Opinion
No. 4-08-bk-12550-EWH.
March 12, 2009
MEMORANDUM DECISION
I. INTRODUCTION
This case presents the question of whether $400 is a reasonable fee for the preparation of Chapter 7 documents by a petition preparer. The Bankruptcy Code limits the compensable services which a petition preparer can provide to time spent on the ministerial function of "typing" the documents. Accordingly, any amount over $200 is unreasonable for the reasons explained below.
II. FACTS AND PROCEDURAL HISTORY
A. Procedural History
Anthony DeSoto ("Debtor') filed a pro se petition on September 18, 2008. The Debtor's bankruptcy documents were prepared by Christopher Richard Hoyt ("Chris Hoyt"), a certified legal document preparer under rules promulgated by the Arizona Supreme Court. Chris Hoyt works as an independent contractor for Richard Hoyt Associates ("Hoyt Associates"), a Tucson company wholly-owned by Chris' father, Richard. Hoyt Associates prepares legal documents for divorce proceedings, Chapter 7 bankruptcy cases, wills, and tax documents. Chris Hoyt's brother, David Hoyt, also works as an independent contractor for Hoyt Associates (Chris Hoyt, Richard Hoyt and Hoyt Associates are hereafter collectively referred to as "Hoyt").
Means Test Calculation, Voluntary Petition, Exhibit D to Voluntary Petition, Summary of Schedules, Statistical Summary of Certain Liabilities, Schedules A-J, Declaration Concerning Debtor's Schedules, Statement of Financial Affairs, Chapter 7 Individual Debtor's Statement of Intention, Bankruptcy Petitioner Preparer Declaration, and Creditor Matrix. (DE 11)
Arizona Supreme Court Rule 31(d)(24). Certification by the Arizona Supreme Court is required for a document preparer to prepare documents to be filed in the U.S. Bankruptcy Court for the District of Arizona under Local Rule 2090-2(a).
In 2008, Hoyt prepared documents for 192 Chapter 7 cases filed in the Tucson Division of the U.S. Bankruptcy Court for the District of Arizona, which represented approximately 6% of all Chapter 7 cases filed in the Division. Until August 15, 2008, Hoyt charged a $200 flat fee for its Chapter 7 document preparation services. In August 2008, the flat fee was raised to $400. More than 30 days before the fee increase, counsel for Hoyt wrote to the Office of the United States Trustee, advising that Hoyt intended to double its fees and requested comments and input about the proposed fee change. The United States Trustee never responded to the letter.
In this case, on September 18, 2008, Chris Hoyt filed the Disclosure of Compensation of Bankruptcy Petition Preparer required by 11 U.S.C. § 110(h)(2) disclosing that its fee was $400. On September 24, 2008, the court, sua sponte, issued a notice of hearing for October 7, 2008 on the reasonableness of Hoyt's increased fee. The Debtor appeared at the October 7, 2008 hearing. Hoyt did not appear. The Debtor testified that his parents had paid Hoyt a total of $440 for the preparation of his Chapter 7 petition and that he was offered no other option than paying the full amount of Hoyt's fees.
On October 9, 2008, the court issued an order to show cause ("OSC") on why Hoyt should not be required to disgorge any excess fees paid in connection with the filing of Debtor's Chapter 7 case. The OSC was set for November 17, 2008. The OSC also ordered the Office of the U.S. Trustee to appear and participate in oral argument and invited the Office of the United States Trustee to file a response or brief regarding the appropriate fee to be charged by document preparers in the District of Arizona. (DE 21).
On October 20, 2008, counsel for Hoyt filed a notice of appearance. Also, on October 20, 2008, the Trustee issued a report of no distribution.
On September 24, 2008, an order was entered waiving the Debtor's filing fees because his income was less than 150% of the median income for a one-person family in the District of Arizona.
Subsequently, Orders to Show Cause on the reasonableness of Hoyt's fees were entered in 33 other cases ("Show Cause Cases") where Hoyt charged a flat fee of $400 (29 assigned to this court and 5 assigned to the Honorable James M. Marlar). A joint hearing in all of the cases before both judges was held on November 17, 2008. Counsel for Hoyt appeared along with Chris Hoyt. One of the Chapter 7 Trustees in one of the Show Cause Cases appeared, as well as counsel for "Amicus Curiae."
On November 12, 2008, an order was entered in Case No. 08-11454-EWH permitting the Amicus Curiae to file a brief on the issue of Hoyt's fees. The Amicus Curiae brief was filed in that case on November 13, 2008.
