nonexempt property is less
than $164,250.” Id. § 101(3).
In enacting the BAPCPA, Congress responded to evidence that attorneys
and other bankruptcy professionals often played a role in abusing the
bankruptcy system. See HOUSE REPORT at 5. Section 526(a)(4) is meant to curb
this abuse by prohibiting debt relief agencies from advising assisted persons to
incur debt “in contemplation of” bankruptcy or to incur debt to pay attorney or
bankruptcy petition preparer fees. Hersh contends that section 526(a)(4) is
facially unconstitutional in violation of the First Amendment because it impairs
her right to provide legal advice to her clients, and chills and punishes speech
that is fundamental to the attorney-client relationship. She asserts that she
intends to engage in speech that violates this statute by advising her clients to
incur debt in contemplation of bankruptcy when doing so would be in good faith
and not abusive of the bankruptcy system.
Section 527(b) was enacted with the intention of providing debtors who are
thinking about filing for bankruptcy with certain basic information about the
bankruptcy system. It requires debt relief agencies to disclose specific basic
information about bankruptcy to assisted persons whom they are counseling
through the bankruptcy process. Hersh argues on appeal that section 527(b)
violates the First Amendment by compelling her to provide factual information
to her clients that is false and misleading, even when it is not pertinent to her
client.
4
No. 07-10226
Hersh does not claim that the government or any individual debtor (or any
other person or organization whatever) has threatened to enforce either section
526 or 527 against her on any occasion. She does not assert that the government
or any official has issued any bulletin or statement (or made any threat to
anyone) indicating that it will in any way punish (or take any adverse action
against) her or any other debt relief agency in her position if she or they take the
actions that she alleges she plans to take in her legal practice. She simply
conclusorily asserts that if she violates section 526(a)(4), she faces a “threat of
civil punishment” for advising her client to take legitimate actions that are
prohibited by the statute, and that the statute of itself has a “chilling effect” on
her communications with her clients. She also contends that the civil penalties
for violating sections 526(a)(4) and 527(b) “deter[] or chill[] the exercise of free
speech rights and cause[] continuing harm or a real and immediate threat of
future injury.” See Sec’y of State v. Joseph H. Munson Co., 104 S.Ct. 2839, 2847
(1984) (“[W]hen there is a danger of chilling free speech, the concern that
constitutional adjudication be avoided whenever possible may be outweighed by
society’s interest in having the statute challenged.”).
After Hersh filed suit against the Government on November 28, 2005, the
Government responded to Hersh’s complaints by filing a motion to dismiss all
of Hersh’s claims under Federal Rule of Civil Procedure 12(b)(6) on February 2,
2006. On July 26, 2006, the district court issued a Memorandum Opinion and
Order in response to the Government’s Motion to Dismiss Hersh’s claim. Hersh,
347 B.R. 19. It held that section 526(a)(4) is facially unconstitutional in violation
of the First Amendment, but granted the Government’s motion to dismiss for all
of Hersh’s other claims. Id. at 21. It dismissed Hersh’s claim that attorneys
advising clients on bankruptcy issues are not “debt relief agencies” as defined in
11 U.S.C. § 101(12A) because the plain meaning of the statute indicates that the
term includes bankruptcy attorneys. Id. at 22-23. It held that section 526(a)(4)
5
No. 07-10226
violates the First Amendment because it “imposes limitations on speech beyond
what is ‘narrow and necessary,’” and invited Hersh to move for summary
judgment on that claim once she amended her complaint to assert it explicitly.
Id. at 25, 28; see also note 3, supra. It dismissed Hersh’s challenge to section
527(b) because the statute “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.” Hersh, 347 B.R. at 27. Finally, the
district court held that Hersh does not have standing to assert her Fifth
Amendment claims. Id. at 28.
After the district court issued this opinion, Hersh filed a motion for
summary judgment regarding her section 526(a)(4) claim, which the district
court granted on December 15, 2006. It ordered that “Hersh have declaratory
judgment that 11 U.S.C. § 526(a)(4) violates the First Amendment.” It also
ordered that “Defendant United States, its agents, and all people acting in active
concert with it are permanently enjoined from enforcement of 11 U.S.C. §
526(a)(4).”
The Government timely appealed the district court’s judgment that section
526(a)(4) violates the First Amendment, and Hersh thereafter timely
cross-appealed the court’s holdings that attorneys qualify as “debt relief
agencies” under section 101(12A) and that section 527(b) does not violate the
First Amendment.
DISCUSSION
We limit our discussion to the issues raised on appeal: whether attorneys
qualify as “debt relief agencies” under 11 U.S.C. § 101(12A); whether 11 U.S.C.
§ 526(a)(4) is wholly invalid as a facially unconstitutional violation of the First
Amendment; and whether 11 U.S.C. § 527(b) unconstitutionally compels speech
in violation of the First Amendment. For the reasons stated below, we affirm the
judgment of the district court insofar as far as it holds that attorneys are debt
6
No. 07-10226
relief agencies and that section 527(b) does not violate the First Amendment.
We reverse the judgment of the district court on Hersh’s section 526(a)(4) claim,
and hold that section 526(a)(4) is not facially unconstitutional.
I. Whether attorneys are “debt relief agencies” under 11 U.S.C.
§ 101(12A)
Hersh argues that the district court erred in holding that attorneys may
qualify as “debt relief agencies” under 11 U.S.C. § 101(12A). This is important
because a debt relief agency must comply with the terms of certain provisions of
the Bankruptcy Code such as those here at issue, sections 526 and 527. The
district court granted the Government’s motion to dismiss Hersh’s claim that the
term “debt relief agency” does not include bankruptcy attorneys. Hersh, 347
B.R. at 23.
The only federal court of appeals to have addressed that issue, namely the
Eighth Circuit in its September 4, 2008 decision in Milavetz, Gallop & Milavetz,
P.A., et al. v. United States, 541 F.3d 785 (8th Cir. 2008) (hereafter “Milavetz”),
has held that “attorneys that provide ‘bankruptcy assistance’ to ‘assisted
persons’ are ‘debt relief agencies’ as that term is defined by the Code.” Id. at
792.5 We agree with that holding.6
5
This issue also has been addressed by a handful of federal district courts, and there
has been no consensus regarding whether attorneys should be considered “debt relief agencies.”
See Olsen v. Gonzales, 350 B.R. 906, 912 (D. Or. 2006), aff’d on reconsideration, 368 B.R. 886
(D. Or. 2007) (“[I]t is the plain language of the Act that leads to the conclusion that attorneys
are to be included in the definition of ‘debt relief agency.’”); In re Reyes, 361 B.R. 276, 280
(Bankr. S.D. Fla. 2007) (“[T]he Court does not believe Congress intended the scope of [11
U.S.C. § 101(12A)] to include attorneys.”); In re Attorneys at Law and Debt Relief Agencies, 332
B.R. 66, 71 (Bankr. S.D. Ga. 2005) (holding that attorneys who are members of the bar of the
Bankruptcy Court for the Southern District of Georgia and those admitted pro hac vice are not
“debt relief agencies” under BAPCPA as long as their activities consist of practicing law, and
do not constitute a separate commercial enterprise).
6
The Milavetz panel was unanimous on that issue (and also in its upholding of 11
U.S.C. §§ 528(a)(4) and 528(b)(2), which sections are not at issue on this appeal, see note 4,
supra). The Milavetz panel was divided on the issue of the constitutionality of § 526(a)(4); as
to that issue we agree with Judge Colloton’s dissenting opinion, as explained below.
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No. 07-10226
“Debt relief agency” is defined by 11 U.S.C. § 101(12A) 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 . . . .”7 “Bankruptcy assistance” is defined
as:
“any goods or services sold or otherwise provided to an assisted
person with the express or implied purpose of providing information,
advice, counsel, document preparation, or filing, or attendance at a
creditors’ meeting or appearing in a case or proceeding on behalf of
another or providing legal representation with respect to a case or
proceeding under this title.” 11 U.S.C. § 101(4A) (emphasis added).
The district court correctly concluded that under the plain language of 11
U.S.C. § 101(12A), attorneys qualify as “debt relief agencies.” Although the
definition does not explicitly include attorneys, it also does not exclude them in
the list of exclusions provided after the definition. See note 7, supra. More
importantly, “debt relief agency” is broadly defined as “any person who provides
any bankruptcy assistance to an assisted person . . . .” 11 U.S.C. § 101(12A).
