Case 6:17-ap-01271 1 2 3 4 5 6 7 Doc 1 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 3 of 147 PETER C. ANDERSON UNITED STATES TRUSTEE ABRAM S. FEUERSTEIN, STATE BAR NO. 133775 ASSISTANT UNITED STATES TRUSTEE MOHAMMAD TEHRANI, STATE BAR NO. 294569 TRIAL ATTORNEY UNITED STATES DEPARTMENT OF JUSTICE OFFICE OF THE UNITED STATES TRUSTEE 3801 University Ave., Suite 720 Riverside, CA 92501-2804 Telephone: (951) 276-6990 Facsimile: (951) 276-6973 Email: Mohammad.V.Tehrani@usdoj.gov 8 UNITED STATES BANKRUPTCY COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 RIVERSIDE DIVISION 11 In re: 12 MARY ANN GILMORE, 13 Debtor. 14 15 16 UNITED STATES TRUSTEE FOR THE CENTRAL DISTRICT OF CALIFORNIA, REGION 16, Plaintiff, 17 18 19 20 21 22 Desc Main v. PATRICIA M. ASHCRAFT and THE LAW OFFICES OF GREGORY ASHCRAFT, APC, Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Case No.: 6:17-bk-13682-MJ Chapter 7 Adversary No. 6:17-apCOMPLAINT FOR DISGORGEMENT OF FEES, CIVIL PENALTIES, SANCTIONS, AND DECLARATORY, INJUNCTIVE, AND OTHER RELIEF (Summons to be Issued) 23 24 Plaintiff, the United States Trustee for the Central District of California, Region 16 (“Plaintiff”), 25 hereby alleges the following against the defendants, Patricia M. Ashcraft and the Law Offices of 26 Gregory Ashcraft, APC (collectively, “Defendants”): 27 28 1 Case 6:17-ap-01271 1 2 3 4 Doc 1 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 4 of 147 I. 1. Desc Main INTRODUCTORY STATEMENT This Complaint concerns the Defendants’ Chapter 7 consumer business practices which adversely affected Mary Ann Gilmore, the debtor in this bankruptcy case, and other consumer debtors. 2. During the past year, the Defendants increased their Chapter 7 consumer client base 5 nearly five-fold by advertising that they would file individual Chapter 7 bankruptcy cases in exchange 6 for “no money down.” 7 3. Under their new business model the Defendants claim to divide, or “bifurcate,” their 8 representation of Chapter 7 consumer debtor clients into two parts: a prepetition component and a post- 9 petition component. The Defendants claim to provide the pre-petition services to clients for “free,” and 10 claim that they charge clients only for the remaining post-petition services. As part of the marketing 11 appeal to would-be clients, the Defendants’ model contemplates that the attorney’s fees for post-petition 12 services will be collected in post-petition monthly installments over the course of a year through ACH- 13 debits of customer bank accounts. 14 4. Although the Defendants’ model claims to charge fees only for the remaining post- 15 petition services, in the “no money down” cases the Defendants charge debtors significantly more than 16 they otherwise charge for a Chapter 7 case. Particularly, the fees include interest and/or other charges 17 exceeding 40 percent. To finance the Defendants’ ongoing business operations the Defendants assign 18 their attorney’s fees for collection to a third party as soon as they file the petition in exchange for 70 19 percent of the account balance. 20 5. The Defendants’ business model is not protected under Ninth Circuit law. The 21 Defendants attempted to evade the Bankruptcy Code’s restrictions on the collection of pre-petition 22 claims. The Defendants’ business practices resulted in, among other things, substantially higher fees 23 and interest charges to Ms. Gilmore and the filing of sworn documents that contained false information. 24 In short, the Defendants’ business model, under the guise of helping debtors, breaches the Defendants’ 25 ethical and professional duties to their clients. 26 27 II. 6. JURISDICTION AND VENUE This is an action for the disgorgement of fees, civil penalties, sanctions, declaratory, 28 2 Case 6:17-ap-01271 Doc 1 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 5 of 147 Desc Main 1 injunctive, and/or other relief against the Defendants pursuant to 11 U.S.C. §§ 105, 329, 526, Federal 2 Rules of Bankruptcy Procedure 2016 and 2017, the California Rules of Professional Conduct, the Local 3 Bankruptcy Rules of the United States Bankruptcy Court for the Central District of California, and the 4 Court’s inherent powers. 