At the November 17, 2008 hearing, the United States Trustee's counsel appeared telephonically and stated that the Executive Office of the United States Trustee had directed the local office of the United States Trustee to take no position on the reasonableness of Hoyt's fees. Discussions ensued with counsel for Hoyt, the Chapter 7 Trustee, and counsel for the Amicus Curiae about the procedural issues involved in determining the reasonableness of Hoyt's fees in all of the Show Cause Cases. Much of this discussion was centered on whether the Show Cause Cases would have to proceed as adversary proceedings. However, the Chapter 7 Trustee stated that none of the panel trustees had the resources to pursue formal adversary proceedings regarding Hoyt's fees. The United States Trustee had determined that it would not participate in any way in proceedings regarding Hoyt's fees, therefore, there was no party available in the Show Cause Cases to prosecute adversary proceedings. The November 17, 2008 hearing concluded with counsel being informed that both courts would issue procedural orders setting up evidentiary hearings in all of the Show Cause Cases.
On December 2, 2008, the Office of the United States Trustee filed, in this case and the other Show Cause Cases, a Statement of Non-position stating that it had reviewed the documents filed by Hoyt and found no violations in 11 U.S.C. § 110 "which would support an independent action by the United States Trustee against Hoyt at this time." (DE 35).
On December 8, 2008, counsel for Hoyt filed a Motion to Set Evidentiary Hearing and Rule 7016 Scheduling Conference in all of the Show Cause Cases. See Fed.R.Bankr.P. 7016. However, no hearing was requested on those motions and, therefore, no action was ever taken. On December 10, 2008, Hoyt filed a Notice of Filing Affidavit of Richard C. Hoyt which stated Hoyt Associates had sequestered $200 of the $400 fees that it had commenced charging in all cases on August 15, 2008 and placed that money in a separate bank account.
On December 16, 2008, a Procedural Order on the Order to Show Cause ("Procedural Order") was issued in this case identical to procedural orders issued in all of the Show Cause Cases establishing the procedures by which evidence would be submitted regarding the reasonableness of Hoyt's fees. The Procedural Order set forth the procedures to be followed for the presentation of evidence by Hoyt and provided for discretionary participation by any panel trustee and counsel for the Amicus Curiae. Under the Procedural Order, if a panel trustee and/or the Amicus Curiae wished to participate in a scheduled evidentiary hearing, they had to file a notice with the court and serve it on counsel for Hoyt no later than 15 days before the scheduled evidentiary hearing ("Evidentiary Hearing"). Neither the panel Trustee nor the Amicus Curiae filed a timely notice of participation in this case or any of the other Show Cause Cases.
Because the Amicus Curiae did not participate in the evidentiary hearing in this or any other Show Cause case, the brief they filed in Case No. 08-11454 has not been considered in any of the Show Cause Cases.
On December 29, 2008, Hoyt filed a Motion to Extend Time to File Notice of Appeal of the Procedural Order. On January 8, 2009, an Order Denying Motion to Extend Time to File Notice of Appeal was entered in this and all of the Show Cause Cases, due to its interlocutory nature. On January 21, 2009, Hoyt filed a Memorandum of Law in Response to Order to Show Cause arguing that the court lacked sua sponte jurisdiction to review the reasonableness of Hoyt's fees, as well as arguing that Hoyt was entitled to charge a $400 fee as a reasonably commercial fee for preparation of Chapter 7 petitions.
On January 26, 2009, the court commenced the Evidentiary Hearing in this case, the first of the Show Cause Cases subject to the Procedural Order.
B. The Evidentiary Hearing
At the commencement of the hearing, counsel for Hoyt urged the court to consider a motion to consolidate which requested that all 34 evidentiary hearings be consolidated before one judge. The request was denied. However, the court did agree to permit counsel for Hoyt to make certain evidentiary proffers to streamline the procedures for taking evidence. Accordingly, all "expert" testimony was taken in this case and proffered in the other Show Cause Cases heard by this court. Certain fact testimony, which was the same in every case, was given in this case and proffered during the evidentiary hearings in the other Show Cause Cases heard by this court.
The Motion to Consolidate was filed in the lowest numbered Show Cause Case (Martin and Elizabeth Palomino 08-09803).
Evidentiary hearings were held by this court in the following Show Cause Cases: Walsh 08-12596, Brady 08-12602, Donovan 08-12606, Chatfield 08-12873, Carpenter 08-12963, Reyna 08-13034, Simmons 08-13463, Ramsey 08-13504, Anzueto 08-13512, McElroy 08-13753, Fernandez 08-14012, Jauregui 08-14161, Diaz 08-14179, Belmontez 08-14340, Contreras 08-14918, and Herrington 08-bk-15021.
