Tuesday, September 9, 2008

BAPCPA's § 526(a)(4) Is Unconstitutional, Says 8th Circuit: Attorneys ARE "Debt Relief Agencies" But MAY Advise Clients to Incur Additional Debt

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

Milavetz, Gallop & Milavetz v. United States

U. S. Circuit Court for the Eighth Circuit, Case
No. 07-2405
September 4, 2008

For the first time, just last week, a Circuit Court has addressed whether bankruptcy attorneys are "debt relief agencies" under BAPCPA, and, if they are, whether specific controversial prohibitions or requirements of debt relief agencies are unconstitutional as applied to attorneys. Although of course not binding on Oregon attorneys, this case is of local interest because of important clues it may give about the long-term viability of our earlier Oregon U. S. District Court opinion covering much of the same ground, Olsen v. Gonzales, 350 B. R. 906 (D. Or. 2006).

The 8th Circuit addressed 3 questions that have arisen under BAPCPA 1) whether bankruptcy attorneys who provide bankruptcy assistance to assisted persons are debt relief agencies; 2) if so, whether the prohibition of
§ 526(a)(4) for debt relief agencies to advise clients to incur debt is unconstitutional; and 3) if attorneys are debt relief agencies, whether the now-familiar advertising disclosure requirements of § 528(a)(4) and (b)(2)(B) are unconstitutional as applied to attorneys. The U. S. District Court for the District of Minnesota had resolved these issues by granting summary judgment in favor of the plaintiff bankruptcy law firm, and thereby ordering that the attorneys of the District of Minnesota were not debt relief agencies and that the above challenged provisions were unconstitutional as applied to Minnesota's attorneys.

1) The Circuit Court disagreed with the lower court's application of the doctrine of constitutional avoidance, which dictates that "where 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." (Quoting from.Edward J. DeBartolo Corp. v. Florida Gulf Coast Bldg. & Constr. Trades Council, 485 U.S. 568, 575 (1988).) The 8th Circuit believed the Congressional intent was clear: that BAPCPA's definition of "debt relief agency" in § 101(12A), and the component definitions of "bankruptcy assistance" and "assisted persons," required the conclusion that Congress intended for attorneys to be included as debt relief agencies. "The statutory language sweeps broadly and clearly covers the legal services provided by attorneys to debtors in bankruptcy unless excluded by another provision." The Court then noted that the five exclusions listed in § 101(12A).did not refer to attorneys, so it ruled that attorneys are debt relief agencies.

2) After briefly addressing the competing First Amendment standards of scrutiny for weighing the prohibition against advising a client to incur more debt in contemplation of bankruptcy, the Circuit Court held that
regardless of whether the government's interest in prohibiting the speech was legitimate (Gentile standard) or compelling (strict scrutiny standard), § 526(a)(4) is unconstitutionally overbroad as applied to attorneys falling within the definition of debt relief agencies because it is not narrowly tailored, nor narrowly and necessarily limited, to restrict only that speech that the government has an interest in restricting. Instead, § 526(a)(4) prohibits attorneys classified as debt relief agencies from advising any assisted person to incur any additional debt in contemplation of bankruptcy; this prohibition would include advice constituting prudent prebankruptcy planning that is not an attempt to circumvent, abuse, or undermine the bankruptcy laws. Section 526(a)(4), as written, prevents attorneys from fulfilling their duty to clients to give them appropriate and beneficial advice not otherwise prohibited by the Bankruptcy Code or other applicable law.
The government argued, and a dissenting opinion discussed at some length, that the restriction on speech is constitutional because it should be interpreted to mean only inappropriately given advice, but the majority dismissed this because "the plain language of the statute does not permit this narrow interpretation."

) As for the advertising disclosure requirements of §§ 528(a)(4) and (b)(2)(B), these require the use of the following (or a substantially similar) disclosure by any debt relief agency providing bankruptcy or a list of other debtor-related assistance to any assisted person: "We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code." In reviewing the constitutionality of these disclosures. the Eighth Circuit disagreed with the District Court's use of the "intermediate scrutiny" standard and determined that the "rational basis" standard was instead appropriate. The Court relied on the U. S. Supreme Court opinion, Zauderer v. Office of Disciplinary Counsel of the Supreme Court of Ohio, 471 U.S. 626 (1985) in determining that the "disclosure requirements here, like those in Zauderer, are intended to avoid potentially deceptive advertising". That context called for the regulation of speech to be merely reasonably related to preventing consumer deception, so "although less intrusive means may be conceivable" for meeting the governmental goal, these disclosures were reasonably related to that goal and so they passed constitutional muster.

This 8th Circuit opinion referred repeatedly and favorably to the 2006 Oregon U. S. District Court opinion, Olsen v. Gonzales, mentioned at the beginning of this Bulletin, in fact using it as direct or indirect support for each of its three key holdings above. That gives strong indication that this
Olsen opinion will represent the law in Oregon on these issues for at least the near future. In addition, the 8th Circuit expressly stated that its was following the majority view that attorneys are debt relief agencies; and it only cited (and presumably only found) opinions supporting the unconstitutionality of § 526(a)(4) and the constitutionality of §§ 528(a)(4) and (b)(2)(B). These seem also to indicate some stability for the same holdings in Olsen. Until the 9th Circuit or its Bankruptcy Appellate Panel rules to the contrary, these particular rooms in the BAPCPA house of ambiguity are relatively settled in Oregon.

THE BOTTOM LINE: In Oregon since 2006, and now in the 8th Circuit, attorneys ARE debt relief agencies, but they are EXCLUDED from the
§ 526(a)(4) prohibition against giving advice to procure additional debt, since that prohibition is unconstitutional broad in violation of the First Amendment. However the disclosure requirements. However the disclosure requirements of §§ 528(a)(4) and (b)(2)(B) are reasonably related to the governmental purpose of regulating deceptive advertising and so they continue to be applicable to attorneys. The holdings of and the rationales used in this 8th Circuit opinion give reason to believe that Oregon's Olsen v. Gonzales will continue to stand firm as least as to these issues.

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

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