Posted by Todd Zywicki:
Fifth Circuit Upholds Sec. 526(a)(4):
http://volokh.com/archives/archive_2008_12_14-2008_12_20.shtml#1229705846
The Fifth Circuit has just handed down an opinion in [1]Hersh v.
United States, upholding sec. 526(a)(4) of the Code (added by BAPCPA).
Section 526(a)(4) 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.�
The purpose of the provision was to prevent attorneys from advising
their clients to incur additional debt right before filing bankruptcy
(and discharging the debt). Or, as the statute indicates, to deal with
the situation where lawyers would tell clients to use their credit
cards to pay for the lawyers' filing fees and then discharge it.
The Eight Circuit previously had ruled that the statute constituted a
facial violation of the First Amendment as a violation on free speech
of the attorneys. Hersh summarizes that case as follows:
where the panel majority held �that § 526(a)(4) is substantially
overbroad, and unconstitutional as applied to attorneys who provide
bankruptcy assistance to assisted persons, as those terms are
defined in the Code.� 541 F.3d at 794 (footnote omitted). The panel
majority there reasoned that �§ 526(a)(4) prohibits attorneys . .
. from advising any assisted person to incur any additional debt in
contemplation of bankruptcy; this prohibition would include advice
constituting prudent bankruptcy planning that is not an attempt to
circumvent, abuse, or undermine the bankruptcy laws,� and that thus
�[s]ection 526(a)(4), as written, prevents attorneys from
fulfilling their duty to clients to give them appropriate and
beneficial advice not otherwise prohibited . . . .� Id. at 793.8
Judge Colloton dissented, on the ground that the court, under
authorities such as Boos v. Barry, 108 S.Ct. 1157 (1988), should
have adopted a narrowing construction of �in contemplation of�
bankruptcy in section 526(a)(4) to mean �with the intent to abuse
the protections of the bankruptcy system,� and that as so construed
section 526(a)(4) was not overbroad. Milavetz, 541 F.3d at 798-99
(Colloton, J., dissenting).
The Fifth Circuit rejected that reasoning, invoking the canon of
avoiding constitutional conflicts to hold that the statute survived a
facial challenge, even if there were situations where it might be
unconstitutional as applied:
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. The statute does not expressly qualify its restriction
on advice to situations in which incurring more debt would be an
abuse of the bankruptcy system. Thus, if interpreted literally,
section 526(a)(4) creates a blanket restriction on attorneys
advising clients to incur any debt when intending, or contemplating
whether to, file for bankruptcy under any circumstances. It would
prohibit some attorney advice that would not be abusive to the
bankruptcy system, harmful to creditors, or harmful to debtors.10
Thus, if interpreted literally, section 526(a)(4) may apply to
speech that is protected by the First Amendment.
However, 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. The �principal
purpose of the Bankruptcy Code is to grant a fresh start to the
honest but unfortunate debtor.� Marrama v. Citizens Bank of
Massachusetts, 127 S.Ct. 1105, 1107 (2007) (internal citation
omitted). By incurring debt before bankruptcy without intending to
repay the debt, a debtor can cost creditors significant amounts of
money. A debtor may also disqualify himself from obtaining
bankruptcy relief. See id. at 1112 (holding that a debtor cannot
automatically convert his bankruptcy from Chapter 7 to Chapter 13
under section 706(a) if he acts in bad faith). Thus, Congress has
an interest in preventing abuse of the bankruptcy system by both
the debtors who incur debts just before filing for bankruptcy and
by the people who advise them to do so. A debtor who incurs debt
before bankruptcy in order to abuse the system is not one of the
�honest but unfortunate� debtors that the bankruptcy system is
designed to protect. Id. at 1107.
Furthermore, when a debtor incurs debt in contemplation of
bankruptcy with no intention of repaying his debts or with the
intention to otherwise manipulate the bankruptcy system, he may
well be committing a fraudulent act that may violate federal law.
See 11 U.S.C. § 523(a)(2);11 18 U.S.C. § 152(2) (�A person who .
. . knowingly and fraudulently makes a false oath or account in or
in relation to any case under title 11 . . . shall be fined under
this title, imprisoned not more than 5 years, or both.�); Id. at §
157.12 See also Attorney Grievance Comm�n of Maryland v. Culver,
849 A.2d 423, 434 (Md. 2004) (�[b]y advising his client to obtain
loans with the intention of having the debts discharged in
bankruptcy, [the defendant] counseled [his client] to commit a
fraudulent act,� which violated the Maryland Rules of Professional
Conduct). Taking out loans without intending to repay them may also
be considered theft under state law. See Henke v. State, 730 S.W.2d
117, 118-19 (Tex. App.�Corpus Christi 1987) (affirming a grain
hauler�s conviction of felony theft because he took grain under a
contract knowing that he would not be able to pay for it). The
government may regulate or ban speech in which a person proposes an
illegal transaction. Village of Hoffman Estates v. Flipside,
Hoffman Estates, Inc., 102 S.Ct. 1186, 1192 (1982).
At the time of the Eighth Circuit's opinion I expressed the view that
I thought that it had misapplied the canon of constitutional
avoidance.
Eventually the Supreme Court will take up the issue and I expect that
it will agree with the holding of the Fifth Circuit.
References
1. http://www.ca5.uscourts.gov/opinions/pub/07/07-10226-CV0.wpd.pdf
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