INTERPRETING 11 USC § 110, General Order No. 96-3.

• Citation: 198 BR 604
• Decision Date: 06 March 1996
• Docket Number: General Order No. 96-3.
• Parties: INTERPRETING 11 U.S.C. § 110 WHICH GOVERNS CONDUCT OF NON-LAWYER BANKRUPTCY PETITION PREPARERS AND DELINEATING THE RELATIONSHIP, POWERS AND FUNCTIONS OF THE BANKRUPTCY COURT AND THE DISTRICT COURT UNDER THE STATUTE.
• Court: U.S. District Court — Central District of California

198 B.R. 604 (1996)

INTERPRETING 11 U.S.C. § 110 WHICH GOVERNS CONDUCT OF NON-LAWYER BANKRUPTCY PETITION PREPARERS AND DELINEATING THE RELATIONSHIP, POWERS AND FUNCTIONS OF THE BANKRUPTCY COURT AND THE DISTRICT COURT UNDER THE STATUTE.

General Order No. 96-3.

United States District Court, C.D. California.

March 6, 1996.

In the fall of 1994, as part of the Bankruptcy Reform Act of 1994, Congress passed a new statute (11 U.S.C. § 110) ("the statute") which, for the first time, governs the activities of non-lawyer bankruptcy petition preparers ("preparers") and provides various sanctions against them for improper actions. The statute is not clearly worded and definitive legislative history which would aid in interpreting it is lacking. As of the date of this General Order, no opinions of appellate courts exist which construe the statute.¹

This district, the Central District of California, is often referred to as the "bankruptcy capital" of the country. Far more bankruptcy cases are filed here than in any other federal district. In fact, more bankruptcies are filed in this district than in any of nine entire circuits. This district has 21 Bankruptcy Judges. The next largest Bankruptcy Court has 12.

Many non-lawyer bankruptcy preparers operate in this district. A number of them are headquartered here and have branches or subsidiary operations elsewhere. Even before enactment of the statute, the Bankruptcy Court of this district had encountered serious problems with many local preparers who had taken unconscionable advantage of bankruptcy debtors. Those problems included incompetent preparation of papers, misleading and/or false advertising, charging excessive fees and other false and deceptive practices.

Soon after the effective date of the statute, numerous proceedings were commenced against preparers in the Bankruptcy Court of this district charging various violations of the statute and seeking various types of sanctions. To this date, the District Court has received 34 cases from the Bankruptcy Court. They are listed in Appendix A. In each case, the Bankruptcy Court found some type of sanction warranted but forwarded the case to the District Court seeking an order imposing some or all of such sanctions.

An examination of the 34 case files indicates that there is a considerable difference of opinion among our Bankruptcy Judges as to which court may impose the various sanctions set forth in the statute and the procedures to be employed in awarding and ordering them.²

The statute imposes duties and responsibilities upon, and grants powers to, both the District Court and Bankruptcy Court. Because, under 28 U.S.C. § 151, the Bankruptcy Court is a "unit" of the District Court, it is appropriate for the District Court, qua court, and pending a body of decisional law from appellate courts construing the statute, to construe the statute, delineate the powers of both courts under the statute, and consider other procedural problems arising under the statute, both generally and in reference to the 34 pending cases. A General Order of the District Court is deemed a proper method to do so.

Rather than assign the said 34 pending cases to various District Judges by random assignment, which would involve duplicative judicial effort in construing the statute, this Court made an interim assignment of all 34 cases to Senior Judge Irving Hill. Judge Hill was instructed to consider the various problems raised by the statute, to review the 34 cases and thereafter draft a proposed General Order of the Court which would include such interpretations of the statute as are necessary to guide the various District and Bankruptcy Judges of the district in the administration of the statute. This order was drafted by Judge Hill in the first instance and has now become a General Order of the District Court.

The constructions of the statute made in this General Order will require remand to the Bankruptcy Court of all of the 34 cases listed in Appendix A for further proceedings. A specific order of remand will be filed in each case.

Any of the 34 pending cases which are returned to this Court after the remand will be assigned to District Judges under this Court's random system for assigning bankruptcy cases.

REVIEW OF THE STATUTORY SCHEME

It is appropriate, at the outset, to review the statutory scheme and list the various types of sanctions included in it. The statute imposes a number of specific requirements on preparers in connection with the content, preparation and handling of bankruptcy papers. It also proscribes many specific types of improper and illegal conduct. The obligations imposed by the statute and its provisions for sanctions can be broken down as follows:

A. FINES (§ 110(b)-(g))

Sections 110(b) through (g) impose affirmative obligations on preparers in connection with composing and signing documents for filing in bankruptcies. It requires preparers to identify themselves and the persons who did the work of preparation. For violation of any of these affirmative obligations, the preparer may be fined not more than $500.00 for each violation. The statute says nothing about which court may adjudicate the violation and impose the fine.

