Court Opinion

ID: 3047449
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:21:33.045572+00
Date Added: 2024-06-11T07:38:09.209231
License: Public Domain

FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

In re: JAYSON REYNOSO,                    
                                Debtor,

FRANKFORT DIGITAL SERVICES, LTD.;
HENRY IHEJIRIKA,
                      Appellants,                No. 04-17190
                 v.
                                                  BAP No.
                                                NC-03-01262-BSP
SARA L. KISTLER*, United States
Trustee,                                           OPINION
                         Appellee,
               and
EXECUTIVE OFFICE OF UNITED
STATES TRUSTEE,
                          Trustee.
                                          
               Appeal from the Ninth Circuit
                 Bankruptcy Appellate Panel
  Perris, Smith, and Brandt, Bankruptcy Judges, Presiding

                  Argued and Submitted
       September 14, 2006—San Francisco, California

                     Filed February 27, 2007

  Before: Betty B. Fletcher and Marsha S. Berzon, Circuit
      Judges, and David G. Trager**, District Judge.

  *Sara L. Kistler is substituted for her predecessor as United States
Trustee. Fed. R. App. P. 43(c)(2).
  ** The Honorable David G. Trager, Senior District Court Judge for the
Eastern District of New York, sitting by designation.

                                2189
2190          IN RE REYNOSO
       Opinion by Judge B. Fletcher
2192                   IN RE REYNOSO

                        COUNSEL

M. Jonathan Hayes, Woodland Hills, California, for the
defendants-appellants.

Catherine Y. Hancock (argued) and I. Glenn Cohen, Appel-
late Staff, U.S. Dept. of Justice Civil Division, Washington,
D.C., for the plaintiff-appellee.

                         OPINION

B. FLETCHER, Circuit Judge:

  This appeal arises from an adversary proceeding initiated
by the United States Trustee (“Trustee”), during the bank-
                             IN RE REYNOSO                          2193
ruptcy proceeding of Debtor Jayson Reynoso, against Henry
Ihejirika, d/b/a Frankfort Digital Services, Ltd. and Zii-
net.com (collectively, “Frankfort”).

   The United States Bankruptcy Court for the Northern Dis-
trict of California found that Frankfort, a seller of web-based
software that prepares bankruptcy petitions, acted as a “bank-
ruptcy 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.

   The Bankruptcy Court’s decision, including the relief
granted, was affirmed by the Bankruptcy Appellate Panel
(“BAP”) of the Ninth Circuit. Frankfort Digital Servs., Ltd. v.
Neary (In re Reynoso), 315 B.R. 544 (9th Cir. BAP 2004)
(amended op.). The case now comes before this court on
appeal. We have jurisdiction pursuant to 28 U.S.C. § 158(d),
and we independently review the bankruptcy court’s decision
—reviewing any conclusions of law de novo, while reviewing
findings of fact for clear error. See Burnett v. Resurgent Capi-
tal Servs. (In re Burnett), 435 F.3d 971, 975 (9th Cir. 2006);
Scott v. U.S. Trustee (In re Doser), 412 F.3d 1056, 1061 (9th
Cir. 2005).

                                    I.

  During the relevant time period, Frankfort did business
under a variety of names including Ziinet.com and
700law.com. The company is owned and operated by Henry
Ihejirika. Ihejirika is not an attorney.
  1
    This case arose prior to the enactment and effective date of the Bank-
ruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAP-
CPA), Pub. L. No. 109-8, 119 Stat. 23, and BAPCPA’s amendments to the
Bankruptcy Code are not relevant to the issues before us. Accordingly, all
references herein are to the pre-BAPCPA Code in effect in October 2002
when the adversary proceeding against Frankfort was filed.
2194                    IN RE REYNOSO
   Frankfort sold access to websites where customers could
access browser-based software for preparing bankruptcy peti-
tions and schedules, as well as informational guides promis-
ing advice on various aspects of relevant bankruptcy law.

   On January 30, 2002, debtor Jayson Reynoso accessed one
of Frankfort’s web sites—the “Ziinet Bankruptcy Engine.”
The site represented to potential customers, like Reynoso, that
its software system offered expertise in bankruptcy law:

    Ziinet is an expert system and knows the law. Unlike
    most bankruptcy programs which are little more than
    customized word processors the Ziinet engine is an
    expert system. It knows bankruptcy laws right down
    to those applicable to the state in which you live.
    Now you no longer need to spend weeks studying
    bankruptcy laws.

It explained that its program would select bankruptcy exemp-
tions 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”—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.

