Opinion
NOT FOR PUBLICATION
Argued by Telephone Conference and Submitted February 21, 2008
Appeal from the United States Bankruptcy Court for the Central District of California. Bk. No. RS 07-10460-MJ. Honorable Meredith A. Jury, Bankruptcy Judge, Presiding.
Before: MONTALI, DUNN, and MARKELL, Bankruptcy Judges.
MEMORANDUM
The United States Trustee (" UST") moved for the disgorgement of fees, imposition of fines and an injunction against a bankruptcy petition preparer, alleging that he had violated 11 U.S.C. § 110 by offering legal advice to the debtor. The bankruptcy court granted the motion and the petition preparer appealed. We conclude that the procedure was tainted by a lack of due process and basic fairness to the petition preparer and therefore REVERSE.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037, as revised by The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23.
I. FACTS
Appellant Armando Carrillo (" Appellant") is a bankruptcy petition preparer within the meaning of section 110. Until the UST filed the motion underlying this appeal, it had never taken any action against Appellant in the twelve years that he has prepared bankruptcy petitions.
Debtor Dorothy Poehlman (" Debtor") retained Appellant to prepare her petition, schedules and statement of financial affairs for a $200.00 fee. In December 2006, Debtor executed an acknowledgment that the staff of Appellant's company, Public Documents Plus (" PDP"), are not attorneys and do not give legal advice and that PDP would be typing and completing documents according to Debtor's instructions. Debtor acknowledged that she was to " thoroughly review" the documents presented to PDP for typing and that she would be responsible for making any corrections.
On January 20, 2007, Debtor executed a Statement Regarding Assistance of Non-Attorney With Respect to the Filing of Bankruptcy Case, declaring under penalty of perjury that she had paid PDP $200.00 and that she had received assistance from a non-attorney in connection with the filing of her case. In addition, Appellant executed a Disclosure of Compensation of Bankruptcy Petition Preparer acknowledging his receipt of $200.00 for document preparation services. Appellant further executed a Declaration of Non-Attorney Bankruptcy Petition Preparer containing his social security number.
Both Debtor and Appellant executed a Notice to Debtor by Non-Attorney Bankruptcy Petition Preparer acknowledging that Appellant is not an attorney and may not practice law or give legal advice, including advice about whether to file a petition, what chapter would be appropriate, and whether debts would be discharged. Appellant and Debtor also signed a certification that Appellant had delivered to Debtor a Notice of Available Chapters on a form promulgated by the United States Bankruptcy Court for the Central District of California. This form explains the differences in the chapters, briefly explains the availability of discharge in each chapter, and touches on issues pertaining to exemptions and eligibility.
After PDP prepared the petition and other documents, Debtor reviewed them for accuracy, signed them, and on January 31, 2007, personally delivered the papers to the bankruptcy court for filing and paid the filing fee directly to the court.
On March 6, 2007, at her section 341 meeting, Debtor executed another declaration, which was presented to her in the form of a questionnaire. In this questionnaire, she stated that she had given Appellant $299.00 in cash for her filing fee, that she was not given her petition and schedules before they were filed, that she did not sign her own name to the petition and schedules and that she was directed to say that she had no assistance in preparing her documents. She further checked a box indicating that she had been informed that an attorney would review the bankruptcy papers before they were filed with the court. She also checked a response indicating that she had been directed to put false information on her bankruptcy documents, but did not fill in the blank describing the purported false information.
Debtor also checked boxes indicating that Appellant had given her legal advice:
The preparer who assisted me explained to me (select all that apply):
[x] whether or not to file a bankruptcy petition.
[x] the difference between bankruptcy cases under Chapter 7, 11, 12, or 13.
[x] whether my debts will be discharged.
[x] whether I will be able to retain my home, car, or other property after filing bankruptcy.
[x] any tax consequences from filing bankruptcy.
[x] whether I should repay any of my debts to a creditor after filing bankruptcy.
