Wow, who would have made this connection? Chuck Newton over at StayViolation.com reports on the 9th Circuit case of Reynoso v Frankfort Digital Services which upheld the U.S. Bankruptcy Court for the Northern District of California finding that Frankfort, a seller of web-based software that prepares bankruptcy petitions, acted as a “bankruptcy petition preparer” within the meaning of 11 U.S.C. § 110 (2002)1 and violated the requirements thereof. The bankruptcy court concluded that Frankfort had committed fraudulent, unfair, or deceptive conduct, and had engaged in the unauthorized practice of law.

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

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

The key for the court was that the software didn’t merely input the debtor’s answers onto the forms, but rather took the responses and restated them prior to including them on the official forms.

Technorati Tags: bankruptcy, Frankfort Digital Services, BAP

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In the case of In re Kirkland, 2007 WL 118107 (Bkrtcy.D.N.M. 2007) a proof of claim that was filed by B-Line LLC, an alleged assignee of credit card debt with no supporting documentation to demonstrate its amount or validity, or that the claimant was indeed an assignee. The Chapter 7 trustee objected to the claim, which was similar in amount to a credit card debt listed on the debtor’s schedules. The court held that the claim should be stricken , the debtor’s schedules were not admissible against the trustee as evidence of the claim.

Though the creditor asked the court to follow the majority of courts that have allowed claims lacking adequate documentation in the absence of further proof that the claim is invalid, see, In re Heath, 331 B.R. 424, 434 (9th Cir.BAP2005), the court refused to do so.

The Court considered many of the cases holding the majority view distinguishable in two important ways: first, the Trustee, not the Debtor, was the objecting party here; and second, and more importantly, the Claim lacks any documentation, rather than the incomplete or inadequate documentation presented in many of the cases. The Court citedf the additional burden the majority view would impose on trustees by requiring additional proof of invalidity when a creditor has failed to cross the threshold required to achieve prima facie status. Additional evidence concerning the Claim (presumably from the Debtor), is as readily available to Next Bank/B-Line as to the Trustee. In this case, following the majority would place the burden on the Trustee to disprove the Claim.

The court instead looked to the cases that hold that a proof of claim can be disallowed for lack of appropriate documentation. See e.g. In re Henry, 311 B.R. 813, 817-18 (Bankr.W.D.Wash.2004)(”In the absence of that minimum evidentiary presentation, the creditor’s claim should be disallowed.”); and In re Armstrong, 320 B.R. 97, 105 (Bankr.N.D.Tex.2005) (lack of documentation requires claimant to establish the claim by a preponderance of the evidence); see also Matter of Stoecker, 5 F.3d 1022, 1028 (7th Cir.1993) (stating that lack of documentation means that creditor cannot stand on proof of claim but that creditor should be given an opportunity to amend its claim). Thus under this view, a creditor cannot rest on its proof of claim, but would be required to present more evidence meet its burden to establish a claim.

So what we have here is a tricky double standard. In a Chapter 7 a debtor does not have standing to object to a claim filed by a creditor - only the trustee has that right. In the context of a Chapter 13 case, a debtor can object to a faulty proof of claim but not necessarily on the basis that the documentation provided is inadequate. The trustee in a Chapter 7, on the other hand, does not have the benefit of the debtor’s knowledge when objecting to a proof of claim. As such, the trustee can fall back on the lack of documentation when objecting.

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In the case of Griffith v. Javitch, Block & Rathbone, LLP, 2007 WL 108309 (SD Ohio 2007) a consumer filed a case under the Fair Debt Collection Practices Act against a collection law firm acting on behalf of Great Seneca Financial Corporation.

Approximately two months after the case was filed, the plaintiff and her husband filed a voluntary Chapter 7 bankruptcy petition. Plaintiff’s disclosure of her assets and liabilities listed a contingent claim described as “Class action lawsuit against Great Seneca Financial Corp.” The class action brought against the law firm for Great Seneca, however, was not separately listed.

When the trustee discovered the claim he refused to abandon it, and reopened the bankruptcy case to deal with it. The court allowed him to do so, maintaining that the trustee has the right and duty to manage the estate for the benefit of Plaintiff’s creditors, and this Court will not interfere in the trustee’s decision to settle the claim.

The court also held that it is only in unusual circumstances where a Chapter 7 trustee is not an adequate representative for a class of non-debtors, even if the class includes the debtor.

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In the case of In re Osborn, Case No. No. 06-6061WM (8th Cir. BAP 2007) Capital One Auto Finance (”Capital One”) held a claim in the amount of $20,279.80, secured by a purchase money security interest in a 2003 Chevrolet pickup truck. The truck was purchased and the debt was incurred within 910 days prior to the filing of the bankruptcy petition. The debtors’ Plan proposed to surrender the truck as full payment of the entire debt, leaving Capital One without an unsecured claim. Capital One objected to the Plan and the debtors objected to Capital One’s claim. The matter was submitted on briefs and stipulated facts. The bankruptcy court confirmed the Plan and allowed Capital One’s claim as fully secured. Capital One appealed, and the 8th Circuit Bankruptcy Appeals Panel affirmed.

Congratulations to NACBA member Vanessa Hayden of Raymore, MO for her excellent work on this important case.

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In the case of In re Wright, Case No. 04-18487-CEC (Bankr. E.D.N.Y. 2005) the law firm of Sharinn and Lipshie P.C. was held liable for violating the automatic stay by failing to remove a lien the firm had placed on the debtor’s checking account, even after it had received notification of the filing of her bankruptcy petition. In the decision, Judge Carla E. Craig noted that

A failure to act by a creditor, such as a failure to release a restraint on the debtor’s bank account, where the creditor had knowledge of the bankruptcy filing, may likewise be a violation of the automatic stay.

In addition, the court referred to In re Robinson, 228 B.R. 75, 80 (Bankr. E.D.N.Y. 1998) for the holding that the receipt of the notice of bankruptcy from the clerk of the court is sufficient for a creditor to be deemed to have knowledge of the bankruptcy proceeding. In other words, this decision seems to maintain that the debtor’s lawyer need take no action aside from listing the creditor on the schedules (thereby ensuring that the creditor is served with a notice of the bankruptcy filing) in order to pursue a stay violation to recover damages as well as legal fees.

On the same date, Judge Craig also decided In re Henry, 04-18738-CEC (Bankr. E.D.N.Y. 2005) as well as In re Parry, 04-15725 (Bankr. E.D.N.Y. 2005) on nearly the same facts.

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