In Re Jayson Reynoso, Debtor, Frankfort Digital Services, Ltd. Henry Ihejirika v. Sara L. Kistler , United States Trustee, and Executive Office of United States Trustee, Trustee

Citations: 477 F.3d 1117; 2007 WL 582719Docket: 04-17190

Court: Court of Appeals for the Ninth Circuit; February 26, 2007; Federal Appellate Court

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The case involves an appeal from an adversary proceeding initiated by the United States Trustee against Henry Ihejirika and his company Frankfort Digital Services, Ltd., which operated under multiple names including Ziinet.com. The United States Bankruptcy Court for the Northern District of California determined that Frankfort acted as a "bankruptcy petition preparer" as defined by 11 U.S.C. § 110 and found it in violation of statutory requirements, concluding that the company engaged in fraudulent, unfair, or deceptive conduct and unauthorized practice of law.

The Bankruptcy Appellate Panel (BAP) of the Ninth Circuit upheld the bankruptcy court's findings and the relief granted. The appeal was reviewed under jurisdiction granted by 28 U.S.C. § 158(d), with legal conclusions assessed de novo and factual findings reviewed for clear error.

Frankfort provided access to software for preparing bankruptcy petitions and schedules, alongside informational guides claiming to offer legal advice. Specifically, on January 30, 2002, debtor Jayson Reynoso used the "Ziinet Bankruptcy Engine," which marketed itself as an expert system knowledgeable in bankruptcy laws tailored to specific states. The site claimed to simplify the bankruptcy process for users by selecting exemptions and providing access to a "Bankruptcy Vault," which included controversial advice on concealing a bankruptcy from credit bureaus and retaining property.

Reynoso purchased a 60-day license for $219 to access the Ziinet Engine, which included software for generating bankruptcy forms. He entered his personal information into the software, which selected specific schedules and exemptions for him, including an exemption under California Code of Civil Procedure § 703.140(B)(5). However, Reynoso did not input this exemption number himself, and the bankruptcy court found he did not choose the exemptions listed. The software indicated "Not Applicable" in the section for non-attorney petition preparer's signature, and Reynoso declared he prepared his bankruptcy documents without any external assistance, stating he used the software independently.

Reynoso filed his Chapter 7 bankruptcy petition on February 28, 2002. During the initial creditors' meeting, the chapter 7 trustee discovered errors in the petition, leading to the revelation that Reynoso had used an "online bankruptcy engine." This prompted the trustee to initiate an adversary proceeding against Frankfort, the software provider, in October 2002, part of multiple similar proceedings against Frankfort for violations of 11 U.S.C. § 110.

On April 11, 2003, the bankruptcy court ruled that Frankfort could not contest its status as a bankruptcy petition preparer engaged in unauthorized legal practice. The court found Frankfort had violated multiple provisions of § 110, had committed fraudulent and deceptive acts, and was permanently enjoined from operating as a bankruptcy petition preparer in the Northern District of California. The court ordered the disgorgement of fees received from debtors over the previous year and certified the fraudulent conduct to the district court for damage assessment under 11 U.S.C. § 110(i).

In In re Pillot, 286 B.R. 157 (Bankr. C.D.Cal. 2002), the Central District of California bankruptcy court determined that Frankfort, through its Ziinet Engine, acted as a bankruptcy petition preparer and engaged in the unauthorized practice of law. The court's findings were upheld by the Bankruptcy Appellate Panel (BAP), which ruled that issue preclusion prevented Frankfort from contesting these conclusions. Issue preclusion, or collateral estoppel, applies when: (1) the issue in question is identical to one previously decided, (2) there was a final judgment on the merits in the prior case, and (3) the party against whom it is asserted was involved in the earlier proceeding. Frankfort acknowledged its participation in the Pillot case and the finality of that judgment. The main point of contention was whether the issues in Pillot were identical to those in the current appeal. Frankfort argued that the website accessed by Pillot was significantly different from the one accessed by subsequent customers, including Reynoso, due to the removal of certain information. However, evidence indicated that Reynoso was also exposed to the same information, and the processes used by both Pillot and Reynoso were alike. Despite extensive support for applying issue preclusion, the absence of a complete record of the website accessed by Pillot led the court to refrain from applying it, upholding the lower court's decisions on other grounds. Additionally, under 11 U.S.C. § 110(a)(1), Frankfort's software, which prepared bankruptcy forms by rephrasing customer inputs into the official forms, qualified it as a bankruptcy petition preparer. The BAP emphasized that the software did more than merely input customer data; it actively processed and formatted the information for filing.

Frankfort provided completed bankruptcy petitions for a fee, relying on data supplied by customers who printed the forms themselves. This practice aligns with previous rulings identifying similar entities as bankruptcy petition preparers under § 110. The court clarified that customer data provision and form printing do not change the preparer's role, and in-person interactions are not a requirement under the statute. The bankruptcy court affirmed Frankfort's classification as a bankruptcy petition preparer.

