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No. 08-1174

 

In the Supreme Court of the United States

SUSAN B. HERSH, PETITIONER

v.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

BRIEF FOR THE UNITED STATES

ELENA KAGAN
Solicitor General
Counsel of Record
TONY WEST
Assistant Attorney General
MARK B. STERN
MARK R. FREEMAN
Attorneys
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217

QUESTION PRESENTED

Section 526(a)(4) of Title 11 of the United States Code provides that bankruptcy professionals who qual ify as "debt relief agencies" and who are hired by con sumer debtors for bankruptcy services may not advise those debtors "to incur more debt in contemplation of" filing a bankruptcy petition. The question presented is whether Section 526(a)(4), construed with due regard for principles of constitutional avoidance, violates the First Amendment.

In the Supreme Court of the United States

No. 08-1174

SUSAN B. HERSH, PETITIONER

v.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

BRIEF FOR THE UNITED STATES

 

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 1-54) is reported at 553 F.3d 743. The memorandum opinion and order of the district court denying in part the gov ernment's motion to dismiss (Pet. App. 61-78) is re ported at 347 B.R. 19.

JURISDICTION

The judgment of the court of appeals was entered on December 18, 2008. The petition for a writ of certiorari was filed on March 18, 2009. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1).

STATEMENT

1. This case concerns 11 U.S.C. 526(a)(4), a provi sion of the Bankruptcy Code that regulates paid bank ruptcy advice. Congress enacted Section 526(a)(4) as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23, "a comprehensive package of reform mea sures" designed "to improve bankruptcy law and prac tice by restoring personal responsibility and integrity in the bankruptcy system and ensure that the system is fair for both debtors and creditors." H.R. Rep. No. 31, 109th Cong., 1st Sess. Pt. 1, at 2 (2005) (House Report). Described by the House Report as "the most compre hensive set of [bankruptcy] reforms in more than 25 years," id. at 3, the BAPCPA both modified the substan tive standards for bankruptcy relief and adopted new measures intended to curb a variety of abusive practices that Congress concluded had come to pervade the bank ruptcy system.

After extensive hearings, Congress determined that misleading and abusive practices by bankruptcy profes sionals, including attorneys, had become a substantial cause of unnecessary bankruptcy petitions, and that such practices had sometimes jeopardized debtors' abil ity to obtain a discharge of their debts. For example, Congress heard evidence that a civil enforcement initia tive undertaken by the United States Trustee Program had "consistently identified * * * misconduct by attor neys and other professionals" as among the sources of abuse in the bankruptcy system. House Report 5 (cita tion omitted). Congress responded by "strengthening professionalism standards for attorneys and others who assist consumer debtors with their bankruptcy cases." Id. at 17.

The BAPCPA added or strengthened several restric tions on bankruptcy professionals' conduct. Those re strictions are intended to protect the clients and pro spective clients of bankruptcy professionals, the credi tors of clients who do enter bankruptcy, and the bank ruptcy system. The pertinent provisions require addi tional disclosures to clients about their rights and the professional's responsibilities; they protect clients against being overcharged, or charged for services never provided; and they discourage misuse of the bank ruptcy system. See, e.g., 11 U.S.C. 110(b)-(h), 526-528, 707(b)(4)(C)-(D). Many of the BAPCPA's requirements and prohibitions apply equally to bankruptcy attorneys, to bankruptcy petition preparers who are not attorneys, and to all other professionals who provide bankruptcy assistance to consumer debtors for a fee; those profes sionals are collectively termed "debt relief agenc[ies]." 11 U.S.C. 101(12A).1

Section 526 sets out four basic rules of professional conduct for debt relief agencies. Section 526(a)(1) re quires debt relief agencies to perform all promised ser vices. Section 526(a)(2) prohibits debt relief agencies from advising an assisted person to make statements that are untrue or misleading in seeking bankruptcy relief. Section 526(a)(3) precludes debt relief agencies from misrepresenting the services they will provide or the benefits and risks attendant to filing for bankruptcy. And Section 526(a)(4), the provision that is directly at issue here, states:

A debt relief agency shall not * * * advise an as sisted 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 bank ruptcy petition preparer fee or charge for services performed as part of preparing for or representing a debtor in a case under this title.

