Texas District Court Rules that BAPCPA's Section 526(a)(4) Unconstitutionally Restricts a "Debt Relief Agent's" Free Speech Rights, But Section 527 Doesn't

A month ago, as part of my continuing BAPCPA Consumer Outline series, I posted an outline section entitled Attorneys as 'Debt Relief Agencies' -- Court Decisions and Constitutional Challenges, in which I reviewed various cases winding their way through the federal courts challenging the constitutionality of BAPCPA's "debt relief agency" provisions.  Yesterday, Dallas' District Court Judge David C. Godbey declared in Hersh v. United States, No. 05-2330-N (N.D. Tex. 7/26/05) (pdf), that BAPCPA did indeed transform consumer bankruptcy lawyers into "debt relief agents."  More significantly, however, Judge Godbey also held that BAPCPA unconstitutionally restricts an agent's free speech rights in certain respects, but not in others.

In finding that BAPCPA does unconstitutionally restrict a debt relief agent's free speech rights, Judge Godbey focused on Code section 526(a)(4), which prohibits a debt relief agent from "advis[ing] an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title."  In finding this provision "not sufficiently narrow," and thus an unconstitutional restriction of an agent's free speech rights, Judge Godbey concluded:

Section 526(a)(4), therefore, is overinclusive in at least two respects:  (1) it prevents lawyers from advising clients to take lawful actions; and (2) it extends beyond abuse to prevent advice to take prudent actions.  Gentile, 501 U.S. at 1075; see a/so In re R. M. J., 455 U.S. 191, 203 (1982) (Even under intermediate scrutiny, "[s]tates may not place an absolute prohibition on certain types of potentially misleading information ... if the information also may be presented in a way that is not deceptive."); Conant v. Walters, 309 F.3d 629, 638-39 (9th Cir. 2002) (pdf) (finding that government could not justify policy that threatened to punish a physician for recommending to a patient the medical use of marijuana on ground that such a recommendation might encourage illegal conduct by the patient). Thus, section 526(a)(4) of the BAPCPA imposes limitations on speech beyond what is "narrow and necessary."  Accordingly, the Court finds 11 U.S.C. § 526(a)(4) facially unconstitutional and denies the Government's motion to dismiss Hersh's claim.

Judge Godbey then invited the plaintiff-agent (the humble Princteon undergrad and UT JD-MBA grad, Susan B. Hersh) to "move for summary judgment on that claim once she amends her complaint to assert it explicitly."

Judge Godbey, however, refused to strike down as unconstitutional Code section 527, which requires debt relief agents to provide "assisted persons" with certain mandatory disclosures (also listed at p.9, fn.11) that were designed, on the one hand, to protect consumers from overreaching debt relief agents, while on the other hand, to scare the bejesus out of them when contemplating a bankruptcy filing.  In holding that these mandatory disclosures do not "unconstitutionally compel speech," Judge Godbey concluded:

In the case at hand, section 527 advances a sufficiently compelling government interest and does not unduly burden either the attorney-client relationship or the ability of a client to seek bankruptcy. The government clearly has a legitimate interest in attempting to ensure that a client is informed of certain basic information before he or she commences a case in bankruptcy. The amount of debt discharged by bankruptcy in a given year can be tens of billions of dollars, H.R. Rep. 109-31, reprinted in 2005 U.S.C.C.A.N. 88, 91, and as among consumer creditors, attorneys, and their debtor clients, the consumer debtor is often at an informational disadvantage.  Thus, the government interest is significant.

Given that significant interest, the compelled speech of section 527 is a reasonable burden.  Hersch argues that many of the paragraphs within the required statement provide false or misleading information. But in an area of law as intricate as bankruptcy, a generalized statement may often require further explanation by a client's attorney.  Nothing in section 527 prevents this. Further, the section itself provides that the statement may be altered, so long as the content is "substantially similar," and that the statements need only be provided "to the extent applicable." 11 U.S.C. § 527(b). This leaves the bankruptcy attorney with sufficient control of the distribution of the messages of the statement to avoid any undue burden. See, e.g., Fargo Women's Health Org. V. Schafer, 18 F.3d 526, 533-34 (8th Cir. 1994) (upholding provision requiring doctors to provide information and where physicians may comment on or dissociate themselves from the materials.)   Finally, unlike in Riley, the provision neither acts as a barrier inhibiting the ability of a potential client to seek relief nor disproportionately impacts the ability of certain attorneys to serve their clients. The factual, viewpoint-neutral statement provides a sufficiently benign and narrow means of ensuring that clients are aware of certain general information regarding bankruptcy. Accordingly, the Court grants the Government's motion to dismiss Hersch's claim that 11 U.S.C. § 527 violates the First Amendment.

Those interested in reading the excellent briefing on the issues presented will find here Agent Hersh's Complaint; Neo's (i.e., the Government's) Brief in Support of the Motion to Dismiss; Agent Hersh's Response Brief; and Neo's Reply Brief.

Special thanks to another humble Texas agent, St. Clair Newbern III of Ft. Worth, for alerting me to this decision. 

[NB:  As long as we're focusing on humble Texas lawyers, here's a raucously entertaining Texas-style "hully-gully slopfest" of a deposition (previously featured here) once again making the rounds on the internet involving some not-so-humble Texas laywers.]

Thanks for reading.

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