The Fifth Circuit has just handed down an opinion in 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.
This reads like "Clearly the statute is unconstitutional on its face, but we won't hold that it's unconstitutional because there may be some narrow circumstances where it may actually pass constitutional muster." How ridiculous.
All statutes should be presumed to be unconstitutional, and the courts should apply every canon of construction and interpretation to read the statute in an unconstitutional manner - because that's exactly how the executive branch will apply the statute.
Thus, if interpreted literally, section 526(a)(4) may apply to speech that is protected by the First Amendment.
Does the court expect the executive branch to apply and interpret this statute any way but literally? Don't they have an obligation to interpret it literally, barring any latent ambiguity? How can the canon of avoiding unconstitutional interpretation of a statute apply to a statute that is concededly unconstitutional "if interpreted literally"? What nonsense.
It amazes me that Article III judges, who have been given lifetime tenure and pay, are so spineless when it comes to striking down statutes. They need to get over their election envy.
Just because laws are enacted by elected officials does not make the actions of Congress more legitimate than the actions of an unelected Article III judge. Anyone who thinks our laws are passed by the people for the people, rather than by the lobbyists and coporations who write them for the lobbyists and coporations who write them, is woefully ignorant. The vast majority - well over 90% - of federal statutes are and should be held to be unconstitutional. Courts should not bend over backwards to keep such laws on the books. Get over the election envy and do your freakin' job - you're appointed by, and confirmed by elected representatives of the people, why is that not good enough for you? Why is that not enough to make your actions as legitimate as those of Congress?
I don't know anything about bankruptcy law nor the particular statute in question here (other than what I've just read about it in this post). I'm just commenting on the 5th Circuit's (all too familiar) reasoning. Reasoning all courts love to apply, and are arguably bound by precedent to apply (which is why I agree that the SCOTUS will agree with the 5th Circuit). Canon of constitutional avoidance? Presumption of constitutionality? How the hell did it ever come to this?
Since abusing the bankruptcy system is a crime, the statute is reasonably read as preventing credit counseling agencies from counseling clients to commit a crime.
The world will not crumble if courts do their job and strike down unconstitutional laws. This need, based on insecurity, to save every law no matter what and no matter how unconstitutional, makes a mockery of our constitution (and don't tell me judicial review is not part of the constitution, I don't want to get into that lame debate).
I think the issue is that the bankrupt individual might be given fraudulent advice with very little recourse. It is VERY HARD to sue lawyers for malpractice. Adding some clarity to the idea that this is illegal is helpful.
However, the large question is when a law is facially unconstitutional. In past SCOTUS rulings, this is defined as one where the law is unconstitutional in a all substantive applications, or where it was intended to do something which was unconstitutional. If Congress oversteps slightly and unintentionally, the correct remedy would be through an as-applied challenge which basically says the law is unconstitutional in this instance, but not generally, and therefore it cannot be applied in this instance. See FEC v. Wisconsin Right to Life for an example of how this might work.
So let's look at an example where this might be a good idea as probably most of us would admit. Sexually explicit images of minors is a felony and this is not generally seen as protected speech. However, suppose there was a case where the speech warranted protection, or where the objections to protecting the speech generally were not warranted. Suppose a court found a case where the law, as applied, infringed inappropriately on protected speech. Would it be better to strike down the whole law? Or just to say that "in this instance, it cannot be constitutionally applied?" Striking down the entire law strikes me as "burning the house to roast the pig."
Also, why not apply this section merely to hold such debts non-dischargeable?
It seems to me both of these actions are well within the Bankruptcy judge's authority.
You claim to know nothing about bankruptcy besides what you read here and neither do I. But from my read of the section that was cut, it's a crime for the DEBTOR to abuse the system.
But what the law appears to do is additionally make it illegal for a credit counseling service or attorney to counsel the debtor to abuse the system.
To interpret the statute in a way that brings it into line with First Amendment principles seems no great sin. If you want to bash the doctrine of constitutional avoidance, I think this isn't the case to do it in.
I recall thinking at the time "oh my god that sounds pretty sleazy" and I'm glad to know it is now explicitly illegal.
I do wonder however-- what is the lawyer to tell them, and what are they to do, about legal fees, when they clearly need to file bankruptcy? Seemingly the lawyer could say "I can't tell you to run up more debt. But my fee is $1500 (or whatever). If you show up later today with that in cash, I'll help you." My non-expert read of 526(a)(4) suggests that would pass muster.
Evelyn Guzman
Exactly. Think about that for a minute before you call it wacko. We have hundreds of thousands of federal laws (if not millions when you take into account all the regs). Why shouldn't the proponents of those laws have the burden of showing they meet constitutional standards? Additionally, all citizens should have standing to challenge any law that applies to them. Nobody should be unable to challenge a law that affects them due to "lack of standing." If you're a US citizen, you should have standing to challenge ANY federal law.