11 U.S.C. 526(a)(4).

The principal remedy for violations of Section 526 is a civil action by the debtor to recover the debtor's "actual damages," including any fees already paid. 11 U.S.C. 526(c)(2). The statute also authorizes state attorneys general to sue for debtors' actual damages or for injunctive relief to prevent violations. 11 U.S.C. 526(c)(3). The bankruptcy court may also impose an injunction or an "appropriate civil penalty" for inten tional or recurring violations, either on its own motion or at the request of the United States Trustee or the debtor. 11 U.S.C. 526(c)(5).

2. Petitioner is an attorney who advises consumer debtors about bankruptcy. Pet. App. 2-3. She filed this action against the United States to challenge the appli cation of several BAPCPA provisions that regulate debt relief agencies' professional conduct, including the ad vice limitation in Section 526(a)(4). Petitioner contended that licensed attorneys are not "debt relief agencies" within the meaning of the statute even if they provide bankruptcy-related advice to debtors. She also argued that, to the extent the statute encompasses licensed at torneys, Section 526(a)(4) and other provisions of the BAPCPA violate the First Amendment. Pet. App. 4.

The district court denied the government's motion to dismiss the challenge to Section 526(a)(4), Pet. App. 61- 78; granted summary judgment for petitioner on that claim, id. at 59; and permanently enjoined enforcement of Section 526(a)(4), id. at 57, 60. Although the district court agreed with the government that an attorney may be a debt relief agency, id. at 66, the court held that Sec tion 526(a)(4) is facially unconstitutional because it is "overinclusive," id. at 70; see id. at 66-70.

3. The court of appeals reversed in relevant part and upheld Section 526(a)(4) as facially constitutional. Pet. App. 1-56. The court also concluded that attorneys may fall within the statutory definition of "debt relief agen cy." Id. at 9-15.

a. The court of appeals concluded that Section 526(a)(4) can be construed in a way that both avoids any constitutional difficulty and focuses directly on Con gress's acknowledged purpose in enacting it, i.e., pre venting attorneys from encouraging their clients to "load up" on debt to abuse the bankruptcy system. Pet. App. 30-38. The court noted that the term "in contem plation of bankruptcy" is often used as a term of art that connotes an intent to abuse the bankruptcy system. Id. at 30-31 (citing Black's Law Dictionary 336 (8th ed. 2004)). Indeed, a few years before Congress enacted the BAPCPA, the Fifth Circuit itself had described the abu sive practice of "incurring card debt in contemplation of bankruptcy" with the term "loading up." Id. at 31 (quot ing AT&T Universal Card Servs. v. Mercer (In re Mer cer), 246 F.3d 391, 421 n.43 (5th Cir. 2001) (en banc)). And the court noted numerous other American and Eng lish authorities supporting such a construction of the phrase "in contemplation of" in the bankruptcy context. Id. at 31 n.17 (citing Milavetz, Gallop & Milavetz, P.A. v. United States, 541 F.3d 785, 799-800 (8th Cir. 2008) (Milavetz) (Colloton, J., concurring in part and dissent ing in part), petition for cert. pending, No. 08-1225 (filed Apr. 3, 2009).

The court of appeals further explained that the struc ture of Section 526 supports the specialized interpreta tion described above. Pet. App. 32-34, 37-38. The court pointed out that violations of Section 526 may be reme died by awarding the debtor actual damages, which strongly suggests that the practices banned are prac tices that would actually harm the debtor. See id. at 34. The court further noted that Section 526(a)(4) was en acted alongside, and placed together with, "three other rules of professional conduct designed to protect debt ors." Id. at 37-38 (citing 11 U.S.C. 526(a)(1)-(3)).

The court of appeals also observed that the legisla tive history and purpose of the BAPCPA supported the court's construction of Section 526(a)(4). Pet. App. 35- 36. The court explained that numerous elements of the BAPCPA were demonstrably "intended to curb abuse," which the court took as further evidence that "as part of this plan, section 526(a)(4) is only meant to curb abusive practices." Id. at 36.

b. The court of appeals also explained that, even if its reading of Section 526(a)(4) were not the most natu ral interpretation of the statute, that reading would be compelled by the doctrine of constitutional avoidance. The court identified several cases in which this Court had adopted an arguably countertextual construction in order to avoid constitutional difficulties. Pet. App. 26-30 (citing Zadvydas v. Davis, 533 U.S. 678 (2001); Boos v. Barry, 485 U.S. 312 (1988); and United States v. Witko vich, 353 U.S. 194 (1957)). The court noted that the avoidance doctrine may even require giving "[a] restric tive meaning [to] what appear to be plain words." Id. at 26 (quoting Witkovich, 353 U.S. at 199) (first brackets in original).