5 7. This complaint arises out of the Chapter 7 bankruptcy case, In re Mary Ann Gilmore, 6 6:17-bk-13682-MJ, filed on May 2, 2017, in the Riverside Division of the United States Bankruptcy 7 Court for the Central District of California. 8 9 8. This is a core proceeding pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(A), as the acts and events upon which this complaint is predicated concern the administration of Ms. Gilmore’s bankruptcy 10 case. This proceeding is both a constitutionally and statutorily core proceeding under 28 U.S.C. § 11 157(b)(2)(A) and (O) in that it asserts only claims arising directly under title 11 of the United States 12 Code (“Bankruptcy Code”). 13 9. Venue is proper under 28 U.S.C. § 1409(a). 14 10. To the extent any of these proceedings are non-core, Plaintiff consents to the entry of a 15 final judgment by the Bankruptcy Court. 16 III. 17 18 11. 21 Plaintiff is the duly-appointed United States Trustee for Region 16, which encompasses the Judicial District of the Central District of California. 19 20 PARTIES 12. Plaintiff is a party-in-interest and has standing to bring this action pursuant to 11 U.S.C. 13. Defendant The Law Offices of Gregory Ashcraft, APC, doing business as the Ashcraft § 307. 22 Firm (“Ashcraft Firm”), is a California professional corporation incorporated on July 2, 2015, with a 23 principal place of business in Murrieta, California. 24 14. Defendant Patricia M. Ashcraft is an attorney licensed to practice law in the state of 25 California. Ms. Ashcraft’s California State Bar Number is 109661. Ms. Ashcraft is an attorney with the 26 Law Offices of Gregory Ashcraft, APC. 27 15. Plaintiff is informed and believes that the Defendants were debt relief agencies as defined 28 3 Case 6:17-ap-01271 1 IV. 3 5 6 7 8 9 10 11 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 6 of 147 Desc Main by 11 U.S.C. § 101(12A) at all relevant times. 2 4 Doc 1 A. 16. FACTUAL ALLEGATIONS THE ASHCRAFT FIRM FACTORS ITS ACCOUNTS RECEIVABLE Plaintiff is informed and believes that on or about April of 2017, the Ashcraft Firm began contracting with BK Billing, LLC (“BK Billing”) to factor its accounts receivable. 17. BK Billing is a third party financing company that offers various services, including accounts receivable factoring and purchasing accounts receivable. 18. A true and correct copy of a sample accounts receivable assignment agreement that BK Billing uses with law firms as of June 19, 2017 (“Accounts Receivable Agreement”), is attached hereto as Exhibit “1,” and is incorporated herein by reference. 19. Under the terms of the Accounts Receivable Agreement, a law firm contracting with BK 12 Billing agrees to assign client contracts to BK Billing in exchange for immediate payment of 70% of the 13 total contractual fee of the account: 14 15 16 Purchase Price. The Firm shall sell to BK Billing the accounts receivable associated with Transferred Accounts at the amount of seventy percent (70%) of the total contractual value of the Transferred Account (the “Purchase Price”). BK Billing will pay the Purchase Price to the Firm within two to three business days after BK Billing’s approval of the Firm’s Transferred Accounts uploaded to the BK Billing online portal. 17 18 19 20 20. While the Defendants are paid immediately, their clients remain liable for the entire contractual fee. 21. According to a document entitled, “Welcome to BK Billing!” (“Welcome Memo”), the 21 “two keys to the BK Billing Program” are: (1) the bifurcation of the bankruptcy case by the law firm; 22 and (2) BK Billing’s funding of the case. A true and correct copy of the Welcome Memo posted on the 23 BK Website as of May 25, 2017, is attached hereto as Exhibit “2,” and is incorporated herein by 24 reference. 25 22. 26 You bifurcate the case. We fund the case. We then collect the post-filing debtor payments on your behalf. We report the post-filing payments positively to the Credit Bureaus to rebuild your client’s credit. 