“Bankruptcy assistance” is defined to include “providing legal representation
with respect to a case or proceeding under” the Bankruptcy Code. Id. § 101(4A)
(emphasis added). Thus, a debt relief agency includes any person who provides
7
The statute goes on to list five exceptions (“but does not include”) to the definition of
“debt relief agency”:
“(A) any person who is an officer, director, employee, or agent of a person who
provides such assistance or of the bankruptcy petition preparer;
(B) a nonprofit organization that is exempt from taxation under section 501(c)(3)
of the Internal Revenue Code of 1986;
(C) a creditor of such assisted person, to the extent that the creditor is assisting
such assisted person to restructure any debt owed by such assisted person to the
creditor;
(D) a depository institution (as defined in section 3 of the Federal Deposit
Insurance Act) or any Federal credit union or State credit union (as those terms
are defined in section 101 of the Federal Credit Union Act), or any affiliate or
subsidiary of such depository institution or credit union; or
(E) an author, publisher, distributor, or seller of works subject to copyright
protection under title 17, when acting in such capacity.” 11 U.S.C. § 101(12A).
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No. 07-10226
legal representation in a bankruptcy proceeding to an assisted person. As only
attorneys can provide legal representation, they are necessarily included in the
definition of “debt relief agency.”
Furthermore, as the district court observed, the legislative history of the
BAPCPA indicates that Congress intended the act to apply to attorneys as the
House Report for the BAPCPA refers to attorneys multiple times. See, e.g.
HOUSE REPORT at 5 (“A civil enforcement initiative . . . has ‘consistently
identified’ such problems as ‘debtor misconduct and abuse, misconduct by
attorneys and other professionals.’”). Therefore, the district court properly
granted the Government’s motion to dismiss Hersh’s motion for declaratory
judgment on this issue.
Hersh argues that this court should apply the doctrine of constitutional
avoidance to eliminate the need to determine the constitutionality of 11 U.S.C.
§§ 526(a)(4) and 527(b) in this case by holding that the term “debt relief agency”
does not apply to attorneys. However, Hersh’s arguments do not overcome the
referenced evident congressional intent and the plain language of the statute.
First, Hersh suggests that because the definition of “debt relief agency”
does not explicitly include attorneys, they are necessarily excluded from the
term. However, because the definition, when read in conjunction with the
definition of “bankruptcy assistance,” clearly and affirmatively includes
attorneys, an exclusion for attorneys should not be implied. This is especially
so because the section 101(12A) definition is simply a general definition without
any specific inclusions, but with five specific exclusions (none of which mentions
or is claimed to embrace attorneys).
Next, Hersh argues that section 527(b) requires debt relief agencies to
inform assisted persons that they have the right to hire an attorney or represent
themselves, which would not be necessary if an attorney was a debt relief
agency. However, debt relief agencies are not limited to attorneys and section
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No. 07-10226
527(b) specifically indicates that this advice is only necessary “to the extent
applicable.” Thus, an attorney acting as a debt relief agency would not be
required to provide her clients with this advice.
Third, Hersh notes that her clients include creditors and others who
qualify as “assisted persons,” but seek legal advice for bankruptcy-related
matters unrelated to their own bankruptcy filings. She suggests that if
attorneys are not omitted from the definition of debt relief agency, they must
abide by the provisions that apply to debt relief agencies even when they are not
advising debtors. The definition of “assisted person” under the BAPCPA does
not explicitly indicate that only those seeking to file for or inquire about entering
bankruptcy qualify as assisted persons. See 11 U.S.C. § 101(3) (An “assisted
person” is “any person whose debts consist primarily of consumer debts and the
value of whose nonexempt property is less than $164,250.”). However, if Hersh
is counseling a client who is a creditor or any other client who qualifies as an
“assisted person” but who is not seeking legal advice related to the client’s own
bankruptcy, Hersh would not be in danger of violating section 526(a)(4) as she
would not advise that client to incur more debt in contemplation of bankruptcy
(precluded by section 526(a)(4)) because that client would not be filing for
bankruptcy. She also would not need to provide that client with the information
required by section 527(b) because that information only must be provided “to
the extent applicable,” and would only apply to debtors contemplating their own
bankruptcy. Thus, Hersh has not shown that attorneys must abide by the
BAPCPA even when they are not counseling debtors. Furthermore, she does not
explain why this argument does not apply to any debt relief agency, so it does
not seem to support her position that attorneys should be excluded from the
definition.
Finally, Hersh suggests that because the BAPCPA regulates the conduct
of debt relief agencies, if attorneys are held to be debt relief agencies, states
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No. 07-10226
would be deprived of their ability to determine and enforce qualifications for
legal practice, which would infringe on the states’ roll in regulating attorneys.
In support of this argument, she cites 11 U.S.C. § 526(d)(2)(A), which states that
nothing in section 526, 527, and 528 shall “be deemed to limit or curtail the
authority or ability . . . of a State or subdivision or instrumentality thereof, to
determine and enforce qualifications for the practice of law under the laws of
that State.” Treating attorneys as debt relief agencies will not deprive states of
the ability to regulate their own lawyers. It is clear that Congress can regulate
the conduct of attorneys practicing in federal courts and in bankruptcy
proceedings without impinging on states’ rights. See, e.g., Rule 11, FED. R. CIV.
P., and Rule 9011, FED. R. BANKR. P.
For the reasons stated, we agree with the Eighth Circuit’s unanimous
opinion in Milavetz on this issue and we hold that the district court properly
concluded that, under the plain language of the section 101(12A) definition, an
attorney providing, “in return for the payment of money or other valuable
consideration,” “bankruptcy assistance,” as defined in section 101(4A), to an
“assisted person,” as defined in section 101(3), is a “debt relief agency” for
purposes of the BAPCPA.
II. Whether 11 U.S.C. § 526(a)(4) is Facially Unconstitutional in
Violation of the First Amendment
The Government argues that the district court erred in holding that
section 526(a)(4) is wholly invalid as a facially unconstitutional violation of the
First Amendment.
Section 526(a)(4) provides that
“(a) A debt relief agency shall not –
...
(4) 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
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No. 07-10226
or charge for services performed as part of preparing for or
representing a debtor in a case under this title.”
As above noted, the only federal appellate court to have addressed section
526(a)(4) is the Eighth Circuit in Milavetz where the panel majority held “that
§ 526(a)(4) is substantially overbroad, and unconstitutional as applied to
attorneys who provide bankruptcy assistance to assisted persons, as those terms
are defined in the Code.” 541 F.3d at 794 (footnote omitted). The panel majority
there reasoned that Ҥ 526(a)(4) prohibits attorneys . . . from advising any
assisted person to incur any additional debt in contemplation of bankruptcy; this
prohibition would include advice constituting prudent bankruptcy planning that
is not an attempt to circumvent, abuse, or undermine the bankruptcy laws,” and
that thus “[s]ection 526(a)(4), as written, prevents attorneys from fulfilling their
duty to clients to give them appropriate and beneficial advice not otherwise
prohibited . . . .” Id. at 793.8 Judge Colloton dissented, on the ground that the
court, under authorities such as Boos v. Barry, 108 S.Ct. 1157 (1988), should
have adopted a narrowing construction of “in contemplation of” bankruptcy in
section 526(a)(4) to mean “with the intent to abuse the protections of the
bankruptcy system,” and that as so construed section 526(a)(4) was not
overbroad. Milavetz, 541 F.3d at 798-99 (Colloton, J., dissenting).
The district court here held that section 526(a)(4) unconstitutionally
restricts Hersh’s speech. Hersh, 347 Bankr. at 25. In proceedings below, the
parties disputed whether strict scrutiny or a more lenient standard set forth in
Gentile v. State Bar of Nevada, 111 S.Ct. 2720, 2745 (1991) should apply in
8
Several district courts that have addressed the constitutionality of § 526(a)(4) have
also determined that the statute violates the First Amendment. See Zelotes v. Adams, 363 B.R.
660, 667 (D. Conn. 2007) (“Because § 526(a)(4) is not sufficiently ‘narrowly tailored to achieve
the desired objective,’ it is unconstitutional as applied to bankruptcy attorneys.”); In re Reyes,
361 B.R. at 279 (“This court . . . holds 11 U.S.C. §§ 526, 527, and 528 are unconstitutional as
applied to attorneys.”); Olsen, 350 B.R. at 916 (following the reasoning of Hersh to hold that
§ 526(a)(4) is unconstitutional in violation of the First Amendment).