1. Evidence Presented by Hoyt
A. Expert Evidence
Hoyt presented testimony of expert witnesses (about matters which Hoyt asserted were common and relevant in all of the Show Cause Cases) on the reasonableness of a $400 fee. Hoyt called James Mason ("Mason") as an expert about the internet. Mason testified about the proliferation of internet service providers in the area of legal document preparation, including bankruptcy document preparation. Mason produced a written report, "Analysis of Internet Bankruptcy Filing Support." Mason's report and testimony demonstrated that several document preparation internet service providers are located in jurisdictions such as Israel or other places in Africa or Asia and, therefore, are not subject to any effective regulation regarding the services they provide.
Admitted into evidence as Exhibit E.
The second expert witness called was Allan David Merrill ("Merrill"), an Arizona certified legal document preparer. Merrill testified that he quit preparing bankruptcy documents in 2007 because it was not profitable. He also testified that he served on the committee to help develop the certification program for legal document preparers adopted by the Arizona Supreme Court in 2002. He testified that as part of the certification process, credit report and criminal background checks are conducted on applicants. He also testified that complaints can be filed against Arizona certified document preparers and that the licensing and certification board has the power to investigate complaints and discipline document preparers. He testified that each certified document preparer must pay a $500 fee every two years and take 10 hours of continuing education in order to maintain certification. Merrill testified that the legal document certification board does not provide any type of fee arbitration services if there is a dispute about the reasonableness of a certified document preparer's fee. Merrill further testified that his "attribution" hourly rate for his document preparation services was $125 per hour, which included labor, materials, overhead and profit.
Merrill's declaration was admitted into evidence as Exhibit G.
Hoyt's final expert witness was Donald Hartman. Hartman, who is a certified public accountant, testified that the current hourly rate for paralegals in Tucson is approximately $90 per hour. He also testified about the costs associated with running a business in Pima County. In Hartman's opinion, an $85 per hour fee was not "unreasonable" for document preparation services. He further testified that, in his opinion, Hoyt Associates was not making any money charging a $200 flat fee for bankruptcy document preparation services, but would be a profitable business if it charged the $400 flat fee.
A letter dated June 12, 2008 from Hartman to Hoyt summarizing Hartman's opinions was admitted as Exhibit F.
B. Fact Witnesses
Hoyt called two fact witnesses, Chris and Richard Hoyt. Chris Hoyt testified that he is certified as an Arizona legal document preparer and obtained that certification when the Bankruptcy Court for the District of Arizona enacted a local rule requiring such certification. He testified that he has been a "contract" employee of Hoyt Associates since 2000. He is paid a commission, which is based, at least in part, on the number of cases he prepares per week.
At the time that Hoyt prepared the documents in this case and the other Show Cause Cases, Hoyt did not keep contemporaneous time records. After the OSCs were issued, Chris and Richard Hoyt reviewed all of the files on the Show Cause Cases and their notes in those files and created a worksheet which purported to document the actual time spent in each of the Show Cause Cases, including this one.
The worksheet was admitted into evidence in this and all of the Show Cause Cases as part of Exhibit I.
Richard Hoyt testified that the procedure Hoyt follows is essentially the same in all cases. A potential debtor first calls Hoyt and is given an intake appointment with Richard Hoyt. In this case, Exhibit I indicates that Richard Hoyt spent 1 hour and 5 minutes during the intake in which the following was discussed:
"7 or 13, Go over intake questions, credit report review. Income, self tax info, go over how it works info, sign disclosures, review list of needed info."
Richard Hoyt testified that when he met with the Debtor, the Debtor "had some questions as to what the types of bankruptcy were. We have a distended packet of information that helps explain the difference between the chapters. We went over that with him." (1-26-09, Transcript p. 60, Ins 13-16). He also testified that he told the Debtor "what to expect as far as being able to show up at the meeting with the trustee." (Id. at lines 22-23). He further testified that with respect to exemptions:
"Yes, we have a copy of the Arizona exemption statutes. We go over it with them; verify that those are the statutes that do pertain to him and what particular ones that pertain to his case." (1/26/09 Transcript, p. 61, Ins 21-25).
During the intake, Richard Hoyt also provided the Debtor with disclosures required to be made pursuant to 11 U.S.C. §§ 527(b) and 527(a)(2). The Debtor was also given a questionnaire to complete. That questionnaire is a modified version of a questionnaire form included in the bankruptcy software used by Hoyt. Debtor was also given a list of information needed to complete his Chapter 7 documents. Hoyt also recommends that all clients obtain a credit report which Hoyt will obtain for a $40 or $60 charge, but the clients are not required to obtain a credit report through Hoyt.