27 The Welcome Memo describes BK Billing’s bifurcation concept: 28 4 Case 6:17-ap-01271 Doc 1 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 7 of 147 Desc Main How Bifurcation Works: 1 Clients want to file their case quickly – they have judgments and garnishments. Attorneys need to get paid for their services. How do you file a case as quickly as possible while ensuring payment from the client? The key is bifurcation – unbundle your legal services and create a legally enforceable right to your post-petition legal services. 2 3 4 Collection on pre-filing services is subject to the automatic stay and discharge order. However, unbundling your legal services into “pre-filing services” and “post-filing services” will create a legally enforceable right to be paid for your post-petition services. 5 6 The result: Clients can file their skeletal case with zero-down or low-money down payment options. 7 8 23. The Welcome Memo also describes BK Billing’s funding program: 9 Here’s how the BK Billing program works: An attorney files a Chapter 7 with a postpetition fee agreement for post-petition services for their debtor client. BK Billing funds post-filing fee agreements from $1,000 to $5,000 with payment terms of up to 12 months. 10 11 An example post-filing fee agreement is $200 per month for 10 months ($2,000 total). Once the $2,000 post-filing fee agreement is signed by the debtor, it is submitted to BK Billing through our cloud-based software. BK Billing will immediately advance 70% of that contract amount directly to the law firm, i.e. $1,400. 12 13 14 We encourage our attorney clients to build their budget off the 70% advanced to them, as most of the remaining contract balance is taken up with our fees and costs, and covers any debtor defaults on their post-petition fee agreement. 15 16 24. Along with the Welcome Memo, BK Billing sends prospective law firms sample two- 17 contract retainer agreement which purportedly bifurcates pre-filing and post-filing fees, as well as a 18 19 Recurring Payment Authorization and Consent Form (“Sample Contracts”) attached hereto with Exhibit “3.” 20 25. 21 As of December 12, 2017, BK Billing advertised online at www.bkbilling.com (“BK Website”). 22 B. THE ASHCRAFT FIRM ADVERTISES A ZERO DOWN MODEL 23 26. 24 At all relevant times, the Ashcraft Firm maintained a website advertising bankruptcy services at www.ashcraftfirm.com (“Ashcraft Website”). 25 27. At all times relevant, the Ashcraft Website did not clearly disclose that the Ashcraft Firm 26 is a debt relief agency. 27 28. Plaintiff is informed and believes that, shortly after entering the Accounts Receivable 28 5 Case 6:17-ap-01271 Doc 1 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 8 of 147 Desc Main 1 Agreement with BK Billing, the Ashcraft Firm began advertising “$0 Down Same-Day Filing” (“Zero 2 Down Model”) on the Ashcraft Website. 3 4 29. Plaintiff is informed and believes that, as of May 25, 2017, the Ashcraft Firm explained to potential consumers the Zero Down Model on the Ashcraft Website: 5 I know what you're thinking. "What's the catch? How can I file bankruptcy with no money down and file the first time I meet with you?" 6 Two things make this possible. First, we have partnered with a company who fronts the money for you to file. Fifteen days after filing, you start paying $250 monthly. This is how we file with $0 down. NOTE: To Qualify, you must earn a monthly income of $1,500 or a co-signer must be willing to sign the payment contract. 7 8 9 Second, we have been practicing in bankruptcy for two decades and have honed our process in such a way that you can come meet with us, we can determine whether you qualify, and that same day you can walk out of our office with a weight off your shoulders because we file your case that same day. That. Same. Day. No seriously, let that sink in... 10 11 12 30. At all relevant times, the Ashcraft Firm advertised its services on the Ashcraft Website 13 through a number of answers to rhetorical questions, including: 14 Does the Ashcraft Firm do Free Bankruptcies or Pro-Bono Bankruptcies? 