12
No. 07-10226
determining the statute’s constitutionality. Hersh, 347 B.R. at 23-24. Because
the district court held that section 526(a)(4) does not survive scrutiny under the
more lenient standard, it did not decide which level of scrutiny should apply. Id.
However, in a footnote, the court held in the alternative that because section
526(a)(4) does not purport to be an ethical standard, which the district court
concluded would render it subject to the more lenient Gentile test, strict scrutiny
should apply. Id. at 24 n.8. It noted that the statute fails under the strict
scrutiny test for the same reasons that it fails the more lenient test. Id.
The district court noted that section 526(a)(4) was meant to end
manipulation of the bankruptcy system, but that it did not close loopholes or
penalize people who take on debt before filing for bankruptcy. Id. at 24. It
suggested that taking on additional debt “in contemplation” of bankruptcy is not
necessarily abusive of the bankruptcy system. Id. In some cases taking on
additional debt will be the most financially prudent option for the debtor, such
as when a debtor “(1) refinanc[es] at a lower rate to reduce payments and
forestall or even prevent entering bankruptcy, or (2) tak[es] on secured debt such
as [a] loan on an automobile that would survive bankruptcy and also enable the
debtor to continue to get to work and make payments.” Id.9 Thus, the court
concluded the statute is over inclusive. Id. at 25. Therefore, the court held that
the statute is facially unconstitutional on overbreadth grounds, and, thus,
completely invalidated the law. Id.
A. Doctrine of Constitutional Avoidance
The parties dispute whether the district court properly interpreted section
526(a)(4) to prohibit attorneys from advising clients to incur debt on the eve of
bankruptcy when doing so would be legal, not abusive of the bankruptcy system,
9
These are essentially the same examples as those cited by the Milavetz majority. 541
F.3d at 793-94. The government argues that § 526(a)(4) does not reach these nonabusive
situations.
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No. 07-10226
and the best option for the debtor. We hold the doctrine of constitutional
avoidance should be applied to section 526(a)(4) to avoid any of the potential
constitutional problems with this statute that have been raised by Hersh.
Under the doctrine of constitutional avoidance, “[W]here an otherwise
acceptable construction of a statute would raise serious constitutional problems,
the Court will construe the statute to avoid such problems unless such
construction is plainly contrary to the intent of Congress.” Edward J. DeBartolo
Corp. v. Fla. Gulf Coast Bldg. & Constr. Trades Council, 108 S.Ct. 1392, 1397
(1988)). See also Zadvydas v. Davis, 121 S.Ct. 2491, 2498 (2001) (“‘[I]t is a
cardinal principle’ of statutory interpretation . . . that when an Act of Congress
raises ‘a serious doubt’ as to its constitutionality, ‘this Court will first ascertain
whether a construction of the statute is fairly possible by which the question
may be avoided.’” (quoting Crowell v. Benson, 52 S.Ct. 285, 296 (1932).
Constitutional avoidance is a “cardinal principal” of constitutional law that “has
for so long been applied by [the Supreme Court] that is it beyond debate.”
DeBartolo, 108 S.Ct. at 1397.
The Government argues that under the doctrine of constitutional
avoidance, the portion of section 526(a)(4) that 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” should be
interpreted narrowly to apply only to situations in which incurring debt just
before bankruptcy would be an abuse of the bankruptcy system. However,
Hersh, on the other hand, argues that the plain language of the statute clearly
prohibits attorneys from advising clients in any situation to incur any debt for
any purpose when intending, or considering whether to, file bankruptcy, even
when doing so would not be an abuse of the bankruptcy system.
If interpreted literally and broadly, section 526(a)(4) would raise serious
constitutional problems because, as Hersh suggests, it would restrict some
14
No. 07-10226
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.10 Thus,
if interpreted literally, section 526(a)(4) may apply to speech that is protected by
the First Amendment.
However, Hersh does not dispute that section 526(a)(4), even when read
literally, does prohibit some speech that Congress can regulate without violating
the First Amendment. The “principal purpose of the Bankruptcy Code is to
grant a fresh start to the honest but unfortunate debtor.” Marrama v. Citizens
Bank of Massachusetts, 127 S.Ct. 1105, 1107 (2007) (internal citation omitted).
By incurring debt before bankruptcy without intending to repay the debt, a
debtor can cost creditors significant amounts of money. A debtor may also
disqualify himself from obtaining bankruptcy relief. See id. at 1112 (holding
that a debtor cannot automatically convert his bankruptcy from Chapter 7 to
Chapter 13 under section 706(a) if he acts in bad faith). Thus, Congress has an
10
Hersh provides some examples of when her clients assertedly should be encouraged
to incur new secured debt before filing for bankruptcy. First, a client may be able to obtain
better secured loan terms prior to filing. It may be appropriate to incur debt such as a home
equity based line of credit before filing for bankruptcy because the terms of the credit may not
be available at all after a bankruptcy filing. Furthermore, it might be advisable for a client
to finance a new vehicle while his credit ratings are intact before filing for bankruptcy so that
he will be able to commute to work to pay off his debts. It may also be advisable for a couple
planning to divorce to have one spouse accelerate efforts to secure a mortgage or lease before
filing for bankruptcy if the mortgage or lease would not be available immediately after
bankruptcy is filed. Finally, it might be advisable for a person to finance education through
non-dischargeable educational loans before filing for bankruptcy if she could not do so after
filing. The government generally takes the position that in nonabusive situations of this kind
§ 526(a)(4) does not preclude advice to incur the debt.
15
No. 07-10226
interest in preventing abuse of the bankruptcy system by both the debtors who
incur debts just before filing for bankruptcy and by the people who advise them
to do so. A debtor who incurs debt before bankruptcy in order to abuse the
system is not one of the “honest but unfortunate” debtors that the bankruptcy
system is designed to protect. Id. at 1107.
Furthermore, when a debtor incurs debt in contemplation of bankruptcy
with no intention of repaying his debts or with the intention to otherwise
manipulate the bankruptcy system, he may well be committing a fraudulent act
that may violate federal law. See 11 U.S.C. § 523(a)(2);11 18 U.S.C. § 152(2) (“A
person who . . . knowingly and fraudulently makes a false oath or account in or
in relation to any case under title 11 . . . shall be fined under this title,
imprisoned not more than 5 years, or both.”); Id. at § 157.12 See also Attorney
Grievance Comm’n of Maryland v. Culver, 849 A.2d 423, 434 (Md. 2004) (“[b]y
advising his client to obtain loans with the intention of having the debts
11
11 U.S.C. § 523(a)(2) states:
“(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title
does not discharge an individual debtor from any debt . . .
(2) for money, property, services, or an extension, renewal, or refinancing of
credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a
statement respecting the debtor’s or an insider’s financial condition”.
12
18 U.S.C. § 157 states:
“A person who, having devised or intending to devise a scheme or artifice to
defraud and for the purpose of executing or concealing such a scheme or artifice
or attempting to do so—
(1) files a petition under title 11, including a fraudulent involuntary bankruptcy
petition under section 303 of such title;
(2) files a document in a proceeding under title 11, including a fraudulent
involuntary bankruptcy petition under section 303 of such title; or
(3) makes a false or fraudulent representation, claim, or promise concerning or
in relation to a proceeding under title 11, including a fraudulent involuntary
bankruptcy petition under section 303 of such title, at any time before or after
the filing of the petition, or in relation to a proceeding falsely asserted to be
pending under such title,
shall be fined under this title, imprisoned not more than 5 years, or both.”
16
No. 07-10226
discharged in bankruptcy, [the defendant] counseled [his client] to commit a
fraudulent act,” which violated the Maryland Rules of Professional Conduct).
Taking out loans without intending to repay them may also be considered theft
under state law. See Henke v. State, 730 S.W.2d 117, 118-19 (Tex. App.—Corpus
Christi 1987) (affirming a grain hauler’s conviction of felony theft because he
took grain under a contract knowing that he would not be able to pay for it). The
government may regulate or ban speech in which a person proposes an illegal
transaction. Village of Hoffman Estates v. Flipside, Hoffman Estates, Inc., 102
S.Ct. 1186, 1192 (1982).
