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					                 Bankruptcy Code Provisions Affecting Attorney Speech
                                             November 28, 2007
                                             Gabrielle A. J. Beam

I.        Introduction

Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,
attempting to curb perceived abuse of the bankruptcy system and protect consumers from those
attorneys and bankruptcy petition preparers who take advantage of consumer debtors. In that
effort, Congress created a new bankruptcy term of art, labeled “debt relief agency.” Based on
that term, the act established three new sections of the Bankruptcy Code (Title 11 of the U.S.
Code) that set out specific restrictions and requirements for those categorized as debt relief
agencies.

This pathfinder seeks to provide an introduction to the new terms, present the implications of
those new provisions, discuss the potential unconstitutionality of the statutes, as well as provide
other resources for further review. Because the new term “debt relief agency” arguably includes
attorneys, even those not practicing bankruptcy, in its very broad definition, almost any
practicing attorney and law student will find this information beneficial.

The restrictions and requirements set out in sections 526, 527, and 528 of the Bankruptcy Code
have created a lot of confusion and concern for bankruptcy, as well as non-bankruptcy
practitioners. The provisions restrict attorney‟s free speech and compel attorneys to advertise
potentially misleading commercial speech. This pathfinder seeks to explore whether the sections
will withstand constitutional scrutiny in the years to come.

II.       Statutory Provisions

          A.      Applicable Bankruptcy Code Provisions

         11 U.S.C.A. § 101(12A) 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 § 110.”

               o § 101(3) defines “assisted person” as “any person whose debts consist primarily
                 of consumer debts and the value of whose nonexempt property is less than
                 $150,000.”

               o § 101(4A) 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 creditor‟s meeting or appearing in a case or proceeding on behalf
                 of another or providing legal representation with respect to case or proceeding on

  That non-exempt amount is now $164,250 after adjusting for inflation pursuant to 11 U.S.C.A. § 104(b), for cases
filed on or after April 1, 2007. 4 Collier on Bankruptcy ¶ 526.01 (15th ed. rev. 2007).


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           behalf of another or providing legal representation with respect to a case or
           proceeding under this title.”

    These definitions are extremely broad and have the capacity to include many attorneys
    that do not practice bankruptcy law. All that is required for an attorney to qualify as a
    debt relief agency, and be subject to those debt relief agency provisions described below
    in §§ 526, 527, and 528 of the Bankruptcy Code, is for an attorney to give bankruptcy
    advice to someone with consumer debts that has a low to moderate level of nonexempt
    assets. The crucial factor in these definitions is that an assisted person does not have to
    be someone who is filing bankruptcy, but could be the spouse or ex-spouse of someone
    filing bankruptcy, the landlord of a tenant filing bankruptcy, or some other creditor of a
    person filing bankruptcy. An attorney representing that spouse, landlord, or other
    creditor would technically meet the definition of debt relief agency and be subject to all
    the ramifications that arise from that designation.

   11 U.S.C.A. § 526 establishes restrictions on debt relief agencies. Sub-section (a)(4)
    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 or to pay an attorney 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.”

    First, it should be noted that incurring more debt in contemplation of bankruptcy is not in
    and of itself illegal or improper, there must be an element of fraud involved to make such
    an action impermissible. Therefore, this provision prohibits an attorney from giving
    advice to a client to do something that is not itself improper. Second, this prohibition
    does not delineate between debt that could benefit the client and his or her creditors, from
    that debt which could harm the creditors – it is a very broad-based restriction. Third, this
    provision could apply to attorneys giving clients advice to incur more debt in an effort to
    try to avoid bankruptcy, and the advice would still constitute a violation.

       o § 526(b) prohibits an assisted person from waiving “any protection or right
         provided under this section” by making such waivers unenforceable.

       o § 526(c) establishes remedies for violations of any of the three applicable
         sections: 526, 527, or 528.

    Sub-section (c) provides that if a debt relief agency violates any of the three sections, any
    contract with an assisted person would be void and unenforceable, the debt relief agency
    would 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 . . . intentionally or negligently failed to
    comply with any provision of [these three sections],”and such other remedies as are
    available in State court.




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          11 U.S.C.A. § 527 establishes disclosures that “[a] debt relief agency providing
           bankruptcy assistance to an assisted person shall provide.”

