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December 26, 2008

5th Circuit Rules Against Attorneys re Debt Relief Agency Rules

Hersh v. USA,  --- F.3d ----, 2008 WL 5255905 (5th Cir. December, 2008)

Issue:   1.  Do the debt relief agency ("DRA") rules apply to attorneys?  2.  Are the provisions of the DRA rules in 526(a)(4) which restrict speech unconstitutional?   3.  Are the provisions of the DRA rules 527(b) which require certain statements to be provided to the debtor unconstitutional?                     

Holding:    1.  Yes,  2.  Yes,   2.  No. 

Hersh is a consumer bankruptcy attorney who filed this case in district court.  “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.  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.”  The district court ruled on summary judgment that attorneys are DRA under the plain language of the statute and “that section 526(a)(4) violates the First Amendment because it ‘imposes limitations on speech beyond what is ‘narrow and necessary.’”  “Hersh argue[d] 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.”
The district court “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.’”

The Court of Appeals affirmed that attorneys are DRA but reversed the ruling that 526(a)(4) is unconstitutional.  It affirmed the dismissal of the 527(b) claim.  The opinion largely restates the opinion of the 8th Circuit in Milavetz and adopts the dissent there as to the speech issue.  It adds that “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.”

As to the issue of free speech in 526(a)(4), the court agreed with the dissent in Milavetz.  “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.”  “If interpreted literally and broadly, section 526(a)(4) would raise serious constitutional problems because, as Hersh suggests, it would restrict some speech that is protected by the First Amendment.”  “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.”  “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.”  “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.”

As to the requirement in 527(b) that the DRA give the statement set forth in that section to a debtor, the court said “The statute merely sets forth a list 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, 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 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.”   

December 26, 2008 in Other Circuit Briefs | Permalink


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The Court of Appeals affirmed that attorneys are DRA but reversed the ruling that 526(a)(4) is unconstitutional. It affirmed the dismissal of the 527(b) claim. The opinion largely restates the opinion of the 8th Circuit in Milavetz.read this page..

Posted by: suzie orman | Dec 27, 2008 7:21:32 AM

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