Sanctions for Bankruptcy Preparer that Fraudulently Held Itself Out as a Law Firm

By: Kathryn Ingle

St. John's University School of Law

American Bankruptcy Institute Law Review Staff Member

            Section 110 of the United States Bankruptcy Code (the "Bankruptcy Code") enumerates penalties “for persons who negligently or fraudulently prepare bankruptcy petitions.”[1] In In re Shippy, the U.S. Bankruptcy Court for the District of South Carolina held that a bankruptcy petition preparer fraudulently prepared bankruptcy petitions when it used an attorney’s information to complete the bankruptcy filing.[2] In late 2018, Ms. Shippy was facing foreclosure of her home, so she contacted Synergy Law, LLC to assist her in obtaining a loan modification for her mortgage. [3] Synergy told her that she needed to file for bankruptcy because the loan modification would not go into effect until after the date of the foreclosure of her home.[4] Synergy never informed Ms. Shippy that her case would be dismissed with prejudice if the petition was not successfully completed.[5] Moreover, an attorney was never involved in the preparation of Ms. Shippy's bankruptcy documents, nor was any assistance provided by an attorney.[6] Nevertheless, Synergy used an attorney’s credentials, without his authorization, to file Ms. Shippy's case.[7] After the petition was filed, Ms. Shippy was notified by the court that her case could be dismissed due to a deficiency.[8] Ms. Shippy, however, did not believe that to be an issue because Synergy was handling her case;[9] yet her case was dismissed with prejudice.[10] Ms. Shippy made multiple attempts to contact Synergy after the dismissal, but Synergy never returned her calls or messages and eventually informed her that there was nothing further the company could do.[11] Because her case was prepared both fraudulently and improperly by Synergy, Ms. Shippy almost lost her home in a foreclosure sale.[12]

            The United States Treasury (the "UST") filed a motion for entry of order seeking disgorgement of fees against Synergy with the District of South Carolina Bankruptcy Court, alleging fraudulent conduct on behalf of Ms. Shippy.[13] Based on the evidence submitted, including documents by the UST, as well as the testimony of Ms. Shippy and the attorney whose credentials were forged on the prepared documents,[14] the court determined that Synergy engaged in fraudulent practice in Ms. Shippy’s case as well as in others.[15] Thus, the court issued sanctions and required Synergy to forfeit any and all of its collected fees received from Ms. Shippy.[16]

            The purpose of Section 110 of the Bankruptcy Code is to protect consumers from fraud and other abuses by petition preparers; it was specifically enacted to stop the unauthorized practice of law by non-attorneys.[17] Section 110 prohibits, among other things, executing documents on behalf of a debtor, providing legal advice, and collecting payments from the debtor for court fees.[18] Petition preparers are also restricted from advertising as a legal service and cannot use the word "legal," or any similar term in advertisements.[19] Thus, any petition preparing service that violates Section 110 can be enjoined from engaging in fraudulent behavior[20] and must also forfeit any fees paid by the debtor.[21] In re Shippy is an example of a case where a court uses Section 110 to deter petition preparers from participating in fraudulent behavior, including using attorney’s credentials without proper authority.[22]

[1] 11 U.S.C. § 110 (2012).

[2] In re Shippy, 605 B.R. 54, 59 (Bankr. D.S.C. Aug. 6, 2019).

[3] Id. at 57.

[4] Id.

[5] Id.

[6] Id.

[7] Id. at 58.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] Id. at 58.

[13] Id. at 56.

[14] Id.

[15] See In re Weathers, No. 19-00173-jw, 2019 WL 3856935 (Bankr. D.S.C. May 20, 2019) (holding that "Synergy acted fraudulently, unfairly, or deceptively in filing Mr. Weathers' bankruptcy case.").

[16] In re Shippy, 605 B.R. at 61.

[17] 2 Collier On Bankruptcy ¶ 110.01 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2009).

[18] 11 U.S.C. §§ 110(e), 110(g) (2012).

[19] Id. at § 110(f).

[20] Id. at § 110(j)(3).

[21] Id. at § 110(h)(3)(B).

[22] In re Shippy, 605 B.R. at 58.