J. CRAIG WHITLEY, Bankruptcy Judge.
This matter arises out of so called "bankruptcy petition preparer services" provided by Dallas X. Evans and Daniel P. Silver, Esq., through the website www.chapter7in24.com that amount to deceit, fraud, the unauthorized practice of law, and violations of Section 110 of the Bankruptcy Code. As a result, Evans and Silver are both fined, ordered to disgorge any funds collected from the debtor, and permanently enjoined from preparing bankruptcy petitions that will be filed in the Western District of North Carolina. Evans is also found to be in contempt of Court.
Debtor, Dennis A. Johnson, filed a pro se Chapter 7 petition on May 16, 2016. His petition immediately raised numerous red flags:
Because of these red flags the Court ordered Silver to appear and show cause. A hearing was set for June 16, 2016.
Prior to that hearing, Silver filed a response that reads in part:
At the June 16 hearing, Johnson and the Bankruptcy Administrator (the BA) appeared in person and Silver appeared telephonically (with the Court's permission). Silver's statements and Johnson's testimony at that hearing indicated that Evans created and maintained the website www.chapter7in24.com through which he received payment from Johnson and advised Johnson regarding his bankruptcy case. The evidence made clear that Evans completed the documents filed by Johnson. As a result, the hearing was continued and Evans was ordered to appear and show cause.
The Court reconvened the hearings on July 19, 2016. The BA and Johnson, now represented by counsel, appeared in person and Silver appeared telephonically. Evans did not appear.
At the hearing, the BA introduced evidence that Evans had actual knowledge of the Court's order requiring him to appear. This included email communications between the BA and Evans as well as the BA and Evans' employer. Several of those emails included copies of the Court's order. Many of Evans' responses to the BA's emails were inflammatory. At one point, he indicated he had no "intention of testifying in [this] matter" and at least twice threatened legal action against the undersigned. Of note, Evans' emails to the BA were sent from "dallasevans@chapter7in24.com" and his electronic signature indicated that he is the "President" of Chapter 7 in 24.
Based on the filings and evidence presented at the hearings on June 16, 2016 and July 19, 2016, the Court makes the following findings:
Evans held out Chapter 7 in 24 to the public as "Americas #1 Chapter 7 Bankruptcy Law Firm!!!" and offered "Complete Package Starting at $399," "Free Consultation," "Free Credit Counseling Courses," and "Free Continued Chapter 7 Counsel Until Discharge." The company website stated that "A bankruptcy case begins with a petition. We will prepare this complex document, using detailed information that you will need to supply." It summarized the bankruptcy process as:
Although in one place the website states that "We are not attorneys and cannot give you legal advice," in another place, it boasts that "Your Chapter 7 Bankruptcy will be completed by a licensed attorney" and lists forty-nine states in which Chapter 7 in 24 operates. Indicative of the quality of service actually provided, on most of the pages, the word "bankruptcy" is misspelled "bancruptcy."
Dallas Evans created the Chapter 7 in 24 website after going through his own bankruptcy. While he is not an attorney, Evans' personal experience led him to believe he was capable of advising and assisting others through bankruptcy.
Evans and Silver met through Silver's employment in the car sales business. At that time, Silver was not a practicing attorney and had no experience in bankruptcy law beyond taking the course in law school over a decade ago. Evans knew that Silver had never represented a debtor in bankruptcy, but nonetheless, asked Silver to work for him because he thought having a licensed attorney would be good for marketing and credibility and would ease potential clients' fears. Silver's likeness was displayed on the website.
If Silver was the face of the operation, put there to sell the public on the notion they were receiving competent legal advice, Evans was the principal. He interacted with all the clients and answered any questions. At the hearing, the case preparation process was described as follows. First, Evans provided clients with a questionnaire and then completed the petitions based upon their answers. Next, Silver conducted a "review" of the draft petitions (although it appears Silver did little if anything to check the quality of Evans' work). Afterward, Evans mailed the petitions to the clients who filed them with various courts "pro se."
Evans initially charged clients $599 to prepare petitions. However, per statements by Silver, the rate was reduced to $399 after the Bankruptcy Court in the Eastern District of Virginia ruled that Silver could not appear as attorney of record in a case.