Moreover, the Supreme Court has upheld other regulations on attorney
speech that are aimed at preventing abusive behavior. In Gentile, the Supreme
Court discussed ABA Model Rule of Professional Conduct 3.6 (1981), which
prohibits attorneys from making extrajudicial statements that a reasonable
person would expect to be spread through public communication if the lawyer
knows or should know that making the statement was substantially likely to
materially prejudice an adjudicative proceeding. 111 S.Ct. at 2725. The Court
indicated that this regulation of attorney speech, as adopted by Nevada, was
permissible as it can be “[i]nterpreted in a proper and narrow manner” so as to
“punish only speech that creates a danger of imminent and substantial harm.”
Id. Thus, it suggested that restrictions on attorney speech are proper in certain
situations. It indicated that attorneys are “subject to ethical restrictions on
speech to which an ordinary citizen would not be,” and that a state “may demand
some adherence to the precepts of [its legal system] in regulating [attorney]
speech as well as [attorney] conduct.” Id. at 2743, 2744. The Court also held
that “speech of lawyers representing clients in pending cases may be regulated
under a less demanding standard than that established for regulation of the
press.” Id. at 2744. Thus, the Supreme Court has held that attorney speech
17
No. 07-10226
may be subject to diminished First Amendment protection when it is regulated
in furtherance of a substantial governmental interest. Id. at 2745.
The ability of the government to regulate the speech of attorneys is also
made evident by other Model Rules of Professional Conduct. For example, Rule
1.2(d) prohibits attorneys from advising clients to commit fraudulent or criminal
acts.13 This ethical rule states:
“A lawyer shall not counsel a client to engage, or assist a client, in
conduct that the lawyer knows is illegal or fraudulent, but a lawyer
may discuss the legal consequences of any proposed course of
conduct with a client and may counsel or assist a client to make a
good-faith effort to determine the validity, scope, meaning, or
application of the law.”
The parties do not cite and this court could not find any case in which this rule,
as adopted by a state, has been challenged as a violation of the First Amendment
right to freedom of speech. Nor does Hersh argue that this type of regulation
unconstitutionally restricts attorney speech. As incurring debt in contemplation
of bankruptcy, where doing so constitutes an abusive practice, is akin to
committing a fraudulent act, it is clear that Congress can constitutionally
prevent attorneys or other debt relief agencies from advising their clients to do
so.
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
13
This regulation on attorney speech, like the language of Gentile, also reveals how
Congress can regulate debt relief agencies other than attorneys. All debt relief agencies,
including non-attorneys, have a similar relationship to their debtor-clients because they are
all advising their clients in or concerning the bankruptcy process. Thus, the assumed
constitutionality of Rule 1.2(d) demonstrates that Congress can prevent all debt relief agencies,
not just attorneys who are debt relief agencies, from advising their clients to incur debt before
bankruptcy when doing so would be an abuse of the bankruptcy system.
18
No. 07-10226
relied on by the Milavetz majority), and conclude that the statute only affects
unprotected speech.
While we recognize that the doctrine of constitutional avoidance “is not a
license for the judiciary to rewrite language enacted by the legislature,” United
States v. Albertini, 105 S.Ct. 2897, 2902 (1985), it is nevertheless the fact that
the Supreme Court has on several occasions applied to acts of Congress “[a]
restrictive meaning for what appear to be plain words” where “such a restrictive
meaning must be given if a broader meaning would generate constitutional
doubts.” United States v. Witkovich, 77 S.Ct. 779, 782 (1957). Thus, in
Witkovich the wording of the challenged statutory section “read in isolation and
literally” conferred on the Attorney General “authority to require whatever
information he deems desirable of aliens whose deportation has not been effected
within six months after it has been commanded.”14 Id. But the Court, rejecting
“the tyranny of literalness,” and relying instead on the doctrine of constitutional
avoidance, id., held that the “appropriate construction” was “to limit the statute
to authorizing all questions reasonably calculated to keep the Attorney General
advised regarding the continued availability for departure of aliens whose
deportation is overdue.” Id. at 784.
In Zadvydas, the Court addressed a statute authorizing the Attorney
General, after the ninety day removal period, to detain without any stated
durational limitation, certain aliens subject to final orders of deportation
pending effectuation of their deportation. 121 S.Ct. at 2494-95.15 The Court held
14
The statutory section there in question (former 8 U.S.C. § 1252(d)(3)) provided that
the Attorney General could require aliens who had been under a deportation order for more
than six months but had not been actually deported “(3) to give information under oath as to
his nationality, circumstances, habits, associations, and activities, and such other information,
whether or not related to the foregoing, as the Attorney General may deem fit and proper.”
Witkovich, 77 S.Ct. at 780.
15
The “removal period” referred to the statutory 90 day period, beginning when the
deportation order became final, within which the Attorney General is required to detain the
19
No. 07-10226
that the statute must be construed, “in light of the Constitution’s demands” to
be limited to detention for a reasonable time, id. at 2498, which the Court
decreed to be presumptively six months (a period nowhere mentioned in the
statute) after the ninety day removal period but which could extend past the six
months “until it has been determined that there is no significant likelihood of
removal in the reasonably foreseeable future.” Id. at 2505. In this connection,
Zadvydas expressly relied on Witkovich, stating:
“We have read significant limitations into other immigration
statutes in order to avoid their constitutional invalidation. See
United States v. Witkovich, 353 U.S. 194, 195, 202, 77 S.Ct. 779, 1
L.Ed.2d. 765 (1957) (construing a grant of authority to the Attorney
General to ask aliens whatever questions he ‘deem[s] fit and proper’
as limited to questions ‘reasonably calculated to keep the Attorney
General advised regarding the continued availability for departure
of aliens whose deportation is overdue’). For similar reasons, we
read an implicit limitation into the statute before us.” 121 S.Ct. at
2498.
Another example of the Court’s adoption of a limiting construction of a
facially unrestricted statutory provision, to avoid a serious constitutional
problem, is afforded by Boos v. Barry, 108 S.Ct. 1157 (1988). There the court
faced, inter alia, a First Amendment challenge to the federal statute, applicable
to “any building or premises within the District of Columbia used or occupied by
any foreign government . . . as an embassy, legation, consulate, or for other
official purposes,” which provided that “[i]t shall be unlawful” (among other
things): “to congregate within 500 feet of any such building or premises, and
refuse to disperse after having been ordered so to do by the police authorities of
said District.” Id. at 1161.
The Court stated:
“Standing alone, this text is problematic both because it applies to
any congregation within 500 feet of an embassy for any reason and
alien and affectuate his removal. Zadvydas, 121 S.Ct. at 2494.
20
No. 07-10226
because it appears to place no limits at all on the dispersal authority
of the police. The Court of Appeals, however, has provided a
narrowing construction that alleviates both of these difficulties.
...
[T]he Court of Appeals . . . concluded that the statute permits the
dispersal only of congregations that are directed at an embassy; it
does not grant ‘police the power to disperse for reasons having
nothing to do with the nearby embassy.’ . . . [T]he Court of Appeals
further circumscribed police discretion by holding that the statute
permits dispersal ‘only when the police reasonably believe that a
threat to the security or peace of the embassy is present.’” Id. at
1168.
The Court proceeded to reject the “protest that the Court of Appeals was without
authority to narrow the statute,” stating:
“It is well settled that federal courts have the power to adopt
narrowing constructions of federal legislation. . . . Indeed the federal
courts have the duty to avoid constitutional difficulties by doing so
if such a construction is fairly possible. . . . [W]e see no barrier to the
Court of Appeals’ adoption of a narrowing construction.” Id. at
1169.16
The Court then held that “[s]o narrowed, the congregation clause
withstands First Amendment overbreadth scrutiny. It does not reach a
substantial amount of constitutionally protected conduct . . . .” Id. Thus, the
Boos Court approved a limiting construction of the statute – adding a
requirement, nowhere expressed in the statute, of reasonable belief of a present
threat to the security or peace of a targeted embassy – to save the statute from
being invalidated on First Amendment overbreadth grounds.
Many factors demonstrate that section 526(a)(4) can and should be
interpreted in an analogous way.
16
The Court likewise rejected the notion that a narrowing construction of this statute
could not properly be adopted “unless such a construction is reasonable and readily apparent.”
