Megan A. Taylor, Gag Me With a Rule of Ethics: Bapcpa's Gag Rule and the Debtor Attorney's Right to Free Speech

• Publication year: 2011

GAG ME WITH A RULE OF ETHICS: BAPCPA'S GAG RULE AND THE DEBTOR ATTORNEY'S RIGHT TO FREE SPEECH

INTRODUCTION

Both the congressional majority and President George W. Bush lauded the passing of the Bankruptcy Abuse Prevention and Consumer Protection Act of

2005 ("BAPCPA")¹as a giant step towards curbing bankruptcy fraud.²

Motivated by the creditor lobby and an overriding sentiment that the bankruptcy system was being abused, Congress intended for the BAPCPA to not only regulate debtor fraud, but also the attorneys that assist consumer debtors.³The stated purpose of the BAPCPA was to "improve bankruptcy law and practice by restoring personal responsibility and integrity in the bankruptcy system and ensure that the system is fair for both debtors and creditors."⁴

However, instead of addressing the original sources of bankruptcy fraud,⁵

Congress enacted provisions that potentially implicate attorneys' rights to free speech under the First Amendment. The most troublesome restriction on attorneys is the Debt Relief Agency provision, Sec. 526(a)(4) (hereinafter referred to as the "Gag Rule"),⁶which forbids a debt relief agency from advising a client-debtor to incur additional debt "in contemplation of filing for bankruptcy."⁷This content-based restriction implicates free speech, because it is entirely legal to incur additional debt, and, thus, to the extent that the term

"debt relief agency" is interpreted to apply to attorneys, the provision forbids them from providing lawful advice to their client-debtors.⁸Moreover, in cases where incurring additional debt is the most prudent action for a debtor to take, the Gag Rule would potentially restrict attorneys from fulfilling their professional and ethical responsibility to provide competent advice.⁹

Attorneys should be concerned about the Gag Rule because it potentially disrupts the way that they advise their clients. Specifically, if applied to attorneys, the Gag Rule now forbids an attorney from advising a client to take actions that are not only legal, but also advantageous.¹⁰Prior to the BAPCPA, attorneys often advised their clients to refinance a mortgage or borrow money from a relative before filing for bankruptcy.¹¹Under the Gag Rule, however, this advice is now not only illegal but may also subject attorneys to sanctions.¹²

As one scholar noted, "[M]any consumer bankruptcy attorneys will ponder removing themselves from the consumer bankruptcy practice to avoid the debt relief agency provisions of the Code, potentially leaving debtors less informed about the bankruptcy process and more vulnerable to fraud."¹³

As of March 2007, seven separate lawsuits had been brought against the

U.S. Attorney General¹⁴and the U.S. Trustee's office¹⁵(collectively, the

"Government") challenging the constitutionality of the Gag Rule under the First Amendment.¹⁶The plaintiffs in each case, primarily attorneys, claim that the Gag Rule is a content-based restriction subject to the most rigid constitutional analysis.¹⁷In response, the Government has argued that the provision should be considered an ethical rule,¹⁸which would arguably entail reduced scrutiny under the First Amendment.¹⁹

Since the passing of the BAPCPA, several scholars have analyzed whether the Gag Rule implicates attorney free speech under the First Amendment.²⁰

This Comment differs in that it focuses on the Gag Rule within the lexicon of legal ethics. More specifically, this Comment examines whether an ethical rule designation, regardless of context, warrants a less rigorous constitutional scrutiny than is typically applied to content-based restrictions. This Comment argues that the Gag Rule is not an ethical rule. Calling the provision an ethical rule would position Congress in the new, unprecedented role as a legislator of attorney ethics.²¹Secondly, even if the Government is successful in convincing the courts that the rule qualifies as an ethical rule, the Gag Rule would still be subject to and would fail strict scrutiny as an unconstitutional restriction on attorneys' First Amendment rights.

Part I of this Comment traces the history of the BAPCPA to provide context for the Gag Rule, as well as the broader concerns for bankruptcy practitioners. Part II describes the operation of the Gag Rule and its constitutional implications for attorney free speech. Part III determines whether the Gag Rule is an ethical rule for First Amendment purposes and reviews the Supreme Court's treatment of both content-based and ethical rule restrictions on an attorney's First Amendment right to free speech. Part IV analyzes the constitutionality of the Gag Rule under a strict scrutiny analysis. The Comment concludes that the Gag Rule is not an ethical rule, but is an unconstitutional infringement on attorney free speech.

