Hersh v. U.S.

• Decision Date: 26 July 2006
• Docket Number: No. CIV.A. 3:05-CV-2330-N.,CIV.A. 3:05-CV-2330-N.
• Citation: 347 B.R. 19
• Parties: Susan B. HERSH, Plaintiff, v. UNITED STATES of America, et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

347 B.R. 19

Susan B. HERSH, Plaintiff, v. UNITED STATES of America, et al., Defendants.

No. CIV.A. 3:05-CV-2330-N.

United States District Court, N.D. Texas, Dallas Division.

July 26, 2006.

COPYRIGHT MATERIAL OMITTED

Howard Marc Spector, Law Office of Howard Marc Spector, Dallas, TX, for Plaintiff.

Marcia K. Sowles, Department of Justice, Washington, DC, for Defendants.

MEMORANDUM OPINION AND ORDER

GODBEY, District Judge.

Before the Court is Defendants' Motion to Dismiss. The Court holds that section 526(a)(4)'s restrictions on legal advice violate Hersh's First Amendment rights, but otherwise grants the motion to dismiss.

I. ORIGINS OF HERSH'S CLAIMS AND THE GOVERNMENT'S MOTION TO DISMISS

In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"). The act contains provisions arguably applicable to consumer bankruptcy attorneys and the manner in which they provide services to both potential and actual clients. Defendant Alberto Gonzales, Attorney General of the United States, and Defendant Greg Abbot, Attorney General of Texas, are the heads of the agencies charged with enforcing these provisions. (Hereafter, the Defendants, i.e., the Attorneys General and their respective governments, will be collectively referred to as the "Government.")

Plaintiff Susan B. Hersh is a Dallas, Texas attorney whose practice includes counseling clients for a fee regarding federal bankruptcy law. She brings this cause of action both seeking declaratory judgement that the BAPCPA does not apply to attorneys and as a facial challenge to the constitutionality several provisions. The provisions at issue are: 11 U.S.C. 526(a)(4), which prohibits attorneys from giving certain advice to their clients;¹ and 11 U.S.C. § 527, which requires specific disclosures by providers of bankruptcy assistance.²

The Government subsequently filed this motion seeking to dismiss all Hersh's claims.

II. STANDARD FOR MOTION TO DISMISS

Where a party fails to state a claim upon which relief can be granted, dismissal pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure is appropriate. See FED. R. Civ. P. 12(b)(6). When ruling on a Rule 12(b)(6) motion, courts must accept all well pleaded facts as true and view them in the light most favorable to the nonmovant. See Calhoun v. Hargrove, 312 F.3d 730, 733 (5th Cir.2002); Campbell v. City of San Antonio, 43 F.3d 973, 975 (5th Cir.1995).³

III. THE TERM "DEBT RELIEF AGENCY" INCLUDES ATTORNEYS

Hersh's first claim seeks declaratory judgement that she, a licensed attorney advising clients on bankruptcy, is not a "debt relief agency" as defined in 11 U.S.C. § 101. Paragraph 12A of section 101 defines debt relief agency as "any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer under section 110...." 11 U.S.C. § 101(12A). The paragraph then continues to list five exceptions to the general definition. Id. at (A-E). Section 101 also defines "bankruptcy assistance" 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).⁴

A reading of the text for plain meaning indicates that the term "debt relief agency" includes bankruptcy attorneys such as Hersh. Plain meaning is the preferred method for interpreting statutory language. See Lamie v. U.S. Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004); Sutton v. United States, 819 F.2d 1289, 1292-1293 (5th Cir.1987). Here, as only attorneys are authorized to provide legal advice and "providing legal advice" is part of the definition of bankruptcy assistance, it seems clear that bankruptcy attorneys such as Hersh fit within the definition of "persons providing bankruptcy assistance." Attorneys also provide most of the other functions defined as "bankruptcy assistance."

Hersh argues that attorneys should be excluded from the' above reading due to seeming inconsistencies their inclusion would cause in other parts of the statute.⁵ Any inferences possibly created by imprecise drafting are surely overwhelmed by the plain language. Moreover, after the above stated definition for "debt relief agency," the paragraph continues to list five exceptions; if Congress had wanted attorneys excluded from the term "debt relief agency" (and, as a result, the requirements of BAPCPA at issue here) it surely would have taken this opportunity to exclude them from what otherwise they are so plainly within.⁶ Further, legislative history clearly indicates that Congress had attorneys in mind with this statute; the House Report on the BAPCPA mentions "attorney" 164 times. H.R. REP. 109-31, reprinted in 2005 U.S.C.C.A.N. 88.⁷ Accordingly, the Court grants the Government's motion to dismiss with respect to Hersh's claim for declaratory judgement that she is not a debt relief agency.