Boos, 108 S.Ct. at 1168-69.
21
No. 07-10226
First, the fact that section 526(a)(4) utilizes the phrase “in contemplation
of” bankruptcy suggests that the statute is directed at situations in which a
debtor intends to abuse the bankruptcy system. The phrase “contemplation of
bankruptcy” has been defined as: “The thought of declaring bankruptcy because
of the inability to continue current financial operations, often coupled with
action designed to thwart the distribution of assets in a bankruptcy proceeding.”
BLACK’S LAW DICTIONARY 336 (8th ed. 2004). The fact that the thought of
bankruptcy under this definition is “often coupled with” an intent to abuse the
system suggests that when enacting this statute Congress’s focus was on
instances of bankruptcy abuse to be prohibited. Furthermore, courts have
employed the “in contemplation” phrase in a manner suggestive of an intent to
defraud the bankruptcy system. See, e.g., In re Mercer, 246 F.3d 391, 421 n.43
(5th Cir. 2001) (en banc) (describing “loading up” on debt, a practice which is
abusive of the bankruptcy system, as the practice of “incurring card debt in
contemplation of bankruptcy”); In re Charles, 334 B.R. 207, 222 (Bankr. S.D.
Tex. 2005) (“It is settled law that a debtor’s good faith should be questioned if the
debtor makes purchases in contemplation of a bankruptcy case.”). Other
opinions reflecting a similar understanding of “in contemplation of” bankruptcy
are discussed in Judge Colloton’s dissenting opinion in Milavetz, 541 F.3d at 799-
800.17
17
See the following from Judge Colloton’s dissenting opinion:
“American and English authorities construing the bankruptcy laws also support
the proposition that the words ‘in contemplation of’ may be understood to
require an intent to abuse the bankruptcy laws. In re Pearce, 21 Vt. 611, 19 F.
Cas. 50, 53 (D.Vt. 1843) (No. 10873) (concluding that an act was done ‘in
contemplation of bankruptcy’ if it was done ‘in anticipation of breaking or failing
in his business, of committing an act of bankruptcy, or of being declared
bankrupt at his own instance, on the ground of inability to pay his debts, and
intending to defeat the general distribution of effects, which takes place under a
proceeding in bankruptcy.’) (emphasis added); Morgan v. Brundrett, 5 Barn. &
Ad. 289, 296, 110 Eng. Rep. 798, 801 (K.B. 1833) (Parke, J.) (interpreting ‘in
contemplation of bankruptcy’ to mean that ‘the payment or delivery must be
22
No. 07-10226
The remedies for violations of section 526(a)(4), which are only civil, also
reflect that the focus of that section is to preclude attorneys from advising clients
to incur debt in order to abuse the bankruptcy system. The primary remedy for
a violation of section 526(a)(4) is a civil action by the debtor or state attorney
general to recover actual damages for the debtor. 11 U.S.C. § 526(c)(2)-(3).
Actual damages, as well as restitution for any fees paid the violator by the
debtor, and attorneys’ fees can be recovered by a debtor when a debt relief
agency intentionally or negligently fails to comply with section 526, 527, or 528.
Id. § 526(c)(2)(A). Furthermore, if the state has reason to believe that a debt
relief agency has violated section 526, it may bring an action to enjoin the
violation, bring an action on behalf of its residents to recover actual damages for
debtors arising out of the violation, and can recover costs and attorneys’ fees
from the debt relief agency if it is successful. Id. § 526(c)(3)(A)-(C).18 Under
with intent to defeat the general distribution of effects which takes place under
a commission of bankruptcy.’); Fidgeon v. Sharpe, 5 Taunt. 539, 545-46, 128
Eng. Rep. 800, 802-03 (C.P. 1814) (Gibbs, C.J.) (An act made in contemplation
of bankruptcy ‘must be intended in fraud of the bankrupt laws.’); cf.
Buckingham v. McLean, 54 U.S. 151, 167, 13 How. 151, 14 L.Ed. 91 (1851) . .
. id. at 169 (relying on English bankruptcy decisions as instructive authority on
meaning of the former Bankrupt Act).” Milavetz, 541 F.3d at 799-800.
18
11 U.S.C. § 526(c)(2)-(3) provides:
“(2) Any debt relief agency shall be liable to an assisted person in the amount
of any fees or charges in connection with providing bankruptcy assistance to
such person that such debt relief agency has received, for actual damages, and
for reasonable attorneys’ fees and costs if such agency is found, after notice and
a hearing, to have—
(A) intentionally or negligently failed to comply with any provision of this
section, section 527, or section 528 with respect to a case or proceeding under
this title for such assisted person;
(B) provided bankruptcy assistance to an assisted person in a case or proceeding
under this title that is dismissed or converted to a case under another chapter
of this title because of such agency’s intentional or negligent failure to file any
required document including those specified in section 521; or
(C) intentionally or negligently disregarded the material requirements of this
title or the Federal Rules of Bankruptcy Procedure applicable to such agency.
(3) In addition to such other remedies as are provided under State law,
whenever the chief law enforcement officer of a State, or an official or agency
23
No. 07-10226
section 526(c)(5), a bankruptcy court may impose an appropriate civil penalty or
enjoin a violation if it finds intentional violations of the provisions or a clear and
consistent practice of violations. Id. § 526(c)(5). Congress’s emphasis on actual
damages for violations of section 526(a)(4) strongly suggests that Congress
viewed that section as aimed at advice to debtors which if followed would have
a significant risk of harming the debtor. This suggests that Congress only
intended to prevent debt relief agencies from advising clients to incur debt before
bankruptcy when doing so would be abusive, and thus have significant potential
negative repercussions for the debtor such as dismissal of a petition or denial of
discharge.
In enacting the BAPCPA, Congress was attempting to address common
abuses of the bankruptcy system. Congress concluded that there was a
pervasive abuse of the bankruptcy system by debtors who incur debt before
bankruptcy with the intention of having their debt discharged. See HOUSE
REPORT at 15 (referring to the “abusive practices by consumer debtors who . . .
knowingly load up with credit card purchases or recklessly obtain cash advances
and then file for bankruptcy relief”). This Congressional intent is made evident
by the changes that the BAPCPA made to section 523(a)(2)(C)(i)(I) to make the
rules regarding debt for eve-of-bankruptcy spending more stringent. This
provision made a debt incurred for “luxury goods” non-dischargeable if over $550
and incurred within ninety days of filing for bankruptcy as opposed to the
previous rule, which made a debt for “luxury goods” non-dischargeable if over
designated by a State, has reason to believe that any person has violated or is
violating this section, the State—
(A) may bring an action to enjoin such violation;
(B) may bring an action on behalf of its residents to recover the actual damages
of assisted persons arising from such violation, including any liability under
paragraph (2); and
(C) in the case of any successful action under subparagraph (A) or (B), shall be
awarded the costs of the action and reasonable attorneys' fees as determined by
the court.”
24
No. 07-10226
$1,225 of debt was incurred within sixty days of bankruptcy. 11 U.S.C.A. § 523,
Historical and Statutory Notes. It appears that Congress enacted section
526(a)(4) as a means of combating such abuse.
In enacting the BAPCPA, Congress also expanded the bankruptcy courts’
authority to dismiss petitions for abuse of the bankruptcy system, which likewise
reflects congressional intent to curb bankruptcy abuse through the new act.
Under the former version of section 11 U.S.C. § 707(b)(1), a bankruptcy court
could dismiss a petition for “substantial abuse,” such as when a debtor
accumulated debt in contemplation of bankruptcy with the intention of having
the debt discharged. Now a bankruptcy petition may be dismissed for mere
“abuse” instead of “substantial abuse,” and the statutory assumption in favor of
granting the relief sought by the debtor has been repealed. 11 U.S.C. §
707(b)(1).19 Moreover, under new section 707(b)(4)(C) an attorney’s signature on
a petition, pleading or motion certifies that after reasonable investigation the
attorney has determined that it “does not constitute an abuse under paragraph
(1).” This demonstrates that Congress intended to curb abuse with the new
provisions of the BAPCPA, and suggests that as part of this plan, section
526(a)(4) is only meant to curb abusive practices.