Once the Debtor compiled the documents and completed the questionnaire, the information was provided to Chris Hoyt. Chris Hoyt testified that he prepares Chapter 7 documents using EZ bankruptcy filing software. In addition to inputting data into a computer using the EZ filing software, Chris Hoyt contacted the Debtor by phone to obtain information regarding previous years' income and "to figure out income and expenses." (Exhibit I). According to Exhibit I, the time Chris Hoyt spent in document preparation was 2 hrs. and 15 minutes.
EZ-Filing Bankruptcy Forms Software is a bankruptcy forms preparation software program designed to assist in inputting information on to Federal bankruptcy forms and in facilitating electronic case filing. The software is a product of EZ-Filing, Inc. and is available for purchase at EZ-Filing, Inc.'s website (http://www.ezfiling.com). The basic cost is $599.
After Chris Hoyt completed the documents, they were reviewed by David Hoyt. According to Exhibit I, David Hoyt spent 20 minutes comparing the prepared documents to the intake questionnaire completed by the Debtor and verifying that certain bills were, in fact, duplicates.
Hoyt then contacted the Debtor by phone to set up an appointment to come in, review the prepared documents and sign them. According to Exhibit I, that appointment took 25 minutes. Once the Debtor signed the documents, he was given copies of the documents and the Chapter 7 petition, which pro se debtors in this district must file directly with the court. See Local Rule 5005-2(a)(3)(B). The Chapter 7 documents, other than the petition, were then uploaded electronically to the court's electronic filing system as permitted by Local Rule 5005-2(a)(3)(A). Exhibit I indicates that the total time spent preparing Debtor's documents was as follows:Hrs. Mins 10
Phone call to make appointment 10 Intake by Richard Hoyt 1 5 Document preparation by Chris Hoyt 2 15 Document review by David Hoyt 20 Phone to make appointment to sign documents 5 Appointment to sign documents and give copies to Debtor 25 Electronic upload of all documents but the petition TOTAL 4 hrs. 30 mins. Richard Hoyt testified that the average time it takes Hoyt to prepare Chapter 7 documents is 5 hours. He testified that the weekly cost of operating Hoyt Associates is $3,520 and the yearly cost of Hoyt Associates' operations, including commissions paid to Christopher, David and Richard Hoyt is $183,000. Exhibit J was admitted into evidence, which set out an itemized list of Hoyt Associates' costs, including, among other things, line items for rent, utilities, advertising, software, and internet service. Richard Hoyt testified that based on his weekly and yearly cost of operation, he calculates that the value of Hoyt Associates' hourly services is approximately $85. Richard Hoyt testified that Hoyt Associates' charges for other document preparation services are as follows: Divorces $400 flat fee Trusts $600 flat fee Taxes $80 — $100 per hour Richard Hoyt testified that Hoyt Associates raised its rate for Chapter 7 preparation because "I was losing money at the $200 rate." (1/26/09 Transcript at p. 93, In 12).III. ISSUES
1. Does the bankruptcy court have the authority to determine, sua sponte, the reasonableness of Hoyt's fees?
2. If so, is $400 a reasonable fee?
IV. JURISDICTION
Whether fees should be disgorged under 11 U.S.C. § 110(b) is a core matter within the meaning of 28 U.S.C. § 157(b)(2)(A), over which the court has jurisdiction pursuant to 28 U.S.C. § 1334.
V. DISCUSSION
A. The Bankruptcy Court Has Sua Sponte Authority to Determine the Reasonableness of Bankruptcy Petition Preparer Fees
Hoyt asserts the court lacks sua sponte authority to determine the reasonableness of its fees because Section 110(h) only allows the court, on its own initiative, to order a bankruptcy petition preparer to disclose the amount of fees collected but does not authorize sua sponte review of the reasonableness of the disclosed fees.
Section 110(h) reads in pertinent part:
. . .
(2) A declaration under penalty of perjury by the bankruptcy petition preparer shall be filed together with the petition, disclosing any fee received from or on behalf of the debtor within 12 months immediately prior to the filing of the case, and any unpaid fee charged to the debtor. . . .
(3)(A) The court shall disallow and order the immediate turnover to the bankruptcy trustee any fee referred to in paragraph (2) found to be in excess of the value of any services —
(i) rendered by the bankruptcy petition preparer during the 12-month period immediately preceding the date of the filing of the petition; or
(ii) found to be in violation of any rule or guideline promulgated or prescribed under paragraph (1).
