B&L's Complaint Results in Extreme Sanctions for Debtor's BPP

When Becket & Lee LLP files a fraud complaint on behalf of a Creditor, not only does the pleading become a matter of public record, but certain interested parties are served in accordance with the rules of procedure. These parties typically include the Chapter 7 Trustee assigned to the case, and the Office of the United States Trustee, who oversees the bankruptcy system.

In a recent adversary proceeding, B&L's complaint sparked interest at the U.S. Trustee's office, and, based on the information contained in the exhibits, led to dismissal of the debtor's case, and extreme sanctions for his bankruptcy petition preparer.

A debtor is not always represented by an attorney; rather, a bankruptcy petition preparer (BPP) may assist a debtor in completing the necessary documents in preparation for filing bankruptcy. BPP's are governed by Section 110 of the Bankruptcy Code, which includes sanctions and penalties for those preparers not abiding by the rules. Penalties range from monetary fines, disgorgement of any fees paid by a debtor, and/or having to reimburse a debtor for attorneys' fees later incurred to rectify problems created by the preparer, to being permanently barred from ever preparing documents to be filed in the bankruptcy court in the future.

The Debtor held two credit card accounts, both of which were "run up" in a very short time period prior to his bankruptcy filing. Charges included over $21,000 at a business called American Internet for "real estate consulting", $6,800 for lamps, $5,300 for "food and beverage", $2,784 at Circuit City, and $2,998 for jewelry. Although payment in full was required, the only payments the Debtor tendered to the Creditor were three insufficient funds checks. B&L filed the fraud complaint and, receiving no answer, obtained a default judgment against the Debtor.

After receiving its copy of the Creditor's complaint, the U.S. Trustee moved to reopen the Debtor's case, which had already been discharged. The U.S. Trustee reviewed the account statements showing all of the luxury charges but noted that the Debtor failed to list the purchases anywhere in his petition and schedules.

The U.S. Trustee deposed the Debtor. Under oath, the Debtor admitted lying on his petition about his home address, personal property and other information, all at the behest of his BPP. He said that he bought the jewelry, electronics, lamps and then sold them for approximately 50 percent to fund his gambling addiction. The Debtor also explained that the American Internet charges were, in fact, fraudulent cash advances incurred through the service establishment account of his BPP. When it came time to pay the BPP, the Debtor was instructed to give the BPP all of his credit cards. The BPP told the Debtor that he could help the Debtor by getting cash for him using the cards, in exchange for 50 percent of the cash obtained. The BPP also counseled the Debtor to open five new credit cards; filling out the applications and presenting them to the Debtor for signature.

The BPP and the Debtor went to various stores where they purchased items using the accounts. After making the charges, the preparer gave the Debtor small amounts of cash. The BPP took the purchases, which he sold for cash.

The Debtor testified that the next month, when the billing statements began arriving, the Debtor turned them over to the BPP. The BPP then demanded money from the Debtor for charges that were solely the Debtor's and not related to their money making scheme. The BPP told the Debtor that they should keep using his credit cards because they were about to be cut off for failure to pay, but that he would not have to pay since they would file the bankruptcy petition.

The Debtor testified that he went along with these plans because he "trusted him" but was also "fearful." The Debtor lied to the Trustees and the court because he was "afraid to make an enemy" of the BPP. Later, the BPP told the Debtor to continue the charade, and that he would find him a "good attorney." That was the last time the Debtor heard from the BPP. However, this was not the last that the BPP would hear from the U.S. Trustee or the Bankruptcy Court.

The Trustee filed for sanctions against the BPP. The motion detailed the "abusive conduct" in this case, including how the BPP took advantage of the Debtor, how he aided and abetted his credit card and bankruptcy fraud as well as other crimes, and monetarily benefited from this scheme. Based on this conduct, the Trustee moved the Court for an Order issuing an injunction preventing the preparer from ever doing this again in the future, to impose monetary fines, and to disgorge his fees including the money obtained from the charges on the credit card.

The Court set a hearing on the motion and ordered that the BPP file a response and appear to explain why he should not be punished. The hearing was never held since the BPP reached an agreement with the U.S. Trustee. The BPP denied the allegations of the motion, but nevertheless stated that he was leaving the United States and returning to his home country. Thus, the Court signed the agreement and forever barred this individual from acting as a bankruptcy petition preparer.

In re Tony, No. SA-05-12694-jb (Bankr. C.D. Cal., 2005).