   Reynoso paid $219 for a license to access the Ziinet
Engine, including the Vault, for 60 days. The online software
prompted Reynoso to enter his personal information, debts,
income, assets, and other data into dialog boxes. The program
then used the data to generate a complete set of bankruptcy
forms.

  As promised by the site, the software selected particular
schedules and exemptions for Reynoso. For example, Reyno-
so’s Schedule C (“Property Claimed as Exempt”) specified
                        IN RE REYNOSO                       2195
that he claimed an exemption under § 703.140(B)(5) of the
California Code of Civil Procedure. However, Reynoso testi-
fied that he did not type in this section number, and the bank-
ruptcy court found that Reynoso “did not choose the
exemptions that showed up on this schedule.”

   Where the bankruptcy forms provided a space for the sig-
nature and social security number of any non-attorney petition
preparer, the software generated the response: “Not Applica-
ble.” Question #9 on the Statement of Financial Affairs
required the debtor to “[l]ist all payments made [by] . . .
debtor to any persons, including attorneys, for consultation
concerning debt consolidation, relief under the bankruptcy
law or preparation of a petition in bankruptcy within one year
immediately preceding the commencement of this case.” The
software generated the following response:

    Realizing that this document is signed under penalty
    of perjury, I declare that I prepared my own bank-
    ruptcy by myself using a computer and that I was not
    assisted by an attorney, paralegal or bankruptcy pre-
    parer. I downloaded the software into my computer’s
    browser as a web page, typed in my bankruptcy
    information and printed my bankruptcy documents
    on my printer in the privacy of my home without any
    human intervention other than mine. The software
    printed the official Federal bankruptcy forms with
    the information I typed in within a few seconds of
    my pressing the print button and no one other than
    myself inputted, edited or reviewed my bankruptcy
    information or handled my bankruptcy documents at
    any point in the process. The contents of my docu-
    ments 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 paragraph makes no mention of the fee that Reynoso paid
to access Frankfort’s software.
2196                         IN RE REYNOSO
   Reynoso printed the forms and filed his chapter 7 bank-
ruptcy petition on February 28, 2002. During the first meeting
with creditors, the chapter 7 trustee noticed errors in the peti-
tion and, upon questioning Reynoso, learned that he had paid
for the assistance of an “online bankruptcy engine.” Follow-
ing further investigation, the Trustee commenced the instant
adversary proceeding against Frankfort in October 2002. This
was one of numerous adversary proceedings against Frankfort
for violations of 11 U.S.C. § 110.2

   On April 11, 2003, the bankruptcy court held that Frankfort
was collaterally estopped from challenging its status as a
bankruptcy petition preparer engaged in the unauthorized
practice of law. Alternatively, the court considered the merits
and found that Frankfort qualified as a bankruptcy petition
preparer, had violated the requirements placed on such pre-
parers by § 110, had committed fraudulent, unfair, or decep-
tive conduct, and had engaged in the unauthorized practice of
law. The court found that Frankfort committed a total of nine
violations of 11 U.S.C. § 110(b), (c), and (f) in “each bank-
ruptcy case filed by a Northern District of California debtor
who was [Frankfort’s] customer” and assessed fines accord-
ingly. The court also ordered disgorgement 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 pre-
parer 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).
   2
     Other cases include In re Pillot, 286 B.R. 157 (Bankr. C.D. Cal. 2002);
In re Briand, 02-21922 (Bankr. E.D. Pa. 2002); Vergos v. ZiiNet.com (In
re Liljeblad), 02-5377 (Bankr. W.D. Tenn. 2002); In re Tyler, 02-00889
(Bankr. S.D. Iowa 2003); In re Renaud, 02-04923 (Bankr. S.D. Iowa
2003); and Fokkena v. Ziinet.com (In re Shugart), 02-33427 (Bankr. D.
Minn. 2003). With the exception of Pillot, Frankfort failed to appear to
defend itself in these cases, resulting in default judgments.
                         IN RE REYNOSO                      2197
                              II.

   In In re Pillot, 286 B.R. 157 (Bankr. C.D. Cal. 2002), the
bankruptcy court for the Central District of California held
that Frankfort, with its Ziinet Engine, was a bankruptcy peti-
tion preparer. Id. at 162. In addition, Frankfort admitted, and
the court found, that it had engaged in the unauthorized prac-
tice of law. Id. at 160-62.

   In the instant case, the bankruptcy court found that the doc-
trine of issue preclusion barred Frankfort from challenging
these conclusions, and the BAP agreed. Reynoso, 315 B.R. at
550-51.