B. DISALLOWANCE OF EXCESS FEES (§ 110(h))

Under Section 110(h) a court is required to disallow any fee paid or payable to a preparer found to be in excess of the value of the services rendered and to order the immediate turnover to the trustee of the excess portion. Under Section 110(h)(4) a preparer who has failed to comply with such a turnover order shall be fined not more than $500.00 for each such failure to comply. The statute says nothing about which court may adjudicate the excess character of the fees, pronounce the turnover order or impose the fine for failure to comply with a turnover order.

C. INJUNCTIONS (§ 110(j))

Under Section 110(j) certain specified persons as plaintiffs may bring a "civil action" seeking an injunction against future improper conduct by a preparer. Two separate types of injunction may be issued: (1) An injunction restraining the preparer from engaging in future misconduct of a type he or she has been found to have committed in the past, and (2) an injunction restraining the preparer from acting as a preparer in any respect anywhere.

Section 110(j) specifies the findings which must underlie the issuance of any such injunction. However, the statute does not define "civil action" and says nothing about which court may entertain the action and issue the injunction.

D. DAMAGE AWARDS TO DEBTORS (§ 110(i))

Section 110(i) provides that for certain specified types of misconduct by a preparer, the Bankruptcy Court shall certify to the District Court the fact that the preparer has engaged in such misconduct. The sanctions for such misconduct are specified. They may be imposed only by order of the District Court after a "motion" is filed and a "hearing" is held in the District Court. The District Court, if it concurs with the facts as certified by the Bankruptcy Court, must award to the debtor involved the debtor's actual damages, plus a penalty of $2,000.00 or twice the amount paid for the preparer's services (whichever is greater), plus the debtor's attorneys fees.

The statute says nothing about how the proceeding, culminating in the certifying of facts to the District Court, is commenced in the Bankruptcy Court or the form of the proceeding in that court. Nor does it say anything about the standard of review to be applied by the District Court in acting upon such certified facts. The statute does require the District Court to hold a "hearing" on the matter after the motion is filed in the District Court asking the District Court to impose the sanctions listed in the section.

INTERRELATIONSHIP OF THE BANKRUPTCY AND DISTRICT COURTS UNDER THE STATUTE AND SPECIFIC HOLDINGS STATING THE STATUTORY FUNCTIONS WHICH MAY BE PERFORMED BY EACH COURT

It is now appropriate to discuss and define the powers and duties of both the District and Bankruptcy Courts under the statute.

A. FINES FOR IMPROPER CONDUCT (§ 110(b)-(g))

This court interprets the statute to permit the Bankruptcy Court to find the facts and impose the fines set forth in Sections 110(b) through (g) inclusive. The Bankruptcy Court's General Order 95-03 suggests that only the District Court may impose such fines. Nothing in the statutory language leads to such a restrictive construction. The misconduct occurs in the Bankruptcy Court and the Bankruptcy Court adjudicates whether the misconduct has in fact occurred. There is no valid reason, in the statutory language or in logic, for denying to the Bankruptcy Court the authority to impose these fines. This Court holds that the Bankruptcy Court has such authority. As with any final order of the Bankruptcy Court, an order of that Court imposing any such fine will be appealable in the normal fashion either to this Court or the Bankruptcy Appellate Panel ("BAP").

Attached as Appendix B to this General Order is a list of those pending cases in which the Bankruptcy Court found misconduct justifying a fine under Section 110(b) through (g), but pursuant to its General Order, declined to impose it and instead referred the matter of its imposition to this Court. A remand order will be entered in each such case.

B. DISALLOWANCE OF EXCESS FEES, TURNOVER ORDERS AND FINES FOR VIOLATING SUCH ORDERS (§ 110(h))

General Order No. 95-03 of the Bankruptcy Court construes Section 110(h) as empowering the Bankruptcy Court to order the disallowance of excess fees and the turnover of such excess fees to the bankruptcy trustee. This Court concurs in that construction. Under the statute, the Bankruptcy Court clearly has both jurisdiction and power to disallow excess fees and order the turnover of excess fees. No reference or certification of any kind to this Court is required. The Bankruptcy Court also has jurisdiction and power itself to determine if a turnover order has...