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A portion of bk reform ruled unconstitutional


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A good decision. A lawyer should be free to advise their client to the best of their ability.

Another Court Finds § 526(a)(4) Facially Unconstitutional

Assuming that bankruptcy attorneys qualify as "debt relief agencies," a federal district court in Connecticut has held that a provision of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) that prohibits attorneys from ever advising their clients to incur additional debt in contemplation of bankruptcy, 11 U.S.C.A. § 526(a)(4), is overbroad and improperly restricts attorney speech.

Contending that he was a "debt relief agency" and that his clients were "assisted persons," a bankruptcy attorney brought an action against the United States Trustee (UST), in her official capacity, as one of the officials charged with enforcing § 526(a)(4), mounting a facial challenge to the constitutionality of that provision. Section 526(a)(4) provides: "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 bankruptcy petition preparer fee or charge for services performed as part of preparing for or representing a debtor in a case under this title." An attorney who violates this provision may be obligated to return "any fees or charges" paid to him or her by the debtor-client along with "actual damages" and "reasonable attorneys' fees." The attorney asserted that he intended to advise clients and prospective clients to incur additional debt in contemplation of their seeking bankruptcy relief, in order to, inter alia, pay their attorney. He argued that § 526(a)(4) violates the First Amendment by impairing and threatening to chill his free speech rights. The UST moved to dismiss for failure to state a claim.

After determining that the attorney had standing to bring a facial challenge to § 526(a)(4), even in the absence of any pending enforcement activity, due to the allegedly chilling effect of the provision on his speech, the court turned to the constitutionality of the provision. The two other district court cases that had addressed the constitutionality of § 526(a)(4) to date, Hersh v. U.S., 347 B.R. 19 (N.D.Tex. 2006), and Olsen v. Gonzales, 350 B.R. 906 (D.Or. 2006), both found the provision unconstitutional, the court reported. "As in those cases, this Court finds, regardless of whether strict scrutiny or the Gentile standard is applied, 11 U.S.C.[A.] § 526(a)(4) is facially unconstitutional," the court stated.

When strict scrutiny applies, the court explained, the government may regulate the content of constitutionally protected speech only if the regulation is narrowly tailored to promote a compelling government interest. In Gentile v. State Bar of Nevada, 501 U.S. 1030, 111 S.Ct. 2720, 115 L.Ed.2d 888 (1991), on the other hand, "the Supreme Court balanced lawyers' First Amendment interests 'against the State's legitimate interest in regulating the activity in question,' and held that an ethical restriction imposed on attorney speech was permissible where it (1) served the State's legitimate interest, i.e., prohibiting speech that would create a substantial likelihood of material prejudice to judicial proceedings, and (2) 'impose[d] only narrow and necessary limitations on lawyers' speech.'" Because § 526(a)(4) failed under either standard, the court assessed its constitutionality under the more lenient Gentile standard.

The court first addressed the governmental interest at stake. Congress enacted BAPCPA, in part, to mitigate the financial toll that the increasing number of bankruptcy filings was taking on creditors and the economy, and to rectify perceived abuses by debtors and by attorneys and other professionals involved in the bankruptcy system. Section 526(a)(4), in particular, was aimed at attorneys who, in light of BAPCPA's new "means test," were expected to advise their clients to take on more debt before filing for bankruptcy.

"Rather than changing the bankruptcy system by closing the loopholes, eliminating the incentives for opportunistic action or enacting penalties for those who take on such debt prior to filing for bankruptcy, Congress enacted § 526(a)(4), a prophylactic rule which prohibits attorneys from advising their clients to take on any additional debt in contemplation of bankruptcy, even when doing so would be lawful," the court stated. There are instances when taking on more debt in contemplation of bankruptcy would not be an abuse of the bankruptcy system, the court noted, but would be beneficial to the debtor. "Without delving too deep into the complexities of bankruptcy law, it is clear that the prohibition in § 526(a)(4), while addressing opportunistic abuses, could also ensnare lawful, financially prudent actions." The court cited numerous examples of these lawful and beneficial actions, including refinancing at a lower rate, taking on secured debt such as an automobile loan that would enable the debtor to continue working, and taking out a loan or borrowing money from family or friends in order to pay bankruptcy counsel or bankruptcy filing fees. "If Congress wishes to curb abusive practices, it can do so directly, rather than broadly restricting attorney advice on otherwise lawful courses of action," the court observed.

"By prohibiting lawyers from advising clients to take a course of action that is lawful and in the client's best financial interest, albeit a counterintuitive one, § 526(a)(4) prevents lawyers from giving clients the best and most complete advice," the court stated. Section 526(a)(4) thus "chills the attorney's very exercise of the advice and counsel function that is the defining feature of [the attorney's] profession." In sum, "y prohibiting lawyers from advising clients to take lawful, prudent actions as well as abusive ones, § 526(a)(4) is overbroad and restricts attorney speech beyond what is 'narrow and necessary' to further the governmental interest," the court concluded. Zelotes v. Martini, 2006 WL 3231423 (D.Conn., Judge Dorsey).

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