I. A BRIEF HISTORY OF THE BAPCPA AND THE DEBT RELIEF AGENCY

PROVISIONS

During the eight years of hearings that preceded the passage of the BAPCPA, Congress heard testimony regarding rampant abuse of the bankruptcy system.²²Judges, legislators, academics, and trustees described consumer fraud,²³attorney misconduct,²⁴and the emergence of so-called "bankruptcy mills."²⁵These testimonials only compounded Congress's anxiety about the stark rise in the number of bankruptcy filings.²⁶Consumer cases, in particular, remained the focus of the perceived abuse.²⁷In 1997, officials estimated that consumers discharged more than $44 billion of debt, which amounted to a loss of $110 million every day.²⁸Reimbursing these losses to creditors and to the economy taxed every U.S. household roughly

$400 per year.²⁹Facts such as these persuaded Congress to pass the most comprehensive revision of U.S. bankruptcy law in more than twenty-five years.³⁰

From the beginning, the bankruptcy bar uniformly criticized the "sweeping" BAPCPA provisions as acquiescence to creditors with potentially dangerous repercussions for both attorneys and their clients.³¹One of the bankruptcy bar's main criticisms was that the BAPCPA would increase the liability of bankruptcy attorneys.³²As one judge noted, "[i]t would seem it is with this lens that Congress viewed [consumer debtors and their attorneys]-as moral equivalents to 'shoplifters'-in enacting the BAPCPA. In so doing, it created a law that is sometimes self-executing, inflexible, and unforgiving."³³

The American Bar Association ("ABA") Journal reported that as a result of the harshness of the BAPCPA, many attorneys who once provided consumer bankruptcy advice had abandoned their practice.³⁴For the attorneys who have maintained their consumer bankruptcy practice, confusion and the threat of sanctions have driven up the attorneys' pricing structures, thus making it more difficult for already-strapped debtors to obtain good legal advice.³⁵

Another criticism of the BAPCPA was that it was poorly drafted and that courts would face "interpretive challenges" to its ambiguous language.³⁶Much of the new legislation remains confusing even to seasoned bankruptcy attorneys and judges.³⁷According to the vice chair of the Consumer Bankruptcy Committee for the ABA, most of the difficulty exists in the consumer arena and, as a result, the predictability of a consumer bankruptcy proceeding under the BAPCPA is similar to "flipping a coin."³⁸Pleas for change came from the ABA, which drafted several amendments for congressional approval that would have removed any ambiguous language from the bill.³⁹Additionally, in September 2005, Senator Jon Kyl prepared a draft bill entitled the "Bankruptcy Reform Technical Amendments Act of

2005" that contained ABA-supported language reversing the ambiguous consumer debtor provisions.⁴⁰Although this bill circulated through both the Senate and House Judiciary Committees, it has not been formally introduced.⁴¹

Criticism of the BAPCPA's harshness and ambiguity highlights the potential problems that attorneys may encounter with the Gag Rule.⁴²If applied to attorneys, the Gag Rule would impose significant sanctions for even minor violations of the provision.⁴³These sanctions reflect a belief in

Congress that bankruptcy attorneys commonly seek to defraud the system by advising their clients to incur additional debt.⁴⁴In light of this, even advice given in the best interest of the client will be met with harsh penalties.⁴⁵

Furthermore, attorneys are unsure whether, under the ambiguous language in the statute, they even qualify as debt relief agencies.⁴⁶This matter is presently being adjudicated in district courts across the country.⁴⁷Regardless of the outcome, it is for these reasons that authorities warned that the Gag Rule would "represent the beginning of a constitutional struggle between consumer bankruptcy attorneys and the federal government."⁴⁸

II. THE GAG RULE

A. Section 526(a)(4)-The Gag Rule

The BAPCPA's most problematic provision for attorney free speech is the Gag Rule, contained in Sec. 526(a)(4) of the Code.⁴⁹This provision prohibits a debt relief agency from advising a client-debtor to incur additional debt in contemplation of filing for bankruptcy.⁵⁰Specifically, the Gag Rule states:

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.⁵¹

Although the language defining the "debt relief agency" classification is somewhat ambiguous,⁵²most commentators and courts have interpreted the classification to include attorneys.⁵³

In passing the Gag Rule, Congress aimed to address two problems. First, Congress hoped to stop debt relief agencies from advising clients about how to discharge additional debt, which dilutes the amount that creditors will receive in a payout.⁵⁴Second, Congress hoped to prevent manipulation of the bankruptcy means test, which determines whether a debtor qualifies for a chapter 7...