As to this case, prior to talking with Evans, Johnson met with an attorney to discuss his bankruptcy options. Financially unable to retain the attorney, Johnson turned to Craigslist where he found an advertisement for the Chapter 7 in 24 website. Through the website, Evans offered to prepare Johnson's Chapter 7 bankruptcy documents for $399. Johnson ultimately paid $399 to dallasevans@chapter7in24.com via PayPal on April 15, 2016.
While his petition was being "prepared," Johnson only communicated with Evans and never spoke to Silver. Their conversations, usually by text message or email, were extensive and resulted in multiple revisions to Johnson's petition. After Evans prepared the final draft, he informed Johnson that he would have an attorney review the documents before filing. Until that time, Johnson was unaware that Evans was not an attorney. Silver conducted the final "review" of Johnson's petition before Johnson filed it.
The petition that Evans ultimately produced was fraught with errors and omissions. In addition to the issues already noted above and those in the BA's Motion to Dismiss, Evans changed many of the financial figures provided by Johnson in an apparent effort to subvert the means test.
Fortunately, after the Court show caused Silver, Johnson hired an attorney who corrected these problems. Otherwise, his case would have likely been dismissed or,
A bankruptcy petition preparer is "a person, other than an attorney for the debtor or an employee of such attorney under the direct supervision of such attorney, who prepares for compensation a document for filing." 11 U.S.C. § 110(a)(1). A document for filing includes petitions as well as "any other document prepared for filing by a debtor" in connection with a bankruptcy case. Id. § 110(a)(2).
Bankruptcy Code Section 110 sets forth extensive and detailed parameters for bankruptcy petition preparers. The Code prohibits petition preparers from offering potential debtors legal advice. Id. § 110(e)(2)(A). Among other enumerated examples, legal advice includes advising the debtor on whether to file a petition, whether his debts will be discharged, and whether he will be able to retain certain assets. Id. § 110(e)(2)(B). Additionally, petition preparers may not counsel debtors on "how to characterize the nature of the debtor's interests in property or the debtor's debts" or on "bankruptcy procedures and rights." Id. § 110(e)(2)(B)(vii).
Like the Bankruptcy Code, North Carolina law specifies that a non-attorney may not "give legal advice or counsel" or "prepare legal documents." N.C.G.S. § 84-4. But for the limited authority carved out by Code Section 110, "preparing a bankruptcy petition would constitute the unauthorized practice of law in North Carolina." In re Bodrick, No. 14-31516, 2016 WL 1555593, at *5 (Bankr. W.D.N.C. Apr. 14, 2016). Consequently, if a petition preparer oversteps the parameters of Code Section 110, he is likely engaged in the unauthorized practice of law, a Class I misdemeanor under North Carolina criminal law. Id.; N.C.G.S. § 84-8.
These strict limitations essentially demote a petition preparer to the role of a "typist," Bodrick, 2016 WL 1555593, at *4 (citations omitted), which is consistent with the legislative history of Code Section 110, id. ("The legislative history of § 110 confirms the conclusions of the courts cited above: `While it is permissible for a petition preparer to provide services solely limited to typing, far too many of them also attempt to provide legal advice and legal services to debtors.'" (quoting H.R. REP. NO. 103-835 (1994), reprinted in 1994 U.S.C.C.A.N. 3340, at 3365, 1994 WL 562232, at *56)).
Given these comprehensive regulations, it is not surprising that the Bankruptcy Code also requires petition preparers to be forthright and honest about their identities and the limits on their permissible services. In this vein, petition preparers must sign and place their Social Security number on each "document for filing" that they prepare. 11 U.S.C. § 110(c)(1). Advertisements for preparer services may not use the term "legal or any similar term." Id. § 110(f).