   [1] Issue preclusion, or collateral estoppel, refers to “the
preclusive effect of a judgment in foreclosing relitigation of
issues that have been actually and necessarily decided in ear-
lier litigation.” Frank v. United Airlines, Inc., 216 F.3d 845,
850 n.4 (9th Cir. 2000). Issue preclusion bars relitigation of
issues adjudicated in an earlier proceeding if three require-
ments are met:

    (1)   the issue necessarily decided at the previous
          proceeding is identical to the one which is
          sought to be relitigated;

    (2)   the first proceeding ended with a final judg-
          ment on the merits; and

    (3)   the party against whom [issue preclusion] is
          asserted was a party or in privity with a party
          at the first proceeding.

Reyn’s Pasta Bella, LLC v. Visa USA, Inc., 442 F.3d 741, 746
(9th Cir. 2006); see Berr v. Fed. Deposit Ins. Corp. (In re
Berr), 172 B.R. 299, 305-06 (9th Cir. BAP 1994). Frankfort
does not dispute that it was a party to the action in Pillot and
that the disposition there was a final judgment on the merits.
2198                         IN RE REYNOSO
The sole question is whether the issues decided in Pillot are
identical to those appealed here.

   Frankfort argues that the website accessed by Pillot differed
substantially from the website accessed by subsequent cus-
tomers, such as Reynoso, because the Vault and other infor-
mation “relating to bankruptcy in general” had been removed.3
The record, however, indicates that the Vault was advertised
to Reynoso, and the district court found that he, like Pillot,
accessed it. The evidence also shows that the process of using
Frankfort’s software and its output were the same as between
Reynoso and Pillot. Cf. Pillot, 286 B.R. at 159.

    [2] Although there is substantial support for a finding of
issue preclusion, we note that the record does not include a
complete print-out of the website as accessed by Pillot that
can be compared with the website as accessed by Reynoso.
Because there remains some possibility that, as Frankfort con-
tends, the website changed significantly after Pillot accessed
it, we decline to hold that issue preclusion applies and instead
affirm the bankruptcy court’s and BAP’s decisions on the
grounds discussed infra. Cf. Berr, 172 B.R. at 306 (noting that
“[a]ny reasonable doubt as to what was decided by a prior
judgment should be resolved against giving it collateral estop-
pel effect”).

                                    III.

                                    A.

   [3] Pursuant to 11 U.S.C. § 110(a)(1), a bankruptcy petition
preparer is “a person, other than an attorney or an employee
of an attorney, who prepares for compensation a document for
filing.” 11 U.S.C. § 110(a)(1).4
   3
     Frankfort does not specify when this occurred but indicates that it was
sometime after October 2001 but “long before” October 2002.
   4
     A document for filing is “a petition or any other document prepared for
filing by a debtor in a United States bankruptcy court or a United States
district court in connection with a case under this title.” 11 U.S.C.
§ 110(a)(2).
                             IN RE REYNOSO                          2199
   [4] 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. Whether a software-provider may qualify as
a bankruptcy petition preparer under 11 U.S.C. § 110(a)(1) is
a question of first impression in the Ninth Circuit. We hold
that the software at issue in this case qualifies as such.

   Frankfort charged fees to permit customers to access web-
based software. Frankfort’s software solicited information
from the customers. Critically, it then translated that informa-
tion into responses to questions on the bankruptcy forms, and
prepared the bankruptcy forms for filing using those
responses. As the BAP 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.’ ” Reynoso, 315 B.R. at 552.

   [5] In sum, for a fee, Frankfort provided customers with
completed bankruptcy petitions. Customers merely provided
the data requested by the software and printed the finished
forms. This is materially indistinguishable from other cases in
which individuals or corporations5 have been deemed bank-
ruptcy petition preparers. See, e.g., Doser, 412 F.3d at 1059-
60. It goes without saying that the customer must provide data
to the preparer, and the customer’s role in printing or other-
wise reproducing the forms before filing does not alter the
role of the preparer. Moreover, § 110 does not require that
bankruptcy petition preparers have in-person interactions with
  5
    The term “person” in the Bankruptcy Code includes corporations. See
11 U.S.C. § 101(41) (“ ‘[P]erson’ includes individual, partnership, and
corporation . . . . .”); see also Consumer Seven Corp. v. U.S. Trustee (In
re Fraga), 210 B.R. 812, 817 (9th Cir. BAP 1997) (holding that a corpora-
tion engaged in the preparation of bankruptcy petitions is not exempt from
the definition of a bankruptcy petition preparer even though it is solely
owned and operated by an attorney).
2200                     IN RE REYNOSO
their customers. Cf. Ferm v. U.S. Trustee (In re Crowe), 243
B.R. 43, 49-50 (9th Cir. BAP 2000) (holding that the author
of an instructional book on bankruptcy petitions who guaran-
teed buyers of the book that he would complete their forms
for free if they were unable to do so themselves was, in fact,
presenting himself as a bankruptcy petition preparer as
defined by § 110(a)(1)), aff’d, 246 F.3d 673 (9th Cir. 2000)
(unpublished table decision); In re Doser, 281 B.R. 292, 303-
04 (Bankr. D. Idaho 2002) (reasoning that a franchisor who
receives information that was solicited in a face-to-face inter-
action between the franchisee and the customer and uses that
information to prepare bankruptcy documents, but never
meets with the customer directly, is a bankruptcy petition pre-
parer), aff’d, 412 F.3d 1056. The bankruptcy court and BAP
did not err in concluding that Frankfort was a bankruptcy peti-
tion preparer.

