In re Barcelo

Citation313 B.R. 135
Decision Date05 August 2004
Docket NumberAdversary No. 04-1117-ess.,Bankruptcy No. 03-22074-ess.
PartiesIn re Emily G. Rosario BARCELO, Debtor. Deirdre A. Martini, as the United States Trustee, Plaintiff, v. We the People Forms & Service Centers USA, Inc., Gail Martin, individually, and We the People Forms and Service Center of Forest Hills, Defendants.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York

Gus Michael Farinella, Thomas A. Farinella, Law Offices of Gus Michael Farinella, New York, NY, for Debtor.

Marianne DeRosa, Jericho, NY, for Trustee.

Diana G. Adams, New York, NY, for Plaintiff.

Charles F. Vihon, Western Springs, IL, for Defendant.

MEMORANDUM DECISION DENYING THE DEFENDANTS' MOTION TO DISMISS COMPLAINT

ELIZABETH S. STONG, Bankruptcy Judge.

Before the Court is the motion to dismiss (the "Motion" or the "Motion to Dismiss") the above-captioned adversary proceeding (the "Adversary Proceeding"), pursuant to Federal Rule of Civil Procedure 12(b)(1), made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7012(b), of We The People Forms & Service Centers USA, Inc. ("WTP-USA"), Gail Martin, and We The People Forms and Service Center of Forest Hills ("WTP-FH") (collectively the "Defendants").1 On February 23, 2004, the United States Trustee (the "UST") filed a complaint (the "Complaint") commencing this Adversary Proceeding which seeks relief for violations of Section 110 of Title 11 of the United States Code (the "Bankruptcy Code"). For the reasons set forth below, the Motion is denied.

Jurisdiction

The Adversary Proceeding was commenced pursuant to Section 110 of the Bankruptcy Code, and therefore arises under the Bankruptcy Code and constitutes a core proceeding as to which the Bankruptcy Court may issue a dispositive order. The Court has jurisdiction over this Adversary Proceeding pursuant to 28 U.S.C. §§ 157, 1334, and 11 U.S.C. § 110(j)(1).

Background

On February 23, 2004, the UST filed this Complaint in the Chapter 7 case of Emily Rosario G. Barcelo (the "Debtor").2 The Complaint alleges, among other things, that at the meeting of creditors conducted pursuant to Section 341 of the Bankruptcy Code (the "341 Meeting"), the Chapter 7 trustee (the "Trustee") learned that the Debtor received incorrect legal advice from WTP-FH. See Complaint, ¶ 22. The 341 Meeting was adjourned to give the UST an opportunity further to question the Debtor (the "Adjourned 341 Meeting"). The Complaint also alleges that at the Adjourned 341 Meeting, the UST learned, among other things, that the Debtor paid the Court filing fee to WTP-FH, that WTP-FH filed the Debtor's petition for her, that WTP-FH gave her documents and booklets explaining legal terms and describing how to claim exemptions, and that WTP-USA required her to sign a written "Hold Harmless" agreement exempting them from liability in connection with the Debtor's bankruptcy filing. Complaint, ¶¶ 29, 32, 34, 37, 38.

The Complaint alleges that the Defendants are "engaging in conduct that is (i) unfair and deceptive, and (ii) in violation of 11 U.S.C. §§ 110(f), (g)."3 Complaint, p. 1. Specifically, the Complaint alleges that "[t]he Defendants have continuously violated the spirit and the law of Section 110 by providing debtors with documents which purportedly enable debtors to determine whether to file bankruptcy, which Chapter to file under, how to properly complete the required forms, and how to protect their assets and obtain a discharge, all without the aid of counsel." Complaint, p. 2. The UST seeks relief against the Defendants for, among other things, using the word "legal" in their advertisements, giving debtors advice that exceeds the permissible scope of a bankruptcy petition preparer's services, and requiring debtors to sign a "Hold Harmless" agreement waiving their rights under Section 110 of the Bankruptcy Code. Id.

In response, the Defendants moved to dismiss the Adversary Proceeding under Federal Rule of Civil Procedure 12(b)(1), made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7012(b), on grounds that (1) this Court lacks subject matter jurisdiction over the Adversary Proceeding because Congress lacked the authority to enact Section 110 under Article I, section 8, clause 4, of the United States Constitution (the "Bankruptcy Clause"); (2) Sections 110(h), (i), and (j) are unconstitutionally vague and overbroad; (3) Section 110 infringes on the Defendants' First Amendment rights; (4) this Court lacks subject matter jurisdiction over the Adversary Proceeding because Section 110 addresses a subject which can be adjudicated only by an Article III court; and (5) an entity which is not a bankruptcy petition preparer ("BPP") is not subject to an action brought pursuant to Section 110. See Memorandum in Support of Motion, p. 2. The Court shall address each of these grounds in turn.