[x] whether I should enter into a reaffirmation agreement with a creditor to reaffirm a debt.
[x] how any property interest I own should be characterized as either real or personal property.
[x] how my debts should be characterized as either priority, secured or unsecured debts.
[x] any bankruptcy procedures and rights I may have as a debtor in bankruptcy.
After receiving Debtor's responses to the questionnaire, Michael S. Smith (" Smith"), a paralegal specialist for the UST, contacted Debtor. Debtor recanted her responses that she had not been given her documents before they were filed, that Appellant had directed her to say that she had received no assistance, and that she had paid the filing fee to Appellant. She further recanted her responses indicating that Appellant had advised her about her ability to retain her property, the tax consequences of filing bankruptcy, whether to repay or reaffirm debts, how to characterize her property interests and debts, and about other bankruptcy procedures and rights. Nonetheless, Smith's declaration indicates that " on two occasions during that discussion, the Debtor confirmed that [Appellant] explained 1) whether or not to file a bankruptcy petition, 2) the difference between bankruptcy cases under chapter[s] 7, 11, 12 or 13, and 3) whether her debts would be discharged." He did not note that Appellant and Debtor had signed a disclosure form promulgated by the bankruptcy court that discusses at least the latter two items.
Even if Debtor had not recanted these responses, the declarations and acknowledgments filed with the petition were clearly inconsistent with her responses to the questionnaire. Those documents reflected that she had retained Appellant, a non-attorney, to assist her. She acknowledged that Appellant could not render legal advice. She did sign her name to the petition and other documents, and she declared that she had reviewed them before filing. She also paid the filing fee directly to the court.
Smith revised Debtor's declaration/questionnaire to reflect the items recanted by Debtor in her conversation with him. Debtor did not sign this revised copy. The UST thereafter filed a Motion Under 11 U.S.C. § 110 for Disgorgement of Fees, Fines, and/or an Injunction Against Bankruptcy Petition Preparer. The UST alleged that Appellant " offered legal advice to the debtor or a potential debtor, " relying on Smith's declaration that Debtor had not recanted her responses that Appellant had advised her whether to file, about the differences between the various chapters, and whether her debts would be discharged. The UST did not allege that it had ever previously sought an order against Appellant under section 110, that any such order had ever been entered against Appellant, or that any other debtors had alleged or responded that Appellant had provided them with legal advice. Instead, the UST relied solely on Smith's characterization of his phone conversation with Debtor in alleging that Appellant had rendered improper legal advice.
Upon receiving the motion against him, Appellant contacted Debtor. After conferring with Debtor, Appellant prepared a revised questionnaire/declaration which Debtor executed under penalty of perjury (on April 22, 2007) " [w]ithout pressure and without being placed under duress." Appellant also prepared and faxed another declaration to Debtor based on his conversation with her.
Debtor declared that she had incorrectly completed the questionnaire at the section 341 meeting, stating " I was very nervous, misunderstood some of the questions, and put some [check] marks where they were not suppose[d] to be or I placed them in the wrong places." She identified specific examples of her incorrect answers, including those where she had checked that she had paid Appellant the filing fee, that Appellant had directed her to place false information in her petition and schedules, and that Appellant had advised her that an attorney would review her documents.
More specifically, Debtor stated that " at no time did [Appellant] advise me, recommend or suggest under which Chapter (7, 11, 12 or 13)" to file as she had already decided the chapter under which she was going to file when she initially contacted Appellant. Debtor further clarified that " [a]t no time did [Appellant] make any statement to me as to which debts or if any my debts [sic] will be discharged. I saw no need to ask him therefore it was never discussed."
Debtor also stated that when Smith called her, she was nervous and " did not understand the reason for the questions." According to Debtor, Smith " used certain terminology that I failed to understand exactly what he was asking [sic] which caused me to make a " Yes" response where a " No" response should have been made. I did not have a copy of the questionnaire in my presence at the time of the inquiry that I could review at the same time the Trustee's agent asked me the question."