(B) All fees charged by a bankruptcy petition preparer may be forfeited in any case in which the bankruptcy petition preparer fails to comply with this subsection or subsection (b), (c), (d), (e), (f), or (g).
(C) An individual may exempt any funds recovered under this paragraph under section 522(b).
(4) The debtor, the trustee, a creditor, the United States trustee (or the bankruptcy administrator, if any) or the court, on the initiative of the court, may file a motion for an order under paragraph (2).
Hoyt's reading of Section 110(h) conflicts with a harmonious construction of Section 110(h)(2)-(4). Statutory provisions are to be read in harmony in the context of the whole statute. In re Houghland 886 F.2d 1182, 1184 (9th Cir. 1989). In other words, all parts of a statute are to be read as a whole, and in harmony with one another, and not in conflict. In re Chiu, 266 B.R. 743, 750 (9th Cir. BAP 2001), aff'd, 304 F.3d 905 (9th Cir. 2002); andIn re Labib-Kiyarash, 271 B.R. 189, 195 (9th Cir. BAP 2001). When read as a whole, Section 110(h)(2)-(4) gives the court sua sponte authority to order fee disclosures and to review the reasonableness of the disclosed fees. Otherwise, Section 110(h)(3)(A) becomes a toothless provision. See also In re Bernales, 345 B.R. 206, 227 (Bankr. C.D. Cal. 2006) (issuing a sua sponte order to show cause regarding fee disgorgement and ultimately requiring disgorgement under 11 U.S.C. § 110(h)(3)).
Hoyt next argues that the court cannot rely on Section 329 or Fed.R.Bank.P. 2017 as authority for sua sponte review of petition preparer fees because the provisions only apply to attorneys. 11 U.S.C. § 329. This argument is without merit. The Ninth Circuit Bankruptcy Appellate Panel has held that a court has authority under Section 329 to limit a petition preparer's fees. In re Agyekum, 225 B.R. 695, 698 (9th Cir. BAP 1998). The Court explained that Section 329 regulates the compensation allowed to both attorneys and lay persons who prepare bankruptcy petitions. Id. at 699. See also In re Cochran, 164 B.R. 366, 368 (Bankr. M.D. Fla. 1994); In re Bachmann, 113 B.R. 769, 774 (Bankr. S.D. Fla. 1990); and In re Grimes, 115 B.R. 639, 649 (Bankr. D. S.D. 1990).
Hoyt also contends that the court cannot rely on Section 105(a) to authorize sua sponte review of fees because Section 105(a) does not give the court substantive authority beyond what is found in the code. 11 U.S.C. § 105(a). The core function of Section 105(a) is to provide the court with the "power . . . to implement" the substantive command of other provisions of the Code. In re Owens Corning, 419 F.3d 195, 209, n. 14 (3d Cir. 2005), cert. denied, 547 U.S. 1123 (2006) (quoting In re Kmart Corp., 359 F.3d 866, 871 (7th Cir. 2004)). Section 105 also gives bankruptcy courts inherent authority to run their courtrooms and to supervise the attorneys appearing before them. Chambers v. NASCO, Inc., 501 U.S. 32, 43 (1991). As discussed above, Sections 110 and 329 give the court power to review bankruptcy petition preparer fees sua sponte. Therefore, the court is authorized to use its Section 105(a) authority to implement Sections 110 and 329.
Finally, Hoyt asserts that the court's sua sponte review of fees violates his procedural due process rights to have the matter decided by an impartial decision maker. He cites Goldberg v. Kelly, 397 U.S. 254, 271 (1970), for the proposition that an impartial decision maker is a requirement of due process. Hoyt maintains that the court is not impartial as it already arrived at some legal position adverse to that of the Respondent by virtue of issuing an order to show cause regarding the reasonableness of Hoyt's fees.
In Goldberg, the Supreme Court reviewed a welfare recipient's final eligibility determination following termination of benefits. In discussing the requirement for an impartial decision maker, it stated: "[w]e agree with the District Court that prior involvement in some aspects of a case will not necessarily bar a welfare official from acting as a decision maker. He should not, however, have participated in making the determination under review." Id. In this proceeding, unlike the situation inGoldberg, no final determination was made by the court prior to hearing evidence on the issue. In fact, the court's final decision is in accordance with Goldberg as it "rest[s] solely on the legal rules and evidence adduced at the hearing." Id.
Moreover, concerning judicial bias, the Supreme Court has stated:
First, judicial rulings alone almost never constitute a valid basis for a bias or partiality motion . . . Second, opinions formed by the judge on the basis of facts introduced or events occurring in the course of the current proceedings, or of prior proceedings, do not constitute a basis for a bias or partiality motion unless they display a deep-seated favoritism or antagonism that would make fair judgment impossible.
