Bloomberg Law’s® Bankruptcy Law News publishes case summaries of the most recent important bankruptcy law decisions, tracks major commercial bankruptcies, and reports on developments in bankruptcy...
By Stephanie Cumings
Dec. 14 — A bankruptcy court violated the due process rights of a bankruptcy petition preparer when it fined him for certain conduct without giving him a sufficient chance to defend himself.
Judge Scott H. Yun held in an unpublished opinion that the petition preparer should have been given a chance to confront the debtor about accusations that he had improperly given the debtor legal advice.
A “bankruptcy petition preparer” is defined in the Bankruptcy Code as a non-attorney “who prepares for compensation a document for filing.” Hudena James helped prepare a Chapter 7 bankruptcy petition for debtor Edward Guidry. After Guidry had some problems concerning a property where his estranged wife was living, he tried to convert the bankruptcy case to a Chapter 13 to stop the property from being sold, but the conversion fell through.
Guidry later told the court that he'd been “ill-advised” by James to attempt the conversion. The bankruptcy court ordered James to explain why he offered legal advice to the debtor in violation of the Bankruptcy Code via an order to show cause.
James denied that offered the debtor legal advice, claiming that the debtor was just upset and blamed James for the issues with the property. But in a written response to the court, James said he helped the debtor prepare the motion to convert the case. James later claimed this was just a typo by his wife, and that he had only helped prepare the Chapter 7 petition.
The bankruptcy court wasn't convinced, and found that James did in fact help prepare the conversion motion. It further found that he violated the Bankruptcy Code by not listing his name, address, and Social Security number on the motion. The court ordered him to disgorge his $200 fee and fined him $500.
The district court first noted that the bankruptcy court's order to show cause only discussed the Bankruptcy Code provision that prohibits a bankruptcy petition preparer from offering legal advice. But the bankruptcy court actually found that James had violated a separate provision by not identifying himself as someone that assisted on the conversion motion.
The district court said this “total change in the basis for his alleged misconduct” was a violation of James's due process rights. The fact that James wasn't given a chance to cross-examine the debtor about his claims that James advised him to convert his case was also a due process violation, the court found.
The court also pointed out that there was no evidence that James took more money from the debtor other than the $200 he was paid for preparing the petition. Therefore, the court said, even he did help with the conversion motion, he wasn't a petition preparer under the code if he didn't charge money for that service, and thus not subject to sanctions.
Also, the debtor's statements about James weren't made under oath, and therefore they weren't formal evidence. The court found the same to be true regarding James's statements to the court.
Finally, the bankruptcy court also relied on the fact that James signed the proof of service for the conversion motion as evidence that he helped prepare the conversion motion.
“It is not beyond the realm of possibility that Mr. James served the conversion motion but was not involved in preparing the motion itself,” the court said. The court said this confusion over James's involvement “underscored” the need for an evidentiary hearing in this case, which the bankruptcy court neglected to hold. The bankruptcy court's order was therefore reversed.
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