Appellant also filed a declaration stating that he had not provided legal advice to Debtor and noting that many of Debtor's responses to the questionnaire were inconsistent with the declarations and acknowledgments that she executed and filed with the bankruptcy court. For example, Debtor responded that Appellant had directed her to say that she had no assistance in the preparation of her documents even though her Statement Regarding Assistance of Non-Attorney With Respect to the Filing of Bankruptcy Case reflected that she had paid Appellant $200.00 and that she had received assistance from a non-attorney in connection with the filing of her case.
On May 22, 2007, the bankruptcy court held the initial hearing on the UST's section 110 motion. Even though Appellant requested that he be allowed to testify, the court refused because Debtor was not present. Similarly, Smith, who was in the courtroom, did not testify, even though counsel for the UST stated that its motion was " based on a conversation between the paralegal [Smith] and [Debtor]." The court authorized the UST to subpoena Debtor and threaten her " that the U.S. Trustee is entitled to bring a motion to revoke her discharge or something, whatever language you want to put in there."
At the continued hearing on July 10, 2007, counsel for the UST made several erroneous or misleading statements. First, counsel incorrectly stated that Debtor had executed four separate differing declarations under penalty of perjury, including in that number the worksheet prepared by Smith and never seen or executed by Debtor. Debtor executed only two questionnaires (at the creditor's meeting on March 6 and again on April 22). Debtor did execute a separate declaration attached to Appellant's opposition to the motion, but that declaration is entirely consistent with the questionnaire executed on April 22.
Second, counsel for the UST incorrectly stated that " I presented [Smith] last time this motion was on calendar" and that he " testified to the nature and extent that the U.S. Trustee goes to assure that these things are accurate before these motions are brought[.]" Smith did not testify at the initial hearing. If he did testify the day of the initial hearing, he did so in the context of a different motion and without giving Appellant an opportunity for cross-examination.
Counsel for the UST also stated that " I -- I don't know how we're supposed to get a handle on these things. The Debtors say whatever they -- whomever's standing in front of them tells them to say." Counsel for the UST then commenced her direct examination of Debtor, her only live witness, largely utilizing leading questions. Debtor testified that she had filled out the questionnaire at the section 341 meeting " very quickly" and she " was nervous" when completing it. She also testified that she was on her cell phone in her automobile when she was conversing with Smith: " not a very great place for me to be . . . doing this." Responding to counsel's leading questions, Debtor testified that Appellant had prepared the questionnaire that she executed on April 22, 2007, and that he had prepared her April 24 declaration explaining and correcting her inconsistent responses to the questionnaire.
This bold and unsubstantiated statement was not made under penalty of perjury. While perhaps we should give counsel the benefit of doubt and call it nothing more than tenacious rhetoric, the court's ruling (discussed later) unfortunately appears to be based, in part, on this loose statement.
Appellant then commenced his cross examination of Debtor, the witness upon whom the UST relied in prosecuting its section 110 motion. Appellant asked Debtor if he had influenced her responses or if he had given her advice about the appropriate chapter for her or about the dischargeable nature of her debts. Debtor's responses to these questions were consistent with her April declaration and amended questionnaire.
When Debtor finished testifying and Appellant began his response, the bankruptcy court abruptly stopped him without giving him an opportunity to argue or to testify. Instead, the court announced its ruling stating that " every question that was asked by [Appellant] was leading." The court observed that Debtor was " going to say whatever was put into her mouth by [Appellant]" and thus disregarded her testimony. The court stated that " I have to go on what the Debtor originally did under no influence, which is to say that she was given improper legal advice by [Appellant]." The bankruptcy court therefore granted the UST's motion, ordered Appellant to disgorge his $200 fee and to pay a $500 fine, and enjoined Appellant from engaging in the unauthorized practice of law.
