Wednesday, February 28, 2007
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Seller of Software Used in Bankruptcy Petitions Held ‘Preparer’
By TINA BAY, Staff Writer
The seller of web-based software used to prepare bankruptcy petitions qualifies as a “bankruptcy petition preparer” subject to the requirements of the U.S. Bankruptcy Code, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
The court unanimously agreed with a Ninth Circuit Bankruptcy Appellate Panel that now-defunct Ziinet.com owner and operator Henry Ihejirika violated 11 U.S.C. Sec. 110, which imposes certain obligations on bankruptcy petition preparers and penalizes negligent or fraudulent preparation.
The court also affirmed the BAP’s conclusion that Ihejirika had engaged in the unauthorized practice of law.
As recently as 2002, Ihejirika, doing business as Frankfort Digital Services, Ltd. and Ziinet.com, sold access to various web sites that guided customers through the preparation of bankruptcy petitions and schedules and purported to provide advice on bankruptcy law.
Web Site’s Representations
One of the sites owned and operated by Ihejirika was the “Ziinet Bankruptcy Engine,” which represented itself to prospective customers as being “an expert system” and claimed to “know[] bankruptcy laws right down to those applicable to the state” in which the particular user lived.
The site stated it would select bankruptcy exemptions for the debtor, eliminating his or her “need to choose which schedule to use for each piece of information.” It also provided a feature called the “Vault,” which offered customers with information on “loopholes” and “stealth techniques,” for example tips on how to hide a bankruptcy from credit bureaus.
In January 2002, debtor Jayson Reynoso paid $219 to purchase a 60-day license to use the Ziinet Engine. He used the software to prepare a chapter 7 bankruptcy petition based on the software’s selection of forms, schedules and exemptions for him.
At the end of the process, the software generated a four-sentence statement, purportedly made by users, that operated as a disclaimer. After declaring the user prepared his or her own bankruptcy using a computer without the assistance of an attorney, paralegal or bankruptcy preparer, the statement briefly described how the software operated, and concluded with the assertion:
“The contents of my documents are based entirely on my own research and no one gave me legal advice or told me to include or omit any information from my documents.”
The statement did not mention that the user had paid a fee to access the software.
Reynoso completed the steps as prompted, printed out the forms and filed his chapter 7 petition on Feb. 28.
After finding errors in Reynoso’s petition and learning he had paid to use the Ziinet Engine to prepare his documents, the chapter 7 trustee—in one of numerous similar actions involving other debtors—sued Ihejirika and Frankfort for violating the Bankruptcy Code.
The bankruptcy judge found the defendants were each “a person, other than an attorney or an employee of an attorney, who prepares for compensation a document for filing,” within Sec. 110’s definition of a bankruptcy petition preparer. Ihejirika and Frankfort violated the requirements of Sec. 110, committed fraudulent, unfair or deceptive conduct, and engaged in the unauthorized practice of law, the court ruled.
The BAP agreed.
Unauthorized Law Practice
Writing for the Ninth Circuit, Judge Betty B. Fletcher echoed the lower courts’ conclusions, pointing out the fact that Sec. 110 does not require a bankruptcy petition prepare to have in-person interactions with their customers.
“Frankfort charged fees to permit customers to access web-based software. Frankfort’s software solicited information from the customers,” Fletcher wrote. “Critically, it then translated that information into responses to questions on the bankruptcy forms, and prepared the bankruptcy forms for filing using those responses.”
With regard to the unauthorized practice of law claim, she explained, “Frankfort’s system touted its offering of legal advice and projected an aura of expertise concerning bankruptcy petitions; and, in that context, it offered personalized—albeit automated—counsel.”
The U.S. trustee was represented on appeal by Catherine Y. Hancock and I. Glenn Cohen, appellate staff attorneys for the U.S. Department of Justice’s Civil Division in Washington, D.C.
A spokesperson for the department told the MetNews yesterday the agency was “very pleased” with the court’s decision.
Ihejirika’s appellate counsel, Woodland Hills attorney M. Jonathan Hayes, did not return calls seeking comment.
The case is Reynoso v. Frankfort Digital Services, Ltd., No. 04-17190.
Copyright 2007, Metropolitan News Company