           While this section‟s requirements have not been hotly contested and appear fairly easy to
           comply with, it technically requires disclosures by debt relief agencies providing
           bankruptcy assistance to assisted person who may be the attorneys of a spouse or other
           creditor. Most of the disclosures would not make sense if the attorney is advising an
           assisted person who is not filing a bankruptcy petition and could constitute a form of
           compelled speech.

          11 U.S.C.A. § 528 establishes requirements for debt relief agencies. Sub-section (a)(4)
           requires that “[a] debt relief agency shall . . . clearly and conspicuously use the following
           statement in such advertisement: „We are a debt relief agency. We can help people file
           for bankruptcy relief under the Bankruptcy Code.‟ or a substantially similar statement.”

           One of the most contentious provisions for attorneys that are not advising clients to
           commence a bankruptcy filing, this provision requires attorneys advertise themselves as a
           debt relief agency that helps people file for bankruptcy relief despite the fact that the
           bankruptcy assistance being provided is to only smaller individual creditors or spouses of
           those filing bankruptcy. This results in a potentially misleading advertisement that does
           not serve the consumer protection purpose it intended to serve.

           B.     Constitution

          U.S. Const. amend. I states, in part, that “Congress shall make no law . . . abridging the
           freedom of speech.”

           While this appears to set a hard and fast rule that Congress may not pass a law that
           restricts people‟s freedom of speech, that has not been the case in Supreme Court
           jurisprudence over the years. There are exceptions to this rule, whereby Congress may
           restrict the speech of persons if the government has some level of interest in restricting
           the speech and the restrictions are sufficiently tailored to accommodate that interest level.
           This has resulted in different scrutiny tests to determine the constitutionality of various
           restrictions based on the type of restriction or the type of speech in question.

III.       Case Law Regarding Constitutionality of New Bankruptcy Provisions

           A.     Do Attorneys have Standing to Sue for Constitutionality?

                  1.      Courts Finding No Standing to Sue

          In re McCartney, 336 B.R. 588 (Bankr. M.D. Ga. 2006).
          Geisenberger v. Gonzales, 346 B.R. 678 (E.D. Pa. 2006).

           Both citing Lujan v. Def. of Wildlife, 504 U.S. 555 (1992), the courts held that a plaintiff
           must demonstrate an “injury in fact” to pursue the case in federal court. The cases also



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    focused on the fact that no party has yet “threatened to enforce . . . the debt relief agency
    provisions of BAPCPA.” In re McCartney, 336 B.R. at 592. Therefore, the plaintiffs
    were unable to even get the above courts to rule on the merits of the constitutionality
    claim, as they did not even pass the threshold issue of standing before the courts.

           2.      Courts Finding Standing to Sue

   Zelotes v. Martini, 352 B.R. 17 (Bankr. D. Conn. 2006); .
   Olsen v. Gonzales, 350 B.R. 906 (Bankr. D. Or. 2006).
   Hersh v. United States, 347 B.R. 19 (N.D. Tex. 2006).

    Olsen identified the standing issue as a party showing “„an invasion of a legally protected
    interest‟ that is „concrete and particularized‟ and „actual or imminent.‟” Olsen, 350 B.R.
    at 913 (citation omitted). Further, while it recognized that some courts had not found
    standing and that “there has been no threatened enforcement of the BAPCPA against
    plaintiffs,” the above courts held that if a restriction on speech threatens to chill the free
    speech rights of the plaintiffs, there is sufficient injury to meet the standing threshold.
    Standing was met based on the plaintiffs making a facial challenge to the statute‟s
    constitutionality, indicating that the statute on its face unconstitutionally chills the speech
    of others.

    B.     Are Attorneys Debt Relief Agencies?

           1.      Courts Finding Attorneys are Not Debt Relief Agencies

   In re Reyes, 361 B.R. 276 (S.D. Fla. 2007).
   In re Sorrell, 359 B.R. 167 (Bankr. S.D. Ohio 2007).
   Milavetz, Gallop & Milavetz P.A. v. United States, 355 B.R. 758 (Bankr. D. Minn. 2006).
   In re Attorneys at Law & Debt Relief Agencies, 332 B.R. 66 (Bankr. S.D. Ga. 2005).

    On its own motion, the court in In re Attorneys at Law concluded that the term debt relief
    agency does not include “attorneys” or “lawyers.” It based this decision on the fact that
    the definition does not specifically include the term attorney while it does include the
    term bankruptcy petition preparer, and the fact that some provisions indicate an attorney
    must tell his or her client that “they have the right to hire an attorney or to represent
    themselves, that only an attorney can render legal advice, and how to perform service pro
    se that would be universally provided if the person hired an attorney” would be absurd if
    attorneys were included in that term.