Counsel for the UST had not objected to any question asked by the Appellant.
See supra footnote 4.
On July 31, 2007, the court entered its order granting the motion, ordering disgorgement, imposing the fine, and enjoining Appellant from engaging in the unauthorized practice of law. Appellant filed a timely notice of appeal on August 10, 2007.
II. ISSUE
Did the bankruptcy court err in granting the UST's motion for the disgorgement of Appellant's fees, imposition of a fine, and issuance of an injunction pursuant to section 110?
III. STANDARD OF REVIEW
We review the imposition of discretionary penalties for violations of section 110 for abuse of discretion. Frankfort Dig. Servs., Ltd. v. Neary (In re Reynoso), 315 B.R. 544, 550 (9th Cir. BAP 2004), aff'd, 477 F.3d 1117 (9th Cir. 2007). A bankruptcy court " necessarily abuses its discretion if it bases its decision on an erroneous view of the law or clearly erroneous factual findings." Id . A factual finding is clearly erroneous " if the appellate court, after reviewing the record, has a firm and definite conviction that a mistake has been committed." Id . at 549, citing Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985).
" 'An abuse of discretion is a plain error, discretion exercised to an end not justified by the evidence, a judgment that is clearly against the logic and effect of the facts as are found.'" Rabkin v. Ore. Health Sciences Univ., 350 F.3d 967, 977 (9th Cir. 2003), quoting Int'l Jensen, Inc. v. Metrosound U.S.A., Inc., 4 F.3d 819, 822 (9th Cir. 1993) (internal quotations and citation omitted).
Evidentiary rulings at trial are reviewed for abuse of discretion. See United States v. Merino-Balderrama, 146 F.3d 758, 761 (9th Cir. 1998). Such rulings will be reversed only if the error more likely than not affected the verdict. See United States v. Pang, 362 F.3d 1187, 1192 (9th Cir. 2004); Miller v. Fairchild Indus., Inc., 885 F.2d 498, 513 (9th Cir. 1989).
IV. JURISDICTION
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. § § 1334 and 157(b)(1). We have jurisdiction under 28 U.S.C. § 158(a)(1), (b)(1) and (c).
V. DISCUSSION
Section 110(e)(2)(A) expressly prohibits bankruptcy petition preparers such as Appellant from offering legal advice to a debtor or potential debtor. Section 110(e)(2)(B) provides that " legal advice" includes advising a debtor
(I) whether (I) to file a petition under this title; or (II) commencing a case under chapter 7, 11, 12, or 13 is appropriate; (ii) whether the debtor's debts will be discharged in a case under this title; (iii) whether the debtor will be able to retain the debtor's home, car, or other property after commencing a case under this title; (iv) concerning (I) the tax consequences of a case brought under this title; or (II) the dischargeability of tax claims; (v) whether the debtor may or should repay debts to a creditor or enter into a reaffirmation agreement with a creditor to reaffirm a debt; (vi) concerning how to characterize the nature of the debtor's interests in property or the debtor's debts; or (vii) concerning bankruptcy procedures and rights.
11 U.S.C. § 110(c); In re Bernales, 345 B.R. 206, 214 (Bankr. C.D. Cal. 2006).
Here, based on the recanted responses of Debtor to the questionnaire, the bankruptcy court found that Appellant improperly offered Debtor legal advice. While we show great deference to a court's findings, particularly with respect to credibility determinations, we believe firmly and definitely that the bankruptcy court committed a clear error of judgment in the conclusion that it reached. The bankruptcy court incorrectly dismissed all of Appellant's questions on cross-examination as leading, denied Appellant an opportunity to argue or testify on his own behalf after he had specifically requested to do so at the initial hearing, placed inordinate weight on hearsay contained in the written declaration of a witness who was not available for cross-examination, may have been misled by inaccurate statements of counsel for the UST, and incorrectly held that Debtor provided no evidence " other than the words that were put in her mouth by [Appellant]." Furthermore, the court erred in issuing an injunction in the absence of an adversary proceeding.