We don't need that many laws. We need about two dozen federal criminal laws (that's being generous, I think 8-10 is about right), and about 150 other noncriminal federal laws. Everything else is unnecessary and unconstitutional. And there should be a strong presumption against any and all new laws to maintain this policy. Laws are incompatable with freedom. Some laws are an absolutely necessary evil to maintain a functioning society (i.e. prohibitions on murder and counterfeiting and theft). The other 99.99999% of laws are there to transfer wealth and or preserve wealth. Those laws, like all laws, should face strict scrutiny and have to overcome a presumption of unconstitutionality. They won't be able to, and freedom will reign supreme.
I've advocated patent reform where only 50 patents are granted each year - the 50 most innovative and important patent applications are approved, the rest are automatically placed in the public domain. And I think 50 is being generous - combining a cellphone and hairbrush is not innovative and not worthy of a patent, yet that's the type of garbage that floods the USPTO's patent application pool. Similarly, Congress should not be permitted to pass more than, say, 5 laws per year/term. And by "law" I mean one statute that governs/regulates one particular field of action. The 5 does not include items like the annual budget or other things congress has a legal duty to pass.
I think we should have a moratorium on new laws for the next several years, while repealing at least 50% of the federal laws already in effect. No new laws until we can enforce the ones we have. It sounds childish (new new toys until you clean up your room) but look at who we're dealing with - childish legislators "representing" ignorant, uninformed consituents, as well as sophisticated interest groups. At this point, any new laws are inherently suspect and almost certainly unnecessary, invalid, and contrary to the enumerated powers granted by the Constitution.
No more laws.
Sometimes it's hard to tell where libertarianism ends and anarchism begins. Wiki seems to have the same problem...
Simple... minarchism.
We need only those laws that are absolutely necessary to prevent total anarchy. All other laws are illegitimate. And the government should have the strict burden of proving that its laws fit this test, lest the law be struck down as unconstitutional. And all citizens should have standing to bring such challenges against all laws that purport to bind them.
Anarchism where personal and property rights are respected, with adequate remedies to redress violations of those rights, is the ideal form of government. That's minarchism, and I believe it's what the framers intended. No society is more free and respectful of individual liberty. But in such a society, religious people won't be able to enact laws that force their morality onto everyone, so minarchism is doomed to never really catch on and be put into effect. Whatever religion has the most power and influence at a given time, whether it's catholics, protestants, baptists, jews, or muslims, they all want to use the law to force their beleifs and moral dogma onto everyone else. Any law based on religion is per se illegitimate.
"But laws that make murder a crime are based on religion - the 10 Commandments says thou shall not murder!"
No, laws that deprive citizens of their right to commit murder are not based on religion, they're based on the fact that if such laws did not exist, then I could kill you and you could kill me and we would have total anarchy and society could not function. That's a prime example of a law that is a necessary evil - I'm willing to give up my right to murder other people in order to keep others from murdering me. Anarchy is bad. But one notch less than anarchy is ideal.
My point is, your argument is circular. All laws you deem necessary you describe as necessary to avoid "anarchy", and the rest are "illegitimate", but you don't offer any way of telling them apart, except for your say-so.
To fix this problem, the social contract has a written counterpart in the constitution. The constitution consists not only of rules delimiting the legitimate scope of government, but also of procedures that describe how the branches of government work together or against each other, as the case may be and depending on their inclination. The legitimacy of the output of it all is at its maximum when all three branches concur. The general advent of the regulatory state in the US (and other countries) has the widespread support of all three branches, as well as the vast majority of the population. So whatever arguments you may have for how it may be done differently, "illegitimate" is certainly the wrong diagnosis.
Hey Todd,
Where can I find your thoughts on the Eighth Circuit ruling? I searched for Milavetz and BAPCPA and didn't find it.
If you have a comment about spelling, typos, or format errors, please e-mail the poster directly rather than posting a comment.
Comment Policy: We reserve the right to edit or delete comments, and in extreme cases to ban commenters, at our discretion. Comments must be relevant and civil (and, especially, free of name-calling). We think of comment threads like dinner parties at our homes. If you make the party unpleasant for us or for others, we'd rather you went elsewhere. We're happy to see a wide range of viewpoints, but we want all of them to be expressed as politely as possible.
We realize that such a comment policy can never be evenly enforced, because we can't possibly monitor every comment equally well. Hundreds of comments are posted every day here, and we don't read them all. Those we read, we read with different degrees of attention, and in different moods. We try to be fair, but we make no promises.
And remember, it's a big Internet. If you think we were mistaken in removing your post (or, in extreme cases, in removing you) -- or if you prefer a more free-for-all approach -- there are surely plenty of ways you can still get your views out.