In the BAPCPA, Congress also introduced “means testing” to restrict
debtors who can repay at least a portion of their debts from obtaining complete
discharge under Chapter 7. See HOUSE REPORT at 2 (“The heart of the
[BAPCPA’s] consumer bankruptcy reforms consists of the implementation of an
19
Bad faith pre-petition conduct by a debtor justifies dismissal of a bankruptcy
proceeding under other chapters of the bankruptcy code as well. See, e.g., Marrama, 127 S.Ct.
at 1107, 1111-12 (indicating that “despite the absence of any statutory provision specifically
addressing the issue, the federal courts are virtually unanimous that prepetition bad-faith
conduct may cause a forfeiture of any right to proceed with a Chapter 13 case,” and holding
that 11 U.S.C. § 706(a), which allows (without relevant express restriction) conversion of a
bankruptcy from a Chapter 7 case to a Chapter 13 case, does not allow such a conversion in
cases in which a debtor has acted in “bad faith”).
25
No. 07-10226
income/expense screening mechanism (‘needs-based bankruptcy relief’ or ‘means
testing’), which is intended to ensure that debtors repay creditors the maximum
they can afford.”). Under this provision, the debtor’s petition for relief under
Chapter 7 is presumed to be abusive if the debtor’s income exceeds the
unsecured debts by a specified ratio.20 11 U.S.C. § 707(b)(2)(A). Thus, a debtor
who is able to repay a certain amount of his debts must file under Chapter 13 or
11, both of which allow for a structured repayment plan, or have his case
dismissed. However, such means testing gives debtors an incentive to load up
on debt because a higher debt ratio can allow a debtor to avoid a Chapter 13
repayment plan and obtain discharge under Chapter 7 by manipulating the
formula under which bankruptcy abuse is presumed. This incentive structure
likely raised concern that attorneys and others would advise clients to take on
more debt before filing for bankruptcy in order to have their debts discharged
and to avoid a Chapter 13 repayment plan. This also suggests that Congress
intended section 526(a)(4)’s restriction on advice to incur “more debt in
contemplation of” bankruptcy to prevent that sort of abuse of the bankruptcy
system.
The placement of section 526(a)(4) among three provisions meant to curb
abuse of the bankruptcy system by debt relief agencies likewise suggests that
the statute was only intended to curb abuse. Section 526(a) contains three other
rules of professional conduct designed to protect debtors from abusive practices
of debt relief agencies. Section 526(a)(1) requires debt relief agencies to perform
20
One treatise explains the means test as follows:
“The debtor must average net income from the six months prior to a bankruptcy
filing (net of allowable expenses), and multiply that monthly average by 60. If
the debtor is able to pay at least 25% of his or her consumer debt, with income
not necessary for the maintenance of the debtor and allowed dependants, then
the debtor will be directed to switch out of Chapter 7 to a Chapter 13 repayment
plan.” WILLIAM L. NORTON, JR., NORTON BANKRUPTCY LAW AND PRACTICE § 26:8
(3d ed. 2008).
26
No. 07-10226
all services promised, section 526(a)(2) prohibits them from advising an assisted
person to make untrue or misleading statements when seeking bankruptcy
relief, and section (a)(3) precludes debt relief agencies from misrepresenting the
services they will provide or the costs or benefits of filing for bankruptcy relief.
This suggests that Congress did not enact 526(a)(4) as a sweeping prohibition on
good faith, lawful, and ethical advice.
For the reasons stated above, we hold that under the doctrine of
constitutional avoidance, the language of section 526(a)(4) can and should be
interpreted only to prohibit attorneys from advising clients to incur debt in
contemplation of bankruptcy when doing so would be an abuse or improper
manipulation of the bankruptcy system. Thus, section 526(a)(4) has no
application to good faith advice to engage in conduct that is consistent with a
debtor’s interest and does not abuse or improperly manipulate the bankruptcy
system.
B. Overbreadth
Hersh argues that the district court correctly concluded that section
526(a)(4) is facially unconstitutional.21 The Government challenges this holding.
Hersh does not suggest that the statute is invalid “as applied” to her or that if
this court does not hold section 526(a)(4) facially invalid, it should invalidate the
statute on more narrow grounds.22 Thus, we will only address whether the
21
In her Second Amended Complaint for Declaratory Judgment and Permanent
Injunctive Relief, Hersh contended that § 526(a)(4) “violates the First Amendment, on its face
and as applied, because it prohibits, under threat of civil penalty, Constitutionally protected
speech.” However, she argued in her motion for summary judgment and in her briefs only that
the statute is facially unconstitutional.
22
It is questionable whether Hersh would have standing to bring an as-applied
challenge to § 526(a)(4) as the statute has not been enforced against her and there is no
evidence or allegation that anyone has threatened to enforce it against her for giving her
clients advice in violation of the statute (or for any other reason). However, as she clearly does
not make an as-applied argument in her brief and the district court held the statute facially
invalid, we need not determine whether she has demonstrated standing for an as applied
challenge.
27
No. 07-10226
district court correctly concluded that section 526(a)(4) is unconstitutional on its
face.
A court can hold a statute to be facially unconstitutional, as opposed to
unconstitutional “as applied,” if it is excessively vague or substantially
overbroad. See JOHN E. NOWAK & RONALD D. ROTUNDA, CONSTITUTIONAL LAW
1142 (7th ed. 2004). The district court held section 526(a)(4) facially
unconstitutional on overbreadth grounds. Hersh, 347 B.R. at 25.23 According to
our First Amendment overbreadth doctrine, a statute is facially invalid if it
prohibits a substantial amount of protected speech.” United States v. Williams,
128 S.Ct. 1830, 1838 (2008). Such facial challenges can succeed only when this
overbreadth is substantial in relation to the statute’s legitimate reach. Id.
There must be a “significant imbalance between the protected speech the statute
should not punish and the unprotected speech it legitimately reaches.”
Shackelford v. Shirley, 948 F.2d 935, 940 (5th Cir. 1991). The party challenging
the statute must demonstrate “‘a realistic danger that the statute itself will
significantly compromise recognized First Amendment protections of parties not
before the [c]ourt’ before a statute will be struck down as facially overbroad.” Id.
(alterations in original) (quoting City Council of Los Angeles v. Taxpayers for
Vincent, 104 S.Ct. 2118, 2126-27 (1984)).
The fact that a court can hypothesize situations in which the statute will
impact protected speech is not alone sufficient. Taxpayers for Vincent, 104 S.Ct.
at 2126; Shackelford, 948 F.2d at 940. Facial challenges to the constitutionality
23
There are two tests for determining whether a statute is facially unconstitutional on
overbreadth grounds. Washington State Grange v. Washington State Republican Party, 128
S.Ct. 1184, 1190 (2008). In cases that do not involve First Amendment claims, a statute is
overbroad if it is “unconstitutional in all of its applications.” Id. (citing United States v. Salerno,
107 S.Ct. 2095, 2100 (1987)). However, in the First Amendment context, there is a second type
of facial challenge in which a law may be impermissibly overbroad if “a substantial number
of its applications are unconstitutional judged in relation to the statute’s plainly legitimate
sweep.” Id. at 1190 n.6 (internal quotations omitted).
28
No. 07-10226
of statutes should be granted “sparingly, and only as a last resort,” so as-applied
challenges are preferred. Broadrick v. Oklahoma, 93 S.Ct. 2908, 2916 (1973).
Facial challenges “often rest on speculation” because they do not involve specific
applications of a statute, but rather hypothetical applications. Washington State
Grange, 128 S.Ct. at 1191. They also “threaten to short circuit the democratic
process by preventing laws embodying the will of the people from being
implemented in a manner consistent with the Constitution.” Id. Invalidating
a law that is perfectly constitutional in some applications has “obvious harmful
effects.” Williams, 128 S.Ct. at 1838.
“The first step in overbreadth analysis is to construe the challenged
statute; it is impossible to determine whether a statute reaches too far without
first knowing what the statute covers.” Williams, 128 S.Ct. at 1838. Although,
as described above, Hersh and the district court noted several examples in which
advice to a client to incur debt in contemplation of bankruptcy should be
protected by the First Amendment, as described above, this court has construed
the statute so that it does not apply to these situations. As so construed, the
statute does not restrict the speech that Hersh argues is protected by the First
Amendment. Thus, there is no significant imbalance between any protected
speech the statute restricts and the speech that the statute legitimately
restricts.
