Hersh v. U.S. ex rel. Mukasey

• Decision Date: 18 December 2008
• Docket Number: No. 07-10226.,07-10226.
• Parties: 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.
• Court: U.S. Court of Appeals — Fifth Circuit

553 F.3d 743

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.

No. 07-10226.

United States Court of Appeals, Fifth Circuit.

December 18, 2008.

Howard Marc Spector (argued), Dallas, TX, for Susan B. Hersh.

Mark Bernard Stern, Tara Leigh Grove, Mark Reiling Freeman (argued), U.S. Dept. of Justice, Civ. Div., Washington, DC, for U.S.

Gene C. Schaerr, Winston & Strawn, Washington, DC, for Amici Curiae.

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 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 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 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.

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., 467 U.S. 947, 104 S.Ct. 2839, 2847, 81 L.Ed.2d 786 (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) 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...