IV. 11 U.S.C. § 526(A)(4) UNCONSTTUTIONALLY RESTRICTS HERSH'S SPEECH

A. Standards to Apply in Determining Constitutionality of Restrictions on Speech

The most significant portions of the parties' briefing concerns 11 U.S.C. § 526(a)(4). This section provides:

(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 or charge for services performed as part of preparing for or representing a debtor in a case under this title.

11 U.S.C. § 526(a)(4).

The parties dispute two issues with respect to section 526(a)(4): whether the Court ought to apply strict scrutiny or a more lenient standard to determine the section's constitutionality, and whether the section meets whichever standard is applied. Because the Court finds that section 526(a)(4) does not survive scrutiny under the more lenient standard, it need not decide the first question.

The arguments of the parties lay out two alternative tests for use to determine the constitutionality of section 526(a)(4). Traditionally, courts subject content-based restrictions on speech to strict scrutiny. Strict scrutiny requires the regulation of speech to be (1) narrowly tailored to promote (2) a compelling government interest. See United States v. Playboy Entm't Group, Inc., 529 U.S. 803, 813, 120 S.Ct. 1878, 146 L.Ed.2d 865 (2000). Here, the Government proposes that section 526(a)(4) is an ethical regulation, and thus subject to a lesser standard outlined in Gentile v. State Bar of Nev., 501 U.S. 1030, 111 S.Ct. 2720, 115 L.Ed.2d 888 (1991).⁸

In Gentile, the Court faced the question of whether a test used by the Nevada Supreme Court in regulating attorney statements to the press violated the First Amendment. It found that the state's test achieved a "constitutionally permissible balance" because it (1) served "the State's legitimate interest in regulating the activity in question" and (2) "impose[d] only narrow and necessary limitations on lawyers' speech." Id. at 1075, 111 S.Ct. 2720. The balancing test in Gentile and the strict scrutiny test appear to share the requirement that any restrictions on speech be narrow.

B. Section 526(a)(4) is Not Sufficiently Narrow

In enacting BAPCPA, Congress sought to remedy abuse of the bankruptcy system. With regards to section 526(a)(4), the Government alleges that Congress sought to end the manipulation of the system by certain filers who took on additional debt prior to bankruptcy. However, rather than changing the system to close the loopholes or penalize those who take on such debt, Congress in section 526(a)(4) enacted a prophylactic rule, banning the bankruptcy attorneys from advising their clients to take on additional debts "in contemplation" of bankruptcy. Thus, section 526(a)(4) prevents lawyers from advising clients to take actions that are lawful, even under BAPCPA.

Moreover, taking on additional debt "in contemplation" of bankruptcy does not necessarily constitute abuse. While the Government argues that taking on additional debt may harm a debtor in some cases, it seems obvious that this also means that in some other cases, it may not. (Defendants' Reply 5-6). Without addressing all the complexities of bankruptcy law, it seems quite possible that sometimes taking on more debt could be the most financially prudent option for someone considering bankruptcy. That situation could be the case when: (1) refinancing at a lower rate to reduce payments and forestall or even prevent entering bankruptcy, or (2) taking on secured debt such as loan on an automobile that would survive bankruptcy and also enable the debtor to continue to get to work and make payments. Thus, section 526(a)(4) prevents lawyers from giving clients their best advice.⁹

Section 526(a)(4), therefore, is overinclusive in at least two respects: (1) it prevents lawyers from advising clients to take lawful actions; and (2) it extends beyond abuse to prevent advice to take prudent actions. Thus, section 526(a)(4) of the BAPCPA imposes limitations on speech beyond what is "narrow and necessary." Gentile, 501 U.S. at 1075, 111 S.Ct. 2720; see also In re R.M. J., 455 U.S. 191, 203, 102 S.Ct. 929, 71 L.Ed.2d 64 (1982) (Even under intermediate scrutiny, "[s]tates may not place an absolute prohibition on certain types of potentially misleading information... if the information also may be presented in a way that is not deceptive."); Conant v. Walters, 309 F.3d 629, 638-39 (9th Cir.2002) (finding that government could not justify policy that threatened to punish a physician for recommending to a patient the medical use of marijuana on ground that such a recommendation...