Moreover, as the Government notes, the district court did not address, and
Hersh did not discuss in her motion for summary judgment, the final portion of
section 526(a)(4), which prohibits debt relief agencies from advising clients to
incur debt in order to pay their fees.24 In her brief in this court, Hersh states
24
This part of § 526(a)(4) states: “A debt relief agency shall not . . . advise an assisted
person or prospective assisted person to incur more debt . . . 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.”
29
No. 07-10226
that this prohibition also violates the First Amendment and separation of powers
principles. Hersh argues that it creates an unconstitutional restriction on
speech because it inhibits advice to hire a lawyer, and “if incurring [debt to pay
fees for services] is the only way that a person of few means in financial distress
may obtain a lawyer, Congress may not prevent an attorney from advising a
client to do it.”
However, Hersh raised her arguments regarding this provision of section
526(a)(4) only on appeal. This court generally does not address an argument
raised for the first time on appeal. See, e.g., Leverette v. Louisville Ladder Co.,
183 F.3d 339, 342 (5th Cir. 1999). Furthermore, Hersh does not argue – and has
never alleged – that she plans to violate (or has ever violated) this provision by
advising her clients to incur debt to pay her fees (nor does anything in the record
so suggest). Moreover, Hersh does not cite authority for the proposition that
preventing a debt relief agency from abusing its position by seeking preferential
treatment in the bankruptcy process violates the constitution. Even if Hersh’s
arguments are correct, and the attorneys’ fees provision of section 526(a)(4)
would unconstitutionally restrict some speech, there is no indication and she
does not argue, that this restriction would be substantial in comparison to the
legitimate reach of the statute.25
Under this court’s construction of section 526(a)(4), it is clear that the
potential for the statute to prohibit protected speech is not by any means
substantial in relation to the statute’s legitimate reach. Therefore, we hold that
the district court erred in holding section 526(a)(4) unconstitutional on its face
and we reverse the judgment of the district court on this issue.26 We also reverse
25
Accordingly, we do not address Hersh’s contentions on appeal concerning the attorney
fees clause in § 526(a)(4).
26
Any remaining challenge to specific applications of § 526(a)(4) would be more
appropriately addressed in an as-applied challenge. See Washington State Grange, 128 S.Ct.
at 1195.
30
No. 07-10226
and dissolve the injunction imposed by the district court preventing the
enforcement of this statute.
III. Whether 11 U.S.C. § 527(b) violates the First Amendment 27
Hersh also argues that the district court erred in holding that 11 U.S.C.
§ 527(b)28 does not violate the First Amendment.29 Section 527(b) requires
attorneys to provide “assisted persons” with written notice of certain basic
information regarding bankruptcy proceedings. It states:
“A debt relief agency providing bankruptcy assistance to an assisted
person shall provide each assisted person at the same time as the
notices required under subsection (a)(1) the following statement, to
the extent applicable, or one substantially similar. The statement
shall be clear and conspicuous and shall be in a single document
separate from other documents or notices provided to the assisted
person.” 11 U.S.C. § 527(b).
27
Hersh states in her brief that § 527 impermissibly impinges her Fifth Amendment
right to act as counsel in a civil matter. The district court dismissed Hersh’s Fifth Amendment
claim because Hersh lacked standing to assert her clients’ right to counsel and because the
Fifth Amendment does not give her the right to provide counsel to her clients. Hersh, 347 B.R.
at 28. Hersh makes no argument in the text of her brief supporting her Fifth Amendment
claim, and never asserts that she has a right to provide counsel to her clients under the Fifth
Amendment. Thus, the argument was not sufficiently briefed, and we will consider it waived
and do not address it. See Procter & Gamble Co. v. Amway Corp., 376 F.3d 496, 499 n.1 (5th
Cir. 2004) (“Failure adequately to brief an issue on appeal constitutes waiver of that
argument.”).
28
Although in her complaint, Hersh suggests § 527 is unconstitutional in its entirety,
in her brief here, she only discusses § 527(b), not the entire § 527. Thus, any arguments that
Hersh could make regarding the other subsections of § 527 have been waived, and we will only
address her argument regarding the constitutionality of § 527(b) at this time. See Procter &
Gamble Co., 376 F.3d at 499 n.1.
29
In her original complaint, Hersh indicated that she is challenging § 527 on its face
and as applied. She repeated this claim in her First Amended Complaint for Declaratory
Judgment, Temporary and Permanent Injunctive Relief. However, it is immaterial whether
Hersh challenges this statute on its face or as it applies to her because we conclude that it does
not violate Hersh’s First Amendment rights for any of the reasons that she proposes.
31
No. 07-10226
The statement set forth in the statute provides basic factual information
regarding bankruptcy proceedings.30 The statement that a debt relief agency
provides to its client need not be identical to the one provided in the statute as
long as it is “substantially similar.” Id. Furthermore, section 527(b) states that
a debt relief agency only needs to provide the information “to the extent
30
As it appears in § 527(b), this statement is as follows:
“‘IMPORTANT INFORMATION ABOUT BANKRUPTCY ASSISTANCE
SERVICES FROM AN ATTORNEY OR BANKRUPTCY PETITION
PREPARER.
‘If you decide to seek bankruptcy relief, you can represent yourself, you can hire
an attorney to represent you, or you can get help in some localities from a
bankruptcy petition preparer who is not an attorney. THE LAW REQUIRES AN
ATTORNEY OR BANKRUPTCY PETITION PREPARER TO GIVE YOU A
WRITTEN CONTRACT SPECIFYING WHAT THE ATTORNEY OR
BANKRUPTCY PETITION PREPARER WILL DO FOR YOU AND HOW
MUCH IT WILL COST. Ask to see the contract before you hire anyone.
‘The following information helps you understand what must be done in a routine
bankruptcy case to help you evaluate how much service you need. Although
bankruptcy can be complex, many cases are routine.
‘Before filing a bankruptcy case, either you or your attorney should analyze your
eligibility for different forms of debt relief available under the Bankruptcy Code
and which form of relief is most likely to be beneficial for you. Be sure you
understand the relief you can obtain and its limitations. To file a bankruptcy
case, documents called a Petition, Schedules and Statement of Financial Affairs,
as well as in some cases a Statement of Intention need to be prepared correctly
and filed with the bankruptcy court. You will have to pay a filing fee to the
bankruptcy court. Once your case starts, you will have to attend the required
first meeting of creditors where you may be questioned by a court official called
a ‘trustee’ and by creditors.
‘If you choose to file a chapter 7 case, you may be asked by a creditor to reaffirm
a debt. You may want help deciding whether to do so. A creditor is not permitted
to coerce you into reaffirming your debts.
‘If you choose to file a chapter 13 case in which you repay your creditors what
you can afford over 3 to 5 years, you may also want help with preparing your
chapter 13 plan and with the confirmation hearing on your plan which will be
before a bankruptcy judge.
‘If you select another type of relief under the Bankruptcy Code other than
chapter 7 or chapter 13, you will want to find out what should be done from
someone familiar with that type of relief.
‘Your bankruptcy case may also involve litigation. You are generally permitted
to represent yourself in litigation in bankruptcy court, but only attorneys, not
bankruptcy petition preparers, can give you legal advice.’”
32
No. 07-10226
applicable.” Id. The statement should be provided to the debtor within three
days of the commencement of representation. Id.
The district court held that section 527 does not violate the First
Amendment because it “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.” Hersh, 347 B.R. at 27.31 The court concluded
that “[t]he factual, viewpoint-neutral statement [required by the statute]
provides a sufficiently benign and narrow means of ensuring that clients are
aware of certain general information regarding bankruptcy.” Id. Thus, it
granted the Government’s motion to dismiss Hersh’s claim that section 527(b)
violates the First Amendment. Id. This court reviews a district court’s
disposition of a 12(b)(6) motion to dismiss de novo. Equal Access for El Paso, Inc.
v. Hawkins, 509 F.3d 697 at 701-02 (5th Cir. 2007).
Hersh argues that the district court erred in holding that section 527(b)
is constitutional because the disclosures required by the statute are false,
misleading, and not narrowly drawn to further a compelling government
interest.