Petitioner had argued that the text of Section 526(a)(4) is so unambiguous that no narrowing construc tion is possible. See Pet. App. 20. The court of appeals concluded, however, that "the language of [the statute] can and should be interpreted only to prohibit attorneys from advising clients to incur debt in contemplation of bankruptcy when doing so would be an abuse or im proper manipulation of the bankruptcy system." Id. at 38; see id. at 26. The court explained that, on that read ing, "[S]ection 526(a)(4) has no application to good faith advice to engage in conduct that is consistent with a debtor's interest and does not abuse or improperly ma nipulate the bankruptcy system." Id. at 38.

c. The court of appeals concluded that, if Section 526(a)(4) is construed in this manner, it is not facially unconstitutional. The court explained that a statute is not unconstitutionally overbroad unless the "over breadth is substantial in relation to the statute's legiti mate reach." Pet. App. 40 (citing United States v. Wil liams, 128 S. Ct. 1830, 1838 (2008)). Petitioner did not dispute that Congress could validly regulate the sort of advice to engage in abusive conduct that all parties agreed was covered by Section 526(a)(4). See id. at 21- 26.2 And under the court's narrowing construction, Sec- tion 526(a)(4) did not apply to any of petitioner's exam ples of speech that could not constitutionally be prohib ited. Id. at 41.3 Accordingly, the Fifth Circuit found it "clear that the potential for the statute to prohibit pro tected speech is not by any means substantial in relation to the statute's legitimate reach." Id. at 43.

d. The court of appeals acknowledged that a divided panel of the Eighth Circuit had reached the opposite conclusion on the same issues and had invalidated Sec tion 526(a)(4) as applied to attorneys. Pet. App. 16-17 (citing Milavetz, supra). On that issue, the court stated, it "agree[d] with Judge Colloton's dissenting opinion" in the Eighth Circuit case. Id. at 10 n.6.

DISCUSSION

The government has filed its own petition for a writ of certiorari seeking review of the Eighth Circuit's deci sion invalidating Section 526(a)(4). Pet. at I, United States v. Milavetz, Gallop & Milavetz, P.A., No. 08-1225 (filed Apr. 3, 2009). As that petition explains, the con flict between the Fifth and Eighth Circuits over the constitutionality of an Act of Congress warrants this Court's review.

In the government's view, Milavetz provides the better vehicle to resolve the circuit conflict, and the peti tion in this case should therefore be held pending the disposition of Milavetz. The disagreement between the Fifth and Eighth Circuits as to the constitutionality of Section 526(a)(4) is rooted in those courts' divergent views on a statutory-interpretation issue that petitioner does not include in her questions presented. The gov ernment construes Section 526(a)(4) to regulate only advice to incur debt with the intention to abuse the bankruptcy system. The Eighth Circuit rejected that interpretation and, as a result, held that the statute is unconstitutionally overbroad. The court below adopted the narrowing construction and sustained the statute against petitioner's overbreadth challenge. Although the court below found that interpretive issue to be dispositive of the case, petitioner does not squarely ad dress it.5

Instead of addressing the statutory question, peti tioner presents two issues on which no circuit conflict exists. First, petitioner appears to contend that Section 526(a)(4) is invalid even if it is given the narrowing con struction adopted by the court of appeals in this case. See Pet. 14-15. No court has adopted that position. The Eighth Circuit concluded that the statute was unconsti tutionally overbroad as applied to attorneys because that court construed the statute to extend to "appropri ate and beneficial advice." Milavetz, 541 F.3d at 793. The Eighth Circuit majority did not dispute Judge Col loton's conclusion that the statute would be constitu tional if a narrowing construction were adopted. See id. at 799 (Colloton, J., concurring in part and dissenting in part). And whereas the Eighth Circuit concluded only that Section 526(a)(4), capaciously construed, was over broad in relation to its legitimate sweep, see 541 F.3d at 794 & n.10, petitioner appears to argue that Section 526(a)(4) has no legitimate application at all.