The Standard on a Motion to Dismiss

When considering a motion to dismiss under Federal Rule of Civil Procedure 12(b)(1), "the court must accept all factual allegations in the complaint as true and draw inferences from those allegations in the light most favorable to the plaintiff." Jaghory v. New York State Dep't of Educ., 131 F.3d 326, 329 (2d Cir.1997). Further, "[t]he court may not dismiss a complaint unless `it appears beyond doubt, even when the complaint is liberally construed, that the plaintiff can prove no set of facts which would entitle him to relief.'" Id. (quoting Hoover v. Ronwin, 466 U.S. 558, 587, 104 S.Ct. 1989, 80 L.Ed.2d 590 (1984)).

When considering challenges to the constitutionality of a statute, the Court begins with the presumption that acts of Congress are constitutional. Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 15, 96 S.Ct. 2882, 49 L.Ed.2d 752 (1976); United States v. National Dairy Prods. Corp., 372 U.S. 29, 83 S.Ct. 594, 9 L.Ed.2d 561 (1963). Where the statute at issue is an economic regulation — that is, where it adjusts the burdens and benefits of economic life — the challenger must "establish that the legislature has acted in an arbitrary and irrational way," giving rise to a violation of due process. Usery, 428 U.S. at 15, 96 S.Ct. 2882.

Discussion
I. Section 110 Is a Valid Exercise of Congress's Legislative Authority.

The Defendants contend that Congress was not authorized to enact Section 110 under its Bankruptcy Clause powers. Memorandum in Support, p. 2. They rely, in large part, on the Supreme Court's decision in Northern Pipeline Co. v. Marathon Pipe Line Co. ("Marathon"), 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), which the Defendants interpret as holding that any legislation passed within the ambit of the Bankruptcy Clause must deal directly with the adjustment of the relationship between debtor and creditor.4 Memorandum in Support, p. 3. The Defendants assert that because Section 110 was enacted pursuant to the Bankruptcy Clause, but has no direct effect on the relationship of debtor to creditor, it is an unconstitutional exercise of legislative authority, and, therefore, it is void. Memorandum in Support, p. 8.

When assessing the constitutionality of a statute, the Court must consider the underlying purpose behind the statute in order to determine whether that purpose falls within the scope of the Constitutional directive. United States v. Biancofiori, 422 F.2d 584, 586 (7th Cir.1970), cert. denied, 398 U.S. 942, 90 S.Ct. 1857, 26 L.Ed.2d 277 (1970). Section 110 of the Bankruptcy Code was enacted in 1994 as part of the Bankruptcy Reform Act, in order to address the "growing problem of bankruptcy preparers who abuse the system in the course of preparing documents for debtors to file" in bankruptcy court. 140 Cong. Rec. S. 4506 (daily ed. April 20, 1994) (statement of Senator Metzenbaum). At the time the statute was enacted, Congress was acutely aware of the growing popularity of BPPs, and the problems arising from their services. See 2 COLLIER ON BANKRUPTCY ¶ 110.LH (15th ed. rev.2004) (discussing the concerns leading to the enactment of Section 110, such as faulty legal advice). The purpose of enacting Section 110 was "to police fraud and abuse by ... preparers." S.Rep. No. 103-168, 103rd Cong., 1st Sess. 51 (1993).5

The Bankruptcy Clause empowers Congress "to establish uniform Laws on the subject of Bankruptcies." U.S. CONST., art. I, § 8, cl. 4. The Defendants argue that based on the Supreme Court's decision in Marathon, any legislation passed pursuant to the Bankruptcy Clause must touch directly upon the restructuring of the debtor-creditor relationship. Memorandum in Support, p. 3 (citing Marathon, 458 U.S. at 71, 102 S.Ct. 2858). The Defendants also argue that where Congress passes legislation pursuant to the Bankruptcy Clause that has no direct effect on the relationship of debtor to creditor, then the statute must fail as an unconstitutional use of Congress's Bankruptcy Clause power. Memorandum in Support, p. 8. The Defendants argue that because the work of BPPs is not related to restructuring the debtor-creditor relationship, and is performed before the creation of the bankruptcy estate, it is not within Congress's authority to regulate under the Bankruptcy Clause. Memorandum in Support, pp. 4-5. This Court is not persuaded by this argument, for several reasons.6

At the outset, in Marathon, the Supreme Court did not, as the Defendants suggest, hold that only those statutes that directly address the restructuring of the debtor-creditor relationship are legitimate under Congress's Bankruptcy Clause powers. Indeed, the very language from Marathon cited by the Defendants, placed in context, does not support the Defendants' assertion. The Supreme Court stated that "the restructuring of debtor-creditor relations, which is at the core of the federal bankruptcy power, must be distinguished from the adjudication of state-created private rights." Marathon, 458 U.S. at 71, 102 S.Ct. 2858. The Supreme Court simply...

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