    The courts in In re Reyes and In re Sorrell took a slightly different approach to determine
    that attorneys are not debt relief agencies, following the Milavetz court rationale. These
    courts analyzed the issue with the “doctrine of constitutional avoidance” in mind, so that
    if interpreting an ambiguous statute one way will pose a constitutional question
    (violation) and interpreting the statute another way will not, you interpret it the way that
    would avoid the constitutional question.




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           2.      Courts Finding Attorneys are Debt Relief Agencies

   Olsen v. Gonzales, 350 B.R. 906 (Bankr. D. Or. 2006).
   Hersh v. United States, 347 B.R. 19 (N.D. Tex. 2006).

    Despite there being a good argument for finding that attorneys are not debt relief
    agencies, these two cases held that the plain meaning of the definitions and the statutes
    using the term are that attorneys are debt relief agencies. One Senator apparently
    attempted to exclude attorneys from the definition, but this amendment was not passed;
    based on that fact and the plain language of the statutory provisions, it is apparent that
    attorneys are debt relief agencies.

    C.     Are the Provisions Constitutional?

           1.      Section 526(a)(4) – All Courts Have Held Unconstitutional

   Hersh v. United States, 347 B.R. 19 (N.D. Tex. 2006).
   Olsen v. Gonzales, 350 B.R. 906 (Bankr. D. Or. 2006).
   Zelotes v. Martini, 352 B.R. 17 (Bankr. D. Conn. 2006).

    The constitutionality of restrictions on free speech differ depending on what type of
    speech is being regulated, as different forms of speech require different tests, or levels of
    scrutiny, for constitutionality purposes. Some forms of speech that the Supreme Court
    believes is crucial to society may only be regulated or restricted if the restriction passes
    some form of strict scrutiny test. Other forms of speech, deemed less-important by the
    Court, will meet constitutional muster so long as the restriction has a rational basis
    (limited scrutiny test). These opinions determine the constitutionality of restrictions on
    attorney advice, or an attorney‟s right to free speech, based on two different tests
    (depending on each side‟s argument), a strict scrutiny test and the lesser scrutiny Gentile
    test.

    Content-based restrictions, which are what prohibitions on attorney advice could be
    defined as, are generally subject to strict scrutiny. “Strict scrutiny requires the regulation
    of speech to be (1) narrowly tailored to promote (2) a compelling government interest.”
    347 B.R. at 24. This is a very difficult burden to meet and restrictions subject to this test
    are almost always held unconstitutional, as evidenced in the above case‟s opinions.

    However, the government argued in the above cases that the restriction constitutes an
    ethical regulation, subject to the less rigorous Gentile test (derived from Gentile v. State
    Bar of Nev., 501 U.S. 1030 (1991)). That test will find such a restriction on speech to be
    constitutional if “(1) it served „the State‟s legitimate in regulating the activity in question‟
    and (2) „impose[d] only narrow and necessary limitations on lawyers‟ speech.‟” 347
    B.R. at 24 (citation omitted). All of the above cases held that the restriction was
    unconstitutional even if the court used the more lenient Gentile test, as the restriction was
    not sufficiently narrow to achieve its interests in curbing abuse of the bankruptcy system.




                                             -5-
                 2.      Section 528(b)(2) – Courts Have Split

                         a.      Constitutional

         Olsen v. Gonzales, 350 B.R. 906 (Bankr. D. Or. 2006).

          The Olsen court indicated that this is a case of compelled commercial speech, for which
          there is no clear precedent. But, using the Central Hudson test (considered an
          intermediate scrutiny test), the court found that the required advertising disclosure was
          not misleading or untrue, could be worded somewhat differently than the exact verbiage
          indicated in the statute, and could be supplemented by some statement indicating that the
          attorney does not file bankruptcy petitions. Furthermore, though the court conceded that
          there might be “better ways” to achieve the government‟s interest in preventing
          “deceptive and fraudulent advertising practices,” it is narrowly drawn as it “generally
          applies to most consumer bankruptcy attorneys while, generally not applying to non-
          consumer bankruptcy attorneys.” 350 B.R. at 920-21.