Second, petitioner contends that this Court should grant certiorari to decide what standard governs a First Amendment challenge to an ethical regulation on attor neys' conduct. See Pet. 12-14. Petitioner urges this Court to apply strict scrutiny, rather than the more def erential standard that the Court applied to attorneys' litigation conduct in Gentile v. State Bar, 501 U.S. 1030, 1071-1076 (1991). But the court below did not resolve that issue, see Pet. 13; nor did either the district court in this case or the Eighth Circuit in Milavetz, both of which stated that the overbreadth analysis would yield the same result under either strict scrutiny or the Gen tile standard. See Pet. App. 17-18; Milavetz, 541 F.3d at 793.

The government's petition in Milavetz presents both the statutory and constitutional questions on which a circuit conflict exists. Depending on the manner in which it construes Section 526(a)(4), the Court in Mila vetz might have occasion to decide whether the Gentile standard applies in this context. But in the absence of a circuit conflict on that question (and, indeed, without the benefit of any holding on that question by any court of appeals), the issue does not warrant plenary review by this Court in its own right.

CONCLUSION

The Court should hold the petition for a writ of cer tiorari in this case pending its disposition of the petition for a writ of certiorari in United States v. Milavetz, Gal lop & Milavetz, P.A., No. 08-1225 (filed Apr. 3, 2009), and then dispose of this case accordingly.

Respectfully submitted.

ELENA KAGAN
Solicitor General
TONY WEST
Assistant Attorney General
MARK B. STERN
MARK R. FREEMAN
Attorneys

MAY 2009

1 The term "bankruptcy assistance" is defined to include providing an "assisted person" with advice, counsel (including "legal representa tion"), or document preparation or filing assistance "with respect to a case or proceeding under" the Bankruptcy Code. 11 U.S.C. 101(4A). An "assisted person" is "any person whose debts consist primarily of consumer debts" and whose nonexempt property is worth less than a specified, inflation-adjusted amount, currently $164,250. 11 U.S.C. 101(3); see 11 U.S.C. 104(a); 72 Fed. Reg. 7082 (2007).

2 The court noted various contexts in which the First Amendment permits Congress and the States to regulate that sort of unethical attorney advice. For instance, the First Amendment does not protect speech proposing an illegal transaction, and abusive accumulation of debt may amount to fraud or theft. See Pet. App. 23-24 (citing Village of Hoffman Estates v. Flipside, Hoffman Estates, Inc., 455 U.S. 489, 496 (1982)). Further, the government has a sufficiently important interest in the judicial process, including the bankruptcy system, to justify regulation of attorneys' unethical conduct affecting that process. See id. at 24-26 (citing Gentile v. State Bar, 501 U.S. 1030 (1991), and Model Rules of Prof'l Conduct R. 1.2(d)). The court explained that the abusive accumulation of debt in contemplation of bankruptcy "is akin to committing a fraudulent act," and therefore "Congress can constitu tionally prevent attorneys or other debt relief agencies from advising their clients to [commit such an act]." Id. at 26.

3 Petitioner had contended, and the district court agreed, that Section 526(a)(4) could not validly regulate advice to take on prebank ruptcy debt under legitimate circumstances, such as advice to refinance a loan. Pet. App. 18, 69.

4 The government is providing petitioner's counsel with a copy of the government's petition for a writ of certiorari in Milavetz.

5 To be sure, "granting certiorari to determine whether a statute is constitutional fairly includes the question of what that statute says." Rumsfeld v. FAIR, 547 U.S. 47, 56 (2006); see United States v. Wil liams, 128 S. Ct. 1830, 1838 (2008) (explaining that "[t]he first step in overbreadth analysis is to construe the challenged statute"). If the Court were to grant review in this case, it accordingly would have dis cretion to consider the proper interpretation of Section 526(a)(4) as a logical antecedent to the constitutional questions that petitioner pre sents. It would nevertheless be preferable to resolve the circuit conflict in a case where the petitioner has expressly sought this Court's review on the relevant interpretive question.