                               B.

  Having affirmed the determination that Frankfort was a
bankruptcy petition preparer under 11 U.S.C. § 110, we now
consider the propriety of the fines and other sanctions
imposed by the bankruptcy court under the statute.

   [6] First, we find that the fines imposed for violations of 11
U.S.C. § 110(b), (c), and (f) were proper. Evidence of record
shows that bankruptcy petitions prepared by Frankfort did not
include the signature, name, address, or social security of the
preparer as required by § 110(b) and (c). Print-outs of the
website accessed by Reynoso also show that the words “law”
or “legal” were used in violation of § 110(f). Thus, the bank-
ruptcy court did not err in imposing fines under these subsec-
tions.

  [7] Second, we reject Frankfort’s contention that the bank-
ruptcy court’s holdings under § 110(i) and (h) were erroneous.
Section 110(i) permits a bankruptcy court, upon a finding that
a bankruptcy petition preparer has engaged in a fraudulent,
                             IN RE REYNOSO                           2201
unfair, or deceptive act, to certify that fact to the district court
for a determination of damages. Section 110(j)(2)(B) autho-
rizes a bankruptcy court to enjoin a person from acting as a
bankruptcy petition preparer upon a finding that she has con-
tinually engaged in, inter alia, violations of § 110 or any other
fraudulent, unfair, or deceptive conduct.

   [8] The bankruptcy court found that Frankfort made false
statements to the court and intentionally concealed its role as
a preparer. Reynoso, 315 B.R. at 553. Notably, the court
found that Frankfort repeatedly and intentionally failed to dis-
close its identity as a bankruptcy petition preparer on the fil-
ings it prepared and failed to disclose the compensation it
received for preparing the petitions as required by § 110(h).
The bankruptcy court and BAP deemed these ongoing acts, as
well as various representations by Frankfort (such as Frank-
fort’s claim that it could show debtors how to “[f]ile bank-
ruptcy and keep it off your credit report!” or to “keep 3, 4, or
even 5 cars”), deceptive. Id.; cf. In re Kaitangian, 218 B.R.
102, 117 (Bankr. S.D. Cal. 1998) (holding that a bankruptcy
petition preparer’s failure to disclose all fees constituted an
unfair and deceptive act). We conclude that this finding was
supported by sufficient evidence and was proper. Correspond-
ingly, we affirm the bankruptcy court’s certification to the
district court and issuance of an injunction.6
  6
   Frankfort also seeks to challenge the bankruptcy court’s order of
accounting and disgorgement of excessive fees. The court found that the
value of Frankfort’s services was negligible, and therefore ordered disgor-
gement “to each Northern District of California debtor who was Defen-
dants’ customer all fees received.” Frankfort did not challenge the
bankruptcy court’s finding that its services were—in essence—valueless,
when it appealed to the BAP, Reynoso, 315 B.R. at 553, or to this court.
Frankfort has therefore waived its opportunity to do so, and we have no
basis on which to reconsider the court’s factual finding.
2202                          IN RE REYNOSO
                                    IV.

   [9] Since “bankruptcy petition preparers” are—by
definition—not attorneys, they are prohibited from practicing
law. Cf., e.g., In re Bernales, 345 B.R. 206, 216 (Bankr. C.D.
Cal. 2006) (“The law is clear: ‘[T]he services of bankruptcy
petition preparers are strictly limited to typing bankruptcy
forms.’ ” (quoting Kaitangian, 218 B.R. at 113)); H.R. Rep.
No. 103-835, at 56 (1994), as reprinted in 1994 U.S.C.C.A.N.
3340, 3365 (“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.”).