          The Central Hudson test is derived from Central Hudson Gas & Elec. Corp. & Public
          Serv. Comm’n of N.Y., 447 U.S. 557 (1980). That test has 4-prongs: (1) Is the speech
          protected by First Amendment (i.e., is the speech lawful activity and not misleading)?
          (2) Is asserted governmental interest substantial (i.e., purpose is to maintain standards of
          licensed professionals, preserve reputation of legal profession, protect privacy and
          decision making of consumers, and prevent deception)? (3) Does the regulation directly
          advance the governmental interest asserted? (4) Is the regulation not more extensive than
          is necessary to serve that interest (i.e., is it reasonable regulation based on interest)? See
          350 B.R. at 919.

                         b.      Unconstitutional

         Milavetz, Gallop & Milavetz P.A. v. United States, 355 B.R. 758 (Bankr. D. Minn. 2006).

          Though the Milavetz case concluded that this section was unconstitutional, it did so based
          on dicta. As indicated above, it used this basis to help determine whether attorneys are
          debt relief agencies and the doctrine of constitutional avoidance to interpret the
          constitutional problem away. The court analyzed the provision‟s constitutionality based
          on the same Central Hudson test, requiring that the advertising requirements “directly
          advance a substantial government interest” and is narrowly tailored to that purpose. 355
          B.R. at 766. The court concluded that the restriction was not “narrowly draw” and “fails
          constitutional scrutiny.” Id. at 766-67.

          These cases were all found by doing an electronic database search in Westlaw and
          LexisNexis, under all federal cases, using the search terms of “constitutional! /p „debt
          relief agenc!‟”

IV.       Secondary Sources




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    A.     Books

   Erwin Chemerinsky & Barbara Glesner Fines, Constitutionality of the Attorney Liability
    Provisions of the Bankruptcy Reform Act, in Attorney Liability in Bankruptcy 141-52
    (Corinne Cooper & Catherine E. Vance eds., Am. Bar Ass‟n 2006).

    This book provides great background material for general constitutionality principles
    related to free speech rights of attorneys and commercial speech. It presents Supreme
    Court cases to help predict how courts will view the constitutionality of the debt relief
    agency sections 526, 527, and 528.

   Hon. William Houston Brown & Lawrence P. Ahern III, 2005 Bankruptcy Reform
    Legislation with Analysis 2d 90-92 (Thomson/West 2006).

    This book summarizes the new debt relief agency provisions in sections 526, 527, and
    528 and indicates the purpose of each restriction and requirement established in these
    bankruptcy code sections. This source also provides “Practice Alerts” for attorneys who
    might meet the definition of debt relief agency, which serve to advise attorneys on what
    they should do to comply with these sections given the legal environment at the date of
    publishing.

   A.S. Pratt & Sons, Pratt’s Guide to the Bankruptcy Abuse Prevention & Consumer
    Protection Act of 2005 8 (ALEX eSOLUTIONS, INC. 2005).

    This source very simply indicates that the term of debt relief agency is so broadly defined
    that it even includes “among others, a creditor who assisted an individual in the
    restructuring of a debt owed to that creditor.”

    B.     Law Review Articles

   Robin Huffman, Note, Bankruptcy and Free Speech: New Bankruptcy Code Provisions
    Restrict Attorneys’ Right to Properly Advise Clients, 35 Hastings Const. L.Q. 118 (2007).

    Written since many cases have discussed and determined the constitutionality of the new
    bankruptcy provisions, this is a good summary of the case law to date.

   Robert Wann, Jr., Note, “Debt Relief Agencies:” Does the Bankruptcy Abuse Prevention
    & Consumer Protection Act of 2005 Violate Attorneys’ First Amendment Rights, 14 Am.
    Bankr. Inst. L. Rev. 273 (2006).

    The first note to discuss the new provisions and the first set of cases to determine the
    provisions‟ constitutionality, this article provides a more thorough review of the
    applicable constitutionality tests and how they might apply to the applicable statutory
    sections.




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   Erwin Chemerinsky, Constitutional Issues Posed in the Bankruptcy Abuse Prevention &
    Consumer Protection Act of 2005, 79 Am. Bankr. L.J. 571 (2005).

    A preeminent constitutional scholar, Dean Chemerinsky provided the first look at the
    constitutionality of each provision before any case law had developed. This article has
    been cited by numerous other sources on the topic.

    These articles were all found by doing an electronic database search in LexisNexis, under
    all federal cases, using the search terms of “constitutional! /p „debt relief agency.‟”




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