Non-Lawyer Found To Have Violated Bankruptcy Code For Providing Web Based Bankruptcy Software To The Public

In what is a very interesting, and one of first impression, the 9th Circuit Court of Appeals upheld a ruling finding that a provider of web based bankruptcy preparation software to consumers violated the Bankruptcy Code provisions regulating bankruptcy preparers.

The Court in Rynoso vs. Frankfort Digital Services (9th Cir. February 27, 2007), the appellate court upheld the findings of the United States Bankruptcy Court for the Northern District of California, which found that Frankfort, a seller of web-based software that prepares bankruptcy petitions, acted as a “bankruptcy petition preparer” within the meaning of 11 U.S.C. § 110 (2002)1 and violated the requirements thereof. The bankruptcy court concluded that Frankfort had committed fraudulent, unfair, or deceptive conduct, and had engaged in the unauthorized practice of law.

Frankfort was not a law firm and did not employ any attorney. Frankfort only sold access to websites where customers could access browser-based software for preparing bankruptcy petitions and schedules, as well as informational guides "advice on various aspects of relevant bankruptcy law."

Frankfort got itself in trouble based primarily on the representations it made on its website and allowing its computer program to select certain tasks.  For example, the website explained that its program would select bankruptcy exemptions for the debtor and would eliminate the debtor’s “need to choose which schedule to use for each piece of information.”  The site also offered customers access to the “Bankruptcy Vault", which it described as a repository of information regarding “loopholes” and “stealth techniques.” For example, according to the site, the Vault would explain how to hide a bankruptcy from credit bureaus and how to retain various types of property.

The Debtor paid the service $219.00.  The debtor imputed information, responded to questions, and the system produced a complete petition, schedules and other bankruptcy forms personalized for the Debtor.  Unfortunately, I suppose to the software company, it also selected the schedules and exemptions for the Debtor.  The Debtor stated he did not himself type in the various exemption and provisions.

The forms did provide for the name and the social security number of the preparer, but the software placed "Non Applicable" in this space.

The Bankruptcy Court ordered disgorgement by Frankfort of the entire fee received from any debtor-customer in the Northern District of California in the preceding twelve months, and permanently enjoined Frankfort from acting as a bankruptcy petition preparer in the Northern District of California. Finally, the court certified the fact of Frankfort’s fraudulent, unfair or deceptive conduct to the district court for a determination of damages under 11 U.S.C. § 110(i).

Frankfort argues that the creation and ownership of a software program used by a licensee to prepare his or her bankruptcy forms is not preparation of a document for filing under the statute. Unfortunately for Frankfort the 9th Circuit found that that the software at issue qualified the company as a bankruptcy preparer because it charged fees to permit customers to access web based
software, the software solicited information from the customers, it then translated that information into responses to questions on the bankruptcy forms, and prepared the bankruptcy forms for filing using those responses.  Quoting the BAP decision, the Court noted, “The software did not simply
place the debtors’ answers, unedited and unmediated, into official forms where the debtors had typed them on a screen; rather, it took debtors’ responses to questions, restated them,
and determined where to place the revised text into official forms.”

Comments

[Kenisha]

Keep up the good work.