Those who violate Section 110 face significant penalties. The Code permits courts to order the forfeiture of all fees charged by a preparer who fails to comply with Section 110. Id. § 110(h)(3)(B). If the petition preparer's acts are fraudulent, unfair, or deceptive, courts shall order the payment of actual damages to the debtor, payment of the greater of $2000 or twice the amount paid by the debtor to the preparer, and attorneys fees and costs. Id. § 110(i)(1). Finally, under Subsection 110(1)(1), the Code permits courts to fine wayward petition preparers up to $500 per offense for violations of most provisions of Section 110. Id. § 110(1)(1) (imposing a per offense fine for petition preparers who fail to comply with Subsections 110(b), (c), (d), (e), (f), (g), or (h)"). The fines mandated by that subsection must be tripled upon a finding that a petition preparer:
Id. § 110(1)(2).
Moving to the application of Section 110 and N.C.G.S. § 84-8 to these facts, Silver and Evans played very different roles in Johnson's bankruptcy case. Each will be addressed in turn.
By his own admission, Silver's participation was intended to give the operation a level of credibility and to comfort and allay the fears of potential clients. Those considering bankruptcy are often at the lowest points in their life, and Silver's deception of such individuals is reprehensible. Though his direct involvement in Johnson's case was minimal, Silver is just as culpable as Evans in this scheme. Even so, the Court cannot conclude that Silver acted as a petition preparer in this case for two primary reasons. (1) By all accounts, Silver did little if any work on Johnson's petition and never actually spoke to Johnson. Evans actually "prepared" Johnson's petition. Silver was but a straw man for Evans. (2) Silver, as an attorney, is legally excluded from the definition of a petition preparer. Thus, it is more appropriate to deal with Silver's conduct outside the purview of Code Section 110.
As has been repeated on numerous occasions, a court has the inherent authority to sanction and discipline those who appear before it. In re Burton, 442 B.R. 421, 466 (Bankr. W.D.N.C. 2009) (citing, inter alia, Chambers v. NASCO, Inc., 501 U.S. 32, 43-44 (1991)). "Additionally, both Bankruptcy Rule 9011 and 28 U.S.C. § 1927 provide for sanctions against wayward attorneys," id. at 467, and 11 U.S.C.§ 105 permits the court to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code.]"
The record supports findings that Silver acted deceptively, knowingly signed documents that contained misrepresentations that were filed under penalty of perjury with this Court, and engaged in the unauthorized practice of law. Accordingly, the Court orders Silver to remit $7500 to Johnson.
This sanction could have justifiably been much higher given the gravity of these wrongs as well as Silver's admission that he had been put on notice by the Bankruptcy Court in the Eastern District of Virginia that he could not appear as attorney of record. More importantly, as a licensed attorney, he is expected to maintain a high standard of ethics and certainly knew better than to allow his name and credentials to be used to deceive the public. To his credit though, Silver has earned some leniency by taking responsibility for his actions and through his forthright cooperation with the BA and the Court.
As for Evans, the "brains" behind Chapter 7 in 24, the harm he caused as an undisclosed petition preparer is precisely the type of harm 11 U.S.C. § 110 and N.C.G.S. § 84-4 seek to remedy. The Court is well within its power to sanction him pursuant to those provisions as well as its inherent authority. On this record, at a minimum, the Court concludes that Evans illegally: (1) offered Johnson legal advice, (2) used advertisements that stated Chapter 7 in 24 is a law firm and provided legal services, (3) failed to sign documents he prepared, and (4) failed to disclose his identity.
In terms of offering legal advice, a violation of 11 U.S.C. § 110(e)(2) and N.C.G.S. § 84-4, Evans had Johnson fill out an intake questionnaire much like the one most bankruptcy attorneys ask of their clients. From there, Evans took the questionnaire and made decisions for Johnson on how to characterize (or mischaracterize) the nature of Johnson's interests in property and debts. 11 U.S.C. § 110(e)(2)(B)(vi). Additionally, Evans advised Johnson on bankruptcy procedures and his rights. Id. § 110(e)(2)(B)(vii). These acts are clear-cut examples of "legal advice" enumerated within Subsection 110(e)(2)(B), go well beyond the duties of a typist, and are also prohibited by N.C.G.S. § 84-4. Accordingly, Evans is fined $1000. See 11 U.S.C. § 110(1)(1) (permitting the Court to fine petition prepares who fail to comply with, inter alia, 11 U.S.C. § 110(e) $500 per offense).