The court upheld fines imposed for violations of § 110(b), (c), and (f), noting that Frankfort's petitions lacked the required preparer information and improperly used the terms "law" or "legal." The court also dismissed Frankfort's challenges to findings under § 110(i) and (h), which allow for damages and injunctions against fraudulent or deceptive practices. The bankruptcy court concluded that Frankfort made false statements and concealed its identity as a preparer, failing to disclose its role and compensation. These actions were deemed deceptive, supported by sufficient evidence. Consequently, the court affirmed the imposition of fines, the certification to the district court, and the issuance of an injunction against Frankfort.

Bankruptcy petition preparers, defined as non-attorneys, are prohibited from practicing law and their services are limited to typing bankruptcy forms. Despite this, many preparers exceed these boundaries by offering legal advice and services to debtors. To assess whether Frankfort engaged in unauthorized practice, California law is applied, which recognizes that practicing law includes providing legal advice and preparing legal documents. California courts emphasize that determining unauthorized practice can be complex and context-dependent.

Frankfort’s operations suggest unauthorized practice; it marketed itself as having legal expertise, offered extensive advice on exploiting bankruptcy code loopholes, and claimed that its software provided capabilities beyond mere clerical tasks. The software not only organized debtor information but also selected exemptions and provided legal citations, actions requiring legal judgment that laypersons cannot perform. Prior rulings indicate that advising on exemptions constitutes practicing law. Cases highlight that while clerical services such as filling out forms are permissible, making legal determinations about documents crosses into the practice of law, reinforcing the conclusion that Frankfort engaged in unauthorized legal practice.

Frankfort's system offered automated legal advice related to bankruptcy petitions, presenting an illusion of expertise. However, this conduct was determined to be the unauthorized practice of law since it was conducted by a non-attorney. The judgment of the Bankruptcy Appellate Panel of the Ninth Circuit was affirmed. Sara L. Kistler succeeded her predecessor as United States Trustee, and the case was evaluated under the pre-BAPCPA Bankruptcy Code relevant to October 2002.

Frankfort failed to appear in several related bankruptcy cases, leading to default judgments against it. The definition of a "document for filing" under the Bankruptcy Code includes any petition or document prepared by a debtor for filing in bankruptcy court. The term "person" encompasses corporations, implying that a corporation preparing bankruptcy petitions is classified as a bankruptcy petition preparer, regardless of attorney ownership.

Additionally, Frankfort sought to contest the bankruptcy court's order for accounting and the disgorgement of excessive fees. The court determined Frankfort's services were negligible and ordered the return of all fees to the affected debtors, a finding Frankfort did not challenge in its appeal, thus waiving the opportunity to contest it. The law at the time did not explicitly prohibit the unauthorized practice of law by bankruptcy petition preparers, though it indicated that such activities could not violate existing laws. In 2005, this law was amended to explicitly prohibit legal advice from bankruptcy petition preparers. Frankfort's services included claims of helping customers structure their bankruptcy filings to avoid detection by credit reporting agencies, promising quick restoration of credit.

The analysis focuses on the case involving Frankfort's system and its implications for the practice of law, particularly regarding bankruptcy. It clarifies that while the discussion is limited to Frankfort's specific actions, it does not determine whether software or other programs alone can constitute legal practice. The excerpt cites several cases, establishing that advising on exemptions and making selections in bankruptcy filings requires legal judgment, which laypersons are not equipped to provide. Notably, the case of In re Anderson illustrates that even non-lawyers can render legal services by providing guidance on bankruptcy consequences and preparing necessary documentation. Additionally, bankruptcy petition preparers are prohibited from advising on exemption selections. The court finds Frankfort's offerings of legal advice and automated counsel constituted the unauthorized practice of law, ultimately affirming the Bankruptcy Appellate Panel's judgment. The excerpt also mentions that the case predates the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, and references to the Bankruptcy Code apply to the version in effect as of October 2002. Frankfort's non-appearance in several related cases resulted in default judgments against it. The excerpt concludes with definitions relevant to the Bankruptcy Code, confirming that the term "person" encompasses various entities, including corporations.

A corporation that prepares bankruptcy petitions is classified as a bankruptcy petition preparer, regardless of being solely owned by an attorney. Frankfort challenges the bankruptcy court's order for accounting and disgorgement of excessive fees, which the court deemed negligible, resulting in an order to return all fees to affected debtors in the Northern District of California. Frankfort did not contest the court's finding of the valueless nature of its services during its appeal to the Bankruptcy Appellate Panel (BAP) or to the current court, leading to a waiver of its opportunity to challenge this finding. The bankruptcy court, in its ruling, did not explicitly prohibit the unauthorized practice of law but indicated that its provisions should not be interpreted to allow activities otherwise illegal. Amendments in 2005 to 11 U.S.C. 110 explicitly barred bankruptcy petition preparers from giving legal advice. Frankfort's service, known as Bankruptcy Vault, claimed to help customers structure bankruptcy filings to improve credit scores faster than usual. The court refrains from commenting on whether software or similar programs could constitute the practice of law.