  [10] We look to state law for guidance in determining
whether Frankfort has engaged in the unauthorized practice of
law. See Taub v. Weber, 366 F.3d 966, 968-69 (9th Cir. 2004).7
The parties agree that California law applies.

   [11] California courts have long accepted that, in a general
sense, “the practice of law . . . includes legal advice and coun-
sel and the preparation of legal instruments and contracts.”
Baron v. City of L.A., 469 P.2d 353, 357 (Cal. 1970) (noting
that this definition was adopted as early as 1922). But they
have recognized too that “ascertaining whether a particular
activity falls within this general definition may be a formida-
ble endeavor.” Id. at 358; see People v. Landlords Prof’l
Servs., 215 Cal. App. 3d 1599, 1605 (1989) (observing that
“whether any given activity is an unauthorized practice of law
depends upon the context and situation involved”).
   7
     As in Taub, when the present case was decided by the bankruptcy
court, § 110 did not specifically prohibit the unauthorized practice of law.
It stated only, “Nothing in this section shall be construed to permit activi-
ties that are otherwise prohibited by law, including rules and laws that pro-
hibit the unauthorized practice of law.” 11 U.S.C. § 110(k) (2002). In
2005, § 110 was amended to bar bankruptcy petition preparers from pro-
viding legal advice. 11 U.S.C. § 110(e)(2).
                             IN RE REYNOSO                            2203
   Determining whether particular assistance rendered in the
preparation of legal forms constitutes the unauthorized prac-
tice is often especially challenging. Cf. Landlords Prof’l
Servs., 215 Cal. App. 3d at 1605-09 (observing, after review-
ing prior cases, that merely clerical preparation services do
not constitute the practice of law, and that impersonal instruc-
tion on form completion—such as may appear in a detailed
manual—may also be permissible).

   Several features of Frankfort’s business, taken together,
lead us to conclude that it engaged in the unauthorized prac-
tice of law. To begin, Frankfort held itself out as offering
legal expertise. Its websites offered customers extensive
advice on how to take advantage of so-called loopholes in the
bankruptcy code,8 promised services comparable to those of
a “top-notch bankruptcy lawyer,” and described its software
as “an expert system” that would do more than function as a
“customized word processor[ ].”

   The software did, indeed, go far beyond providing clerical
services. It determined where (particularly, in which sched-
ule) to place information provided by the debtor, selected
exemptions for the debtor and supplied relevant legal cita-
tions. Providing such personalized guidance has been held to
constitute the practice of law. See, e.g., Kaitangian, 218 B.R.
at 110 (“[A]dvising of available exemptions from which to
choose, or actually choosing an exemption for the debtor with
no explanation, requires the exercise of legal judgment
beyond the capacity and knowledge of lay persons.”); In re
Anderson, 79 B.R. 482, 484-85 (Bankr. S.D. Cal. 1987) (find-
ing that a non-lawyer had rendered legal services when he
advised customer as to the consequences of filing for bank-
ruptcy, solicited information from her and prepared the bank-
  8
    Frankfort’s Bankruptcy Vault claimed to show customers how to struc-
ture bankruptcy “so that it is . . . invisible to Experian, Trans Union, and
Equifax, etc.”, to “reestablish good credit in 3 months instead of 3 years,”
and other such feats.
2204                          IN RE REYNOSO
ruptcy forms, and selected her exemptions); see also Hastings
v. U.S. Trustee (In re Agyekum), 225 B.R. 695, 701 (9th Cir.
BAP 1998) (noting that bankruptcy petition preparers are pro-
hibited from advising debtors as to the selection of exemp-
tions under the Bankruptcy Petition Preparer Guidelines for
the Northern District of California); People v. Sipper, 142
P.2d 960, 962 (Cal. App. Dep’t Super. Ct. 1943) (holding that
the “clerical service” of filling out forms is not the practice of
law, but that a defendant who goes further and makes deter-
minations about the type of document appropriate engages in
legal practice), disapproved on other grounds by Murguia v.
Mun. Court, 540 P.2d 44 (Cal. 1975).

  [12] 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. Cf. Landlords Prof’l Servs., 215 Cal.
App. 3d at 1609. We find that because this was the conduct
of a non-attorney, it constituted the unauthorized practice of
law.9

  The judgment of the Bankruptcy Appellate Panel of the
Ninth Circuit is AFFIRMED.

  9
   Since we are asked only to consider the facts of the case presented (i.e.,
Frankfort’s system), we express no view as to whether software alone, or
other types of programs, would constitute the practice of law.