Liteky v. United States, 510 U.S. 540, 555-56 (1994).
While a court is not prohibited from adjudicating a proceeding raised sua sponte, the court must provide fair notice and an opportunity for a hearing. The Ninth Circuit has held, in the context of a Section 330(a)(1) fee award, that if the bankruptcy court materially reduces the fee requested, Fed.R.Bankr.P. 2017(b) requires that the court first provide notice and a hearing. In re Eliapo, 468 F.3d 592, 602 (9th Cir. 2006). The Ninth Circuit "emphasize[d] that the notice-and-hearing definition in § 102(1) is flexible and sensitive to context" but that "the essential point is that the court should give counsel a meaningful opportunity to be heard." Id. The Eliapo court further explained all that is required is that the applicant be given a reasonable opportunity to present legal argument and/or evidence to clarify or supplement a fee application. Id.
In this proceeding, Hoyt was given fair notice and an opportunity to present legal argument and evidence. The Order to Show Cause noticed Hoyt of the alleged violations of Section 110. After the hearing on the Order to Show Cause, the Court issued a Procedural Order setting the procedures and deadlines to be used at the hearings. The court then conducted evidentiary hearings in which Hoyt had the opportunity to present legal arguments, expert testimony, witnesses, and documentary evidence. Hoyt's due process rights have been satisfied as required by Eliapo.
B. The Bankruptcy Code Limits the Scope of Services Which May be Provided by Petition Preparers
Section 110 governs what petition preparers may or may not do. 11 U.S.C. § 110. It is a consumer protection statute passed to "control the proliferation of bankruptcy typing mills." In re Guttierez, 248 B.R. 287, 292 (Bankr. W.D. Tex. 2000). The legislative history of Section 110 makes it clear that Congress intended to protect debtors from unregulated bankruptcy petition preparers:
Bankruptcy petition preparers not employed or supervised by any attorney have proliferated across the country. 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. These preparers often lack the necessary legal training and ethics regulation to provide such services in an adequate and appropriate manner. These services may take unfair advantage of persons who are ignorant of their rights both inside and outside the bankruptcy system.
HR Rep. 103-835, 103rd Cong., 2nd Sess 56 (Oct. 4, 1994), as reprinted in U.S.C.C.A.N. 1994, 3340, 3365; 140 Cong. Rec. H10770 (Oct. 4, 1994) (House Judiciary Committee Report).
In 2005, Section 110 was amended to add Section 110(e)(2)(A) which specifically prohibits a petition preparer from providing legal advice. 11 U.S.C. § 110(e)(2)(A). Section 110(e)(2)(B) lists the legal advice which a petition preparer cannot give as follows: (1) whether to file a petition; (2) what chapter to file under; (3) whether the debtor will receive a discharge; (4) whether the debtor will be able to retain her home, car or other property; (5) the tax consequences of filing and dischargeability of tax claims; (6) how to characterize debtor's interest in property or debts; and (7) advice concerning bankruptcy procedures and rights.
The evidence indicates that Hoyt did more than Section 110 permits. At intake, Richard Hoyt gave the Debtor information about each of the bankruptcy chapters. Richard Hoyt also gave the Debtor the Arizona exemption statutes and testified that he "verified" that the Debtor used the exemptions that "pertain to his case." The Debtor was told what to expect when he filed for bankruptcy. The Debtor was given a questionnaire to fill out based on the EZ filing software. Chris Hoyt evaluated the information provided in the questionnaire to determine if the Debtor's income should be listed as self-employment income. All these activities have been found to constitute legal advice. See In re Kaitangian, 218 B.R. 102, 110 (Bankr. S.D. Cal. 1998) (plugging in solicited information from questionnaires and personal interviews to a pre-packaged bankruptcy software program constitutes the unauthorized practice of law). See also In re Gomez, 259 B.R. 379 (Bankr. D. Colo. 2001) (petition preparer cannot offer any information or advice as to what the law is).
In fact, to the extent that Hoyt provides legal advice, it may be engaging in unfair and deceptive practices in violation of 11 U.S.C. § 110(i)(1). See In re Moffett, 263 B.R. 805, 815 (Bankr. W.D. Ky. 2001) and In re Rojero, 2008 WL 5191689 (Bankr. D. N.M. 2008). However, for due process reasons, the court cannot reach that issue in this decision; it is limited to the issue of the reasonableness of Hoyt's fees.