Evans' Chapter 7 in 24 website also runs afoul of the advertising provisions of Section 110 in numerous ways. As previously stated, advertisements for preparer services may not use the term "legal or any similar term." Id. § 110(f). The most egregious examples of Evans suggesting he was providing legal services include statements that Chapter 7 in 24 is "Americas #1 Chapter 7 Bankruptcy Law Firm!!!," offered "Free Continued Chapter 7 Counsel Until Discharge," and that "Your Chapter 7 Bankruptcy will be completed by a licensed attorney." For violating 11 U.S.C. § 110(f), Evans is fined an additional $1500. See 11 U.S.C. § 110(1)(1) (permitting the Court to fine petition prepares who fail to comply with, inter alia, 11 U.S.C. § 110(f) $500 per offense).
Though Evans had extensive conversations with Johnson and completed the entire petition, Evans' signature does not appear anywhere on the petition as required by 11 U.S.C. § 110(c)(1). For failing to sign the petition, Evans is fined an additional $500. See 11 U.S.C. § 110(1)(1) (permitting the Court to fine petition prepares who fail to comply with, inter alia, 11 U.S.C. § 110(c) $500 per offense). Because the petition does not disclose that Evans had any involvement in its preparation, the Court must triple the amount of Evans' fines to this point ($3000) for his failure to disclose his identity pursuant to 11 U.S.C. § (1)(2)(D) for a total of $9000 to be deposited and expended per the terms of 11 U.S.C. § 110(1)(4)(B) ("Fines imposed under this subsection in judicial districts served by bankruptcy administrators shall be deposited as offsetting receipts to the fund established under section 1931 of title 28, and shall remain available until expended to reimburse any appropriation for the amount paid out of such appropriation for expenses of the operation and maintenance of the courts of the United States.").
Furthermore, if the petition preparer's acts were fraudulent, unfair, or deceptive, Section 110 requires that courts order the payment of actual damages to the debtor, payment of the greater of $2000 or twice the amount paid by the debtor to the preparer, and attorneys fees and costs. 11 U.S.C. § 110(i)(1). Evans actions were certainly fraudulent and deceptive. He held out Chapter 7 in 24 to the public as "Americas #1 Chapter 7 Bankruptcy Law Firm!!!," and he sought out an attorney, Silver, in an attempt to give credibility to the ruse. Johnson's testimony that he believed Evans was an attorney supports this conclusion. While the record is insufficient to calculate Johnson's actual damages or attorneys fees and costs,
For the benefit of a reviewing court, the undersigned feels compelled to address the potential argument that Evans was not an undisclosed petition preparer because Silver's name and social security number appeared on the petition as well as the trade name Chapter 7 in 24. In other words, Silver's participation and signature somehow allows Evans to operate outside the confines of the Bankruptcy Code. That argument fails for several reasons:
As a final matter, the Court finds that Evans is in civil contempt for his failure to appear at the July 19 hearing as ordered. To purge his contempt, Evans must remit $1000 payable to the Clerk of Court prior to November 4, 2016. Evans is ordered to appear at a compliance hearing on November 10, 2016 at 9:30 AM at the Charles R. Jonas Federal Courthouse in Charlotte, North Carolina.
The BA is directed to effectuate service of this order on Silver and Evans. The Clerk is directed to forward a copy of this order to the Massachusetts Board of Bar Overseers of the Supreme Judicial Court and the North Carolina State Bar as well as the Consumer Protection Division c/o the North Carolina Attorney General's Office and State Division of Consumer Protection Consumer Assistance Unit c/o the New York State Department. Given that this matter may implicate criminal acts including violations of 18 U.S.C. §§ 151 through 158, the Clerk is also directed to forward a copy of this order to the United States Attorney's Office for the Western District of North Carolina. 18 U.S.C. § 3057 ("Any judge, receiver, or trustee having reasonable grounds for believing that any violation under chapter 9 of this title or other laws of the United States relating to insolvent debtors, receiverships or reorganization plans has been committed, or that an investigation should be had in connection therewith, shall report to the appropriate United States attorney all the facts and circumstances of the case, the names of the witnesses and the offense or offenses believed to have been committed. Where one of such officers has made such report, the others need not do so.").