The Supreme Court has held that notwithstanding the great deference given to a trial court's findings, particularly with respect to credibility, an appellate court may nevertheless find clear error when documents and other objective evidence contradict the witness' story or the findings:
A. The Court Clearly Erred in Adopting Debtor's Initial Responses to the Questionnaire
The bankruptcy court's findings and conclusions center on one determination: that Debtor's recantation of her responses to the questionnaire was due to the influence of Appellant, and thus that her original responses were accurate. The record simply does not support this finding or conclusion. Not only did Debtor recant most of her responses during her conversation with Smith well before Appellant was even aware of her responses to the questionnaire, but she also executed declarations and certifications at the time she signed her petition which were contrary to her initial responses to the questionnaire. Appellant did not influence or force Debtor to recant her clearly inaccurate responses in her phone conversation with Smith. Debtor's initial response to the questionnaire was replete with errors clearly inconsistent with prior representations by the Debtor. Therefore, the court's decision to adopt those responses as " what Debtor originally did under no influence" was clear error.
The UST's motion was also based on the hearsay written testimony of Smith who did not testify in any hearing relating to Appellant, notwithstanding the UST's representations to the contrary. Smith acknowledged in his declaration that in his phone conversation with Debtor, she had recanted many of her responses to the initial questionnaire and that he had therefore modified her questionnaire (although Debtor never saw or swore to the modified version). In his written declaration, Smith stated that Debtor confirmed to him that Appellant advised her whether to file a petition, about the differences between the chapters, and whether her debts would be discharged. Under Federal Rule of Evidence 801, Smith's testimony constitutes multiple hearsay (written declaration about conversations with the debtor, who was not a party-opponent). Even though the UST indicated that Smith had testified at the first hearing about the procedures the UST uses to ensure the accuracy of its motions, Smith did not testify at that hearing. In fact, he never testified and Appellant was not able to cross-examine him given the abruptness of the court's ruling.
Cross-examination of Smith would have been particularly appropriate, in light of (1) Debtor's testimony (during the UST's direct examination) that she was on a cell phone in her automobile when she spoke to Smith, (2) Debtor's April 24 declaration that she did not understand Smith's questions to her and that she did not have a copy of the questionnaire in front of her when conversing with Smith, and (3) Debtor's execution of a certification (filed with her petition) that she had received a form (required by the court) from Appellant that explained the differences in the chapters and described briefly the availability of discharge.
Both Debtor and Appellant filed declarations swearing that Appellant did not offer legal advice and that Debtor's initial responses were wrong. Even if the court disregarded that testimony, it should have given Appellant an opportunity to cross-examine Smith to determine exactly how Appellant purportedly conveyed legal advice to Debtor. In other words, did Debtor tell Smith that Appellant did anything beyond providing the form required by the court?
In addition to making the misleading representation that Smith had testified at a prior hearing on the motion, counsel for the UST also inaccurately stated that Debtor had furnished four different declarations about whether Appellant had provided legal advice. Debtor executed only two responses to the questionnaire, and the second version of the declaration was entirely consistent with her April 24 declaration. The UST (and thus the court) placed too much weight on the fact that Appellant drafted these documents, given Debtor's testimony that she -- without coercion by Appellant -- executed the documents to correct her inaccurate initial responses and given that the UST's own purported correction of the questionnaire was not reviewed or signed by Debtor.
Here, the only evidence to support any finding that Appellant offered Debtor improper legal advice is Debtor's recanted response and the UST's hearsay declaration that Debtor told Smith that Appellant offered such advice. Both Debtor and Appellant testified that Appellant did not offer such advice. Tellingly, the UST offered no corroborating testimony from any other debtor to show that Appellant provides such legal advice. Debtor's initial response to the questionnaire was replete with errors, was inconsistent with documents filed with the petition, and was disavowed by Debtor. For the UST and the court to rely on it in concluding that Appellant provided improper legal advice is clear error.