In In re Doser, 412 F.3d 1056 (9th Cir. 2005), the court held that a petition preparer can perform "only the modest service of transcribing or typing bankruptcy forms that the Debtors alone must prepare without assistance" and that "other sorts of services are improper" and cannot be compensated. 412 F.3d at 1063 (citing In re Busch, 275 B.R. 69, 85 (Bankr. D. Idaho 2002)). Handing potential debtors packets of information about Arizona exemption law is providing information about what the law is. It does not matter that such information is available elsewhere, including the court's own website. Petition preparers may not "assist" debtors in completing bankruptcy documents — they can only type or input information provided by the debtors.
Under Doser, the only compensable service that can be charged for is the time spent inputting information to produce Chapter 7 documents and the time and costs associated with copying and uploading the documents to the court's electronic filing system. In this case, the approximate time spent inputting data, producing and proofreading documents was 2 hours and 35 minutes. Therefore, the compensable time for preparation of Chapter 7 documents should be 2.5 hours, not the 5 hours claimed by Hoyt.
C. Calculation of a Reasonable Fee
Part of the changes made to Section 110 by the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") was the addition of Section 110(h)(1), which permits the Supreme Court or the Judicial Conference of the United States to "prescribe guidelines for setting a maximum allowable fee chargeable by a bankruptcy petition preparer." 11 U.S.C. § 110(h)(1). However, the provision is optional and no action has been taken by the Judicial Conference or the United States Supreme Court to set maximum guidelines for petition preparers' fees.
Some Districts set petition preparers' fees by local rule. See,eg., In re Agyekum, 225 B.R. 695, 699 (9th Cir. BAP 1998) (enforcing local rule establishing Bankruptcy Petition Preparer Guidelines for the Northern District of California). In this District, $200 has been the de facto maximum fee charged by petition preparers based, in large part, on Judge Marlar's 1996 decision in In re Kassa, 198 B.R. 790 (Bankr. D. Ariz. 1996),aff'd 232 B.R. 822 (9th Cir. BAP 1999).
In Kassa, Judge Marlar determined that petition preparers should not charge more than the hourly rate charged by legal secretaries, which he found to be $16.32 an hour. If the court were to set Hoyt's fees based on the Kassa model adjusted for inflation, the amount of the fee would be far less than $200 used in this District since 1996. Given the increased number of documents involved in Chapter 7 document preparation since the passage of BAPCPA, the court does not believe that lowering the $200 flat fee is warranted. Furthermore, there has been a significant change in our court's local rules since Kassa was decided. Document preparers now must be certified by the Arizona Supreme Court pursuant to Local Rule 2090-2(a). There are, therefore, costs which Hoyt must incur for certification and continuing education which are not reflected in the hourly rate charged by legal secretaries.
$16.32 adjusted for inflation through 2008 would be approximately $23 per hour.
In this case, Richard Hoyt testified that it costs $85 per hour to provide document preparation services. If Hoyt's argument that $85 per hour is adopted as a reasonable rate to charge, then the flat fee would be very close to the existing $200 flat rate (2.5 hrs. x $85 per hour = $212.50). However, $85 is higher than the hourly rate in any reported decision the court has been able to find on petition preparer fees. A review of those decisions indicate that courts have generally found a reasonable hourly rate in the neighborhood of $30 to $50 per hour. See, e.g., In re Dickerson, 331 B.R. 697, 699 (Bankr. W.D. Ky. 2005) ($30 per hour); In re McDonald, 318 B.R. 37, 46 (Bankr. E.D.N.Y. 2004) ($50 per hour); In re Bonarrigo, 282 B.R. 101, 107 (D. Mass. 2002) ($20 per hour); In re Schneider, 271 B.R. 761, 765 (Bankr. D. Vt. 2002) ($30 an hour); and In re Pavlis, 264 B.R. 57, 59 (Bankr. D. R.I. 2001) ($30 per hour). But see In re Landry, 268 B.R. 301, 308 (Bankr. M.D. Fla. 2001) ($75 per hour).
Hoyt submitted Exhibit J in support of Richard Hoyt's testimony that the cost of providing document preparation services is approximately $85.00 an hour. Exhibit J lists the weekly operating expenses for Hoyt Associates and divides by 40 to arrive at the per hour amount. Exhibit J, however, does not allocate the weekly operating expenses among the various other form preparation services provided by Hoyt, including bankruptcy, divorce, wills, and tax. In other words, Exhibit J shows the cost per hour of operating Hoyt Associates, in all its aspects, while the correct analysis should show the cost per hour of providing only bankruptcy petition preparation services. Therefore, Exhibit J is not helpful in identifying the expenses directly attributable to bankruptcy form preparation. Accordingly, Hoyt has not carried the burden of demonstrating that $85 per hour is a reasonable fee. In re Dimas, 357 B.R. 563, 575 (Bankr. N.D. Cal. 2006) (citing Hensley v. Eckerhart, 461 U.S. 424, 437 (1983)) (finding the applicant bears the burden of establishing entitlement to an award and demonstrating that the fees are reasonable).
