Memorandum of Decision Re: Unlicensed Practice
Krug was once a lawyer, but was disbarred by the State of California. Miller has never been a lawyer. In each of the two cases above, Miller and Krug counseled and assisted the debtors to file a Chapter 11 petition in pro per. Both cases ended in disaster. Now before the court are two matters brought on by the U.S. Trustee: a motion to review the fees Krug and Miller charged, and an order to show cause why they should not be sanctioned pursuant to Local Rule 110-8 for the unauthorized practice of law. Unlike the other Chapters of the Bankruptcy Code, Chapter 11 is extremely complicated and demanding; successful negotiation in pro per is virtually impossible. Whittaker filed her petition on October 19, 1993. Before a month was out, the U.S. Trustee had moved for conversion of the case due to her failure to comply with U.S. Trustee guidelines. The case was converted on December 7. Soon thereafter, the deed of trust holder on Whittaker's property obtained relief from the automatic stay to complete its foreclosure. Krug and Miller charged Whittaker $1050.00 for their services, which included advice as to the filing of a bankruptcy, the chapter to file, and the preparation and filing of the bankruptcy schedules and statements. Mary Roach's case is much more tragic. She is a working mother with two young disabled children. When her home, inherited from her mother, went into foreclosure, she received the Legal Resource Network solicitation. Krug and Miller put her into a pro per Chapter 11, charging her $1,500.00 plus the court filing fee of $600.00, for a total of $2,100.00. Ten days after the Chapter 11 was filed, the secured creditor filed a motion for relief from the automatic stay. The motion was granted by default when no opposition was filed and nobody appeared to oppose the motion at the hearing. Roach did not know she had lost her home until state court eviction proceedings were commenced. Krug and Miller are obviously ignorant as to what constitutes the unauthorized practice of law. Krug himself, in his declaration filed in opposition to the U.S. Trustee's motions, stated:
"I told her she could not afford the house and that she would probably need to file a bankruptcy petition to stay the sale . . . . I told her she needed to file the schedules and a plan, that there would be notices to her until she got an attorney, and if she didn't understand the notices, she should contact Dave [Miller] or myself. . . . I typed the Petition, Creditor's List, and Matrix on Sunday with her giving me the information." While Krug states that all of his services were to be temporary, until Roach could hire a lawyer, Roach stated in her declaration that Krug and Miller held themselves out as bankruptcy experts and told her that a lawyer would only be hired "if needed." This version is borne out by a letter written to Roach by Krug on November 6, 1993. It stated, in part:
In order to stop the pending foreclosure sale on your home it is necessary to file for an auto- matic stay in the U.S. Bankruptcy Court. This is not a bankruptcy filing, but what is called a "re- organization. The letter went on to discuss (wrongly) the differences between Chapter 11 and Chapter 13, recommend a Chapter 11, and quote fees for both. No mention of a lawyer is made. In short, Krug counseled Roach as to her rights under the Bankruptcy Code, explained the different chapters to her, advised her that she needed to file, prepared her petition and other necessary papers for her, filed the petition for her, and then told her that he would explain to her the meaning of any legal papers she received. He also charged her more than many of the attorneys who practice in this court charge. All of this constitutes the unauthorized practice of law. See, e.g., O'Connell v. David, 35 B.R. 141, 143 (Bkrtcy.E.D.Pa.1983) modified 35 B.R. 146 (E.D.Pa. 1983) aff'd 740 F.2d 958 (3rd Cir.1984)[actual preparation and direct or indirect filing of bankruptcy petition and papers constitutes unauthorized practice of law]; In re Herren, 138 B.R. 989, 994-95 (Bkrtcy.D.Wyo.1992)[same]; In re Glad, 98 B.R. 976, 978 (9th Cir.BAP 1989)[solicitation of financial information used to prepare bankruptcy papers was practicing law]; In re Grimes, 115 B.R. 639, 643 (Bkrtcy.D.S.D.1990)[same]; In re Harris, 152 B.R. 440 (Bkrtcy.W.D.Pa.1993)[same]; People v. Landlords Professional Services, Inc., 215 Cal.App.3d 1599 (1989) [conducting interview with clients, eliciting information, selecting and preparing forms from such information was the unlawful practice of law]. Section 329 of the Bankruptcy Code gives the court jurisdiction over all fees paid for legal services, whether or not they were rendered by a lawyer. in re Telford, 36 B.R. 92 (9th Cir.BAP 1984). Where a nonlawyer has assisted the debtor in filing a Chapter 11, the court may order the nonlawyer to disgorge the fees. In re Glad, 98 B.R. 976 (9th Cir.BAP 1989). Such disgorgement is clearly mandated here. The fees were charged for illegal services. The advice to file a Chapter 11 was bad, and based on erroneous advice as to the applicability of Chapter 13 and the further erroneous advice that Chapter 13 debtors needed to pay quarterly U.S. Trustee fees. No disclosure of fees was filed as required of even nonlawyers who render legal services. Most importantly, the advice given by Krug and Miller led directly to financial disaster for the debtors. In the Roach case especially, it appears that the debtor had enough available funds to hire a competent lawyer who could have saved her property. Krug and Miller shall accordingly be ordered to return all fees paid to them by the debtors. without prejudice to the debtors' rights to seek damages. In addition to being liable for the return of fees, both Krug and Miller are in contempt of court pursuant to Local Rule 110-8 for their unauthorized practice of law. Krug is clearly the more guilty party, since he was once a lawyer. Since the the court's primary concern is the protection of the public, it will order a fine of $20,000.00 for Krug and $10,000.00 for Miller, but will stay enforcement so long as they cease all bankruptcy-related practices. This civil penalty will be assessed without prejudice to any criminal prosecutions or criminal contempt sanctions the district court may wish to assess. Pursuant to FRBP 9021, the court will enter an order granting the U.S. Trustee's motion for review of the fees and a separate order, pursuant to FRBP 9020, finding Krug and Miller in contempt. In addition to the parties, the Clerk shall serve a copy of this decision and the two order on the U.S. Attorney and the Sonoma County District Attorney.
Dated: _______________________ Alan Jaroslovsky U.S. Bankruptcy