We are disturbed by the UST's decision to prosecute this motion given that the only evidence offered was Debtor's clearly erroneous initial response to the questionnaire and the hearsay testimony of one of its employees. We are concerned about the UST's incorrect characterizations of the record (about the number of differing declarations from Debtor and about the purported oral testimony of Smith at a prior hearing). We are further disturbed that the UST chose not to defend its actions and motion on appeal, instead forcing Appellant to incur the cost of appealing a decision on a motion that did not appear to be supported by adequate evidence and forcing us to search in vain for some justification for the UST's conduct in this matter.
The court also erred in disregarding the testimony of Debtor because the questions asked by Appellant were leading. Federal Rule of Evidence 611(c) provides that when a party calls a witness " identified with an adverse party, " interrogation may be by leading question. Fed.R.Evid. 611(c). Debtor was the primary witness for the UST; its case against Appellant rested almost entirely on her initial responses to the questionnaire. In fact, the UST examined Debtor on direct, often using leading questions. Appellant called Debtor on cross-examination. " Ordinarily leading questions should be permitted on cross-examination." Fed.R.Evid. 611(c). Inasmuch as Debtor was a witness identified with the UST and was being cross-examined by Appellant, Appellant was not prohibited from asking leading questions. That Debtor's testimony on cross-examination was solicited by leading questions should not affect its admissibility, but only its probative value or weight. To the extent the court disregarded all of Debtor's cross-examination testimony in light of Appellant's leading questions, it erred.
Finally, Appellant was denied a chance to tell his side of the story, being cut-off in mid-sentence by the court's ruling, before he could even ask to be heard, as he had requested at the prior hearing.
After counsel for the UST indicated that she had no further questions for Debtor, Appellant stated " Your Honor, you know I've been doing this --." At that point, the court interjected: " Okay. I'm going to rule on this one. Every question that was asked by [Appellant] was leading." Appellant was given no further opportunity to speak.
B. The Court Erred in Issuing the Injunction Absent An Adversary Proceeding
Even if the bankruptcy court had not erred in finding that Appellant had offered improper legal advice to Debtor, it erred in issuing an injunction against Appellant in the absence of an adversary proceeding. Section 110(j)(1) permits the UST to bring a civil action to enjoin a bankruptcy petition preparer from engaging in conduct in violation of section 110, such as the unauthorized practice of law. That civil action, however, must be in the form of an adversary proceeding. Demos v. Brown (In re Graves), 279 B.R. 266, 273 (9th Cir. BAP 2002); In re Nieves, 290 B.R. 370, 380 (Bankr. C.D. Cal. 2003). Even though the injunction prohibits only activity that is already prohibited by law, it exposes Appellant to contempt in the event of a future violation. Thus, any error in its issuance is not harmless, and we must reverse.
VI. CONCLUSION
We are mindful of the duty of the UST and the bankruptcy court to police unscrupulous bankruptcy petition preparers and to protect innocent and helpless debtors who may be easy prey for them. But we are equally mindful of the even more important need to afford all litigants with a level playing field and equal and adequate process of law. Here we regret that the intensity and fervor in performing the former functions ran roughshod over the latter obligations. We are left with a firm and definite conviction that the bankruptcy court abused its discretion when it punished and enjoined Appellant. For the foregoing reasons, therefore, we REVERSE.
This is not to suggest that the trial judge may insulate [her] findings from review by denominating them credibility determinations, for factors other than demeanor and inflection go into the decision whether or not to believe a witness. Documents or objective evidence may contradict the witness' story; or the story itself may be so internally inconsistent or implausible on its face that a reasonable factfinder would not credit it. Where such factors are present, the court of appeals may well find clear error even in a finding purportedly based on a credibility determination.
Anderson, 470 U.S. at 575.