Setting a flat fee is not an exact science. Not all cases require the same amount of time — the idea of a flat fee is to assure that the service provider's compensation is roughly equal to the value of the compensable work done. Perhaps the best solution for setting petition preparer fees would be the adoption of a local rule in this District. However, until such a rule is adopted and/or bankruptcy courts are given direction by the Judicial Conference of the United States about what should be a maximum fee, the existing $200 de facto rule should not be disturbed. However, because Hoyt has not demonstrated that a fee of $400 is reasonable, the excess $200 charged in this case must be disgorged. Accordingly, pursuant to Section 110(h)(3)(A), $200 of the fee charged in this case must immediately be turned over to the Chapter 7 Trustee. Debtor may then seek to exempt the refunded fee under Section 110(h)(3)(C). Furthermore, because Hoyt has not demonstrated that a $400 flat fee is reasonable, pursuant to 11 U.S.C. §§ 110(j)(1) and 105(a), Hoyt is enjoined from the date of this decision from charging more than $200 as a flat fee for preparation of Chapter 7 documents. See In re Graves, 279 B.R. 266, 273 (9th Cir. BAP 2002).
The use of flat fees for attorney services in consumer cases has been recognized as appropriate in the Ninth Circuit. See In re Eliapo, 468 F.3d 592, 600 (9th Cir. 2006).
The court will set status hearings in all cases assigned to this court, which were not subject to a show cause order, but where Hoyt charged a $400 flat fee to determine if evidence should be taken in those cases or if the court should order disgorgement based on its holding that only $200 may be charged as a reasonable flat fee by petition preparers in this District.
VI. CONCLUSION
Richard Hoyt testified that at the $200 flat rate, Hoyt cannot make a profit and that if it is not allowed to charge more, it may discontinue preparing Chapter 7 bankruptcy documents. If that occurs, then based on 2008 statistics, approximately 200 pro se debtors may turn for help to internet providers or to "secret" petition preparers who take money for preparing petitions, and tell debtors not to disclose that they have received assistance.
Unlike the internet providers and "secret" preparers, Hoyt has complied with Local Rule 2090 by assuring that Richard, David and Chris Hoyt are all certified document preparers under the rules of the Arizona Supreme Court. Furthermore, Hoyt informed the United States Trustee of its proposed increase in fees and attempted to engage the United States Trustee in a dialogue about how to set fees. Hoyt has retained counsel and has responded to all of the Show Cause hearings in a timely manner. Hoyt has set aside the excess $200 of the fees that it commenced charging in August 2008 in a separate bank account so that those fees can be disgorged, if necessary. However, because Section 110 does not permit document preparers to be compensated for anything more than the ministerial function of data entry, Hoyt can only be paid for the performance of that task. It may be that in attempting to protect pro se debtors, Section 110 actually results in the unintended consequence of driving more responsible petition preparers out of business, leaving pro se debtors with few viable options. Such a result is frustrating, but it is one which only Congress, not this court, can change.
Even at $400 a case, Hoyt prepares Chapter 7 documents for rates far below what attorneys charge for Chapter 7 filings. The court's review of its own docket, indicates that two of the consumer debtor attorneys who routinely file Chapter 7 petitions in this Division, charged between $900 and $1,600 per Chapter 7 case in 2008.
An order consistent with the findings in this Memorandum Decision and requiring disgorgement of $200 of the fees charged in this case, and all other Show Cause Cases assigned to this court, will be entered this date.
Notice Recipients
Recipients of Notice of Electronic Filing:
District/Off: 0970-4 User: granillob Date Created: 3/12/2009 Case: 4:08-bk-12550-EWH Form ID: pdf008 Total: 5 db ANTHONY DESOTO anthonydst1@gmail.com ust U.S. TRUSTEE USTPRegion14.PX.ECF@USDOJ.GOV tr STANLEY J KARTCHNER ch7trustee@comcast.net docprep CHRISTOPHER RICHARD (AZCLDP 80052) HOYT AZCLDP80052@aol.com aty HENRY JACOBS hjacobs@jacobsazlaw.com TOTAL: 5