The First Amendment protects compelled speech as well as compelled
silence. Thus, it protects an attorney’s right not to provide her client with
certain factual information. Riley v. Nat’l Fed’n of the Blind of North Carolina,
108 S.Ct. 2667, 2677-78 (1988) (stating that in the context of protected speech,
the difference between compelled speech and compelled silence is “without
constitutional significance,” and that compelled statements of fact as well as
compelled statements of opinion burden protected speech). However, the
31
Other courts have addressed this issue as well. While some have held § 527(b)
unconstitutional, others have found the statute to be a permissible compulsion of speech. See,
e.g., In re Reyes, 361 B.R. at 279 (holding § 527 unconstitutional as it applies to attorneys);
Olsen, 350 B.R. at 917 (following the reasoning of the district court in Hersh to hold that § 527
does not unconstitutionally compel speech).
33
No. 07-10226
Supreme Court has acknowledged that the government may, under certain
circumstances, restrict or compel the speech of professionals. See, e.g., Zauderer
v. Office of the Disciplinary Counsel of the Supreme Court of Ohio, 105 S.Ct.
2265, 2282 (1985) (recognizing that “unjustified or unduly burdensome
disclosure requirements might offend the First Amendment,” but holding that
an attorney-advertiser’s rights are adequately protected under a state statute
requiring certain disclosures in advertisements “as long as disclosure
requirements are reasonably related to the State’s interest in preventing
deception of consumers”).
The Supreme Court addressed a compelled speech case in Riley, 108 S.Ct.
2667. There, the Court applied strict scrutiny to invalidate a North Carolina law
that required professional fundraisers to disclose to solicited potential donors the
percentage of charitable contributions that the fundraiser collected during the
past year that were actually given to the charities represented. Id. at 2672,
2677-78. Strict scrutiny was held appropriate because the Court determined
that the statute implemented a content-based regulation on speech. Id. at 2677.
The Riley Court held that the state’s interest in “informing [charitable] donors
how the money they contribute is spent” was “not as weighty as the State
assert[ed].” Riley, 108 S.Ct. at 2678. It also held that the requirement was
“unduly burdensome and not narrowly tailored,” id., and would hamper
charitable fundraising and “necessarily discriminates against small and
unpopular charities.” Id. at 2679. It listed multiple “more benign and narrowly
tailored” options that were available. Id. Thus, the Court held that the statute
was unconstitutional in violation of the First Amendment. Id. at 2680.
In Planned Parenthood of Southeastern Pennsylvania v. Casey, 112 S.Ct.
2791, 2826 (1992), a plurality of the Supreme Court upheld a Pennsylvania law
requiring doctors to provide women seeking abortions with certain information
about the procedure, the health risks, conditions surrounding the pregnancy,
34
No. 07-10226
and availability of state-provided information. The Court determined that the
state had a “legitimate goal” of protecting the life of an unborn child and making
sure that women make “mature and informed” decisions regarding abortions.
Id. at 2824. It further reasoned that the requirement that the doctors provide
the women seeking abortions with certain information was not a “substantial
obstacle” to obtaining an abortion, and therefore, not an “undue burden” on the
woman. Id.
The district court properly concluded that the government’s interest
sought to be furthered by section 527(b) was “substantially compelling” for First
Amendment purposes. The government’s interest to be furthered by section
527(b) is in ensuring that debtors who are contemplating filing for bankruptcy
have some basic knowledge about the process. The amount of debt discharged
in bankruptcy is immense, so the government has a compelling interest in
ensuring that those who enter bankruptcy know what it entails. HOUSE REPORT
at 4 (indicating that in 1997, it was estimated that more than $44 billion of debt
was discharged by debtors who filed for bankruptcy). Furthermore, section
527(b) requires debt relief agencies to provide information to “assisted persons,”
who are consumer debtors with a limited amount of non-exempt property. 11
U.S.C. § 101(3). Congress could have determined that these consumer debtors
often lack basic knowledge about the bankruptcy system in comparison both to
creditors and to their advisors (who are advising them “in return for the
payment of money or other valuable consideration”), which puts the debtors at
a disadvantage. The government has an interest in having the bankruptcy
system explained in “plain English” to such debtors contemplating filing for
bankruptcy.
The district court also correctly concluded that section 527(b) is narrowly
tailored to promote this government interest, and creates a reasonable burden
on attorneys and other debt relief agencies. The statute merely sets forth a list
35
No. 07-10226
of information about bankruptcy proceedings that a debt relief agency – acting
in return for the payment of money or other valuable consideration – must
provide to its clients who are “assisted persons.” It does not limit the amount of
information that the debt relief agency can provide, so the debt relief agency is
free to expand upon, clarify, or even express disagreement with any of the
provisions in the required statement. Furthermore, because section 527(b)
provides that the statement should be given to the client “to the extent
applicable,” if the debt relief agency feels that some of the provisions of the
statement are not relevant to its client, it can omit the irrelevant information.
This language also provides great leeway for debt relief agencies deciding
whether it is necessary to provide a client with the statement at all. If, for
example, Hersh represents a creditor who qualifies as an “assisted person,”
section 527(b) only requires her to present the creditor with the statement if it
is “applicable” to that client. Furthermore, although it may be a burden for a
debt relief agency to determine whether a prospective client is an “assisted
person” in three days, it would not be unduly burdensome to simply provide the
person with the section 527(b) statement, and explain that it may not be
necessary. Section 527(b) is narrowly tailored to Congress’s interest in
educating debtors about the bankruptcy system because it does not inhibit
clients from obtaining relief, nor does it significantly interfere with the
relationship between the debt relief agency and its client. As a debt relief
agency, Hersh can provide her clients with all of the information she desires, she
simply must also provide them the basic information required by section 527(b),
but only when and to the extent that information is relevant to the client’s
situation (and she is free to add any appropriate explanation desired).
Furthermore, contrary to Hersh’s arguments, section 527(b) does not
require Hersh or other debt relief agencies to make false and misleading
statements. Most of the statements that Hersh cites as examples of false and
36
No. 07-10226
misleading material are simply generalizations that she is free to expand upon
and clarify for her clients. For example, Hersh complains that the assertion in
the statute that her client “will have to pay a filing fee to the bankruptcy court”
is misleading because the fee can be deferred under Federal Rule of Bankruptcy
Procedure 1006(b). Hersh is completely free to explain to her client the deferral
options. She can clarify for her client other provisions in the section 527(b)
statement that she claims are false and misleading, or even express
disagreement with them. For example, she can explain to her client that the
bankruptcy trustee is not literally a “court official,” and that Chapter 13 cases
do not have a three year minimum requirement for certain repayment plans as
the statement suggests. Furthermore, contrary to Hersh’s arguments, the fact
that the section 527(b) statement does not mention that only attorneys can give
advice regarding whether to reaffirm debts and prepare a Chapter 13 plan, and
that only attorneys can help with confirmation hearings, does not mean that she
is required to provide her clients with “false and misleading” information.
Again, she is free to explain every detail of the bankruptcy process as it applies
to her client. She may even alter the language of the statement to fit her
preferences as long as the content remains “substantially similar.”
We note that the Court in Milavetz unanimously upheld 11 U.S.C. §§
528(a)(4) and 528(b)(2), rejecting challenges thereto which are essentially
parallel to those raised by Hersh as to section 527(b). See Milavetz, 541 F.3d at
794-97. This reasoning in Milavetz supports our holding as to section 527(b).
For the reasons stated above, we hold that the district court properly
concluded that section 527(b) does not violate Hersh’s First Amendment rights
because it does not unduly burden her or her clients, and is narrowly tailored to
promote the government’s compelling interest in ensuring that consumer debtors
are aware of basic bankruptcy information.
CONCLUSION
37
No. 07-10226
The judgment of the district court is AFFIRMED insofar as it holds that
an attorney providing, in return for the payment of money or other valuable
consideration, “bankruptcy assistance” as defined in section 101(4A) of the Code,
to “an assisted person” as defined in section 101(3) of the Code, is a “debt relief
agency” as defined in section 101(12A) of the Code, for purposes of the BAPCPA,
and is,
AFFIRMED and insofar as it holds that section 527(b) of the Code is not
invalid as violative of the First Amendment, and is,
REVERSED insofar as it holds that section 526(a)(4) of the Code is facially
unconstitutional in violation of the First Amendment, and is REVERSED insofar
as it enjoins the enforcement of section 526(a)(4), and,
Judgment is here rendered dissolving the injunction issued by the district
court and,
Judgment is further here rendered that Hersh take nothing by her suit.
38