15 If you think about it, everybody filing bankruptcy is basically broke. I don't know of any bankruptcy attorneys in the area or beyond that actually will file your case for free. However, we offer our services with no money down so that people can get their fresh start and begin the process of rebuilding their credit now. 16 17 18 19 C. MARY ANN GILMORE ENGAGES THE ASHCRAFT FIRM FOR BANKRUPTCY 20 21 22 23 24 25 SERVICES 31. Ms. Gilmore was at all relevant times an “assisted person” as defined by 11 U.S.C. § 101(3). 32. Plaintiff is informed and believes that Ms. Gilmore selected the Ashcraft Firm based on their advertisements of the Zero Down Model. 33. On May 2, 2017, Ms. Gilmore signed three contracts for bankruptcy services with the 26 Ashcraft Firm: (1) a pre-petition services contract; (2) a post-petition services contract; and (3) a direct- 27 debit agreement. 28 6 Case 6:17-ap-01271 1 2 Doc 1 1. 34. Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 9 of 147 Desc Main The Pre-Petition Services Contract On May 2, 2017, Ms. Gilmore entered into a contract for pre-petition legal services 3 (“Pre-Petition Services Contract”) with the Ashcraft Firm. A true and correct copy of the Pre-Petition 4 Services Contract is attached hereto as Exhibit “4,” and is incorporated herein by reference. 5 35. 6 I understand that the Law Firm is going to charge me $0 for the following pre-petition bankruptcy services: meeting and consulting with me as needed; detailed analysis of my financial situation; and preparation and filing of a Chapter 7 Voluntary Petition, Statement AB out [sic] Social Security Numbers, Pre-filing Credit Counseling Briefing Certificate and List of Creditors. I also understand that the Law Firm may incur costs for items such as credit reports and debt counseling courses for which it will not seek reimbursement. I understand that, once my bankruptcy is filed, I will not be legally obligated to pay any fees for pre-petition services to the Law Firm. If any pre-petition fees are owed to the Law Firm and not paid as of the filing of the bankruptcy case, they will be discharged in the bankruptcy and may not be collected by the Law Firm or its assignees. 7 8 9 10 11 The Pre-Petition Services Contract states in pertinent part as follows: 12 13 14 36. Under the Pre-Petition Services Contract, the Ashcraft Firm also financed Ms. Gilmore’s bankruptcy petition filing fees. 16 Bankruptcy Filing Fee Options. I have been presented two options regarding the filing fee of $335 that is payable to the Bankruptcy Court, and I elect to . . . Request that Law Firm pay this cost for me and seek reimbursement of this cost from me . . . . 17 37. 15 18 19 20 21 22 23 24 25 26 27 28 The Pre-Petition Services Contract includes three post-petition options: This contract contemplates that the Law Firm will provide all of the necessary services required for commencing a Chapter 7 bankruptcy case on my behalf. The Law Firm’s contractual responsibilities will end upon completion of the filing of my bankruptcy case. However, the Law Firm will remain professionally obligated to serve as counsel for Client in the case until the Bankruptcy Court allows the Law Firm to formally withdraw. I understand that there remains post-petition legal work necessary to finish my bankruptcy case and receive a discharge. After my bankruptcy case is filed, I shall have three options regarding post-petition representation: 1) I may retain the Law Firm to represent me in the post-petition proceedings in my case. I will be presented with a second retainer agreement where I promise to pay attorney’s fees in the amount of $3000 (plus any necessary post-petition costs) for the Law Firm to Represent me in the post-petition proceeds [sic] in my bankruptcy case, including the following services.  Prepare and file my Statement of Financial Affairs and Schedules; 7 Case 6:17-ap-01271 Doc 1 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 10 of 147 Desc Main  Prepare for and attend at my Section 341a Meeting of Creditors;  Provide me with written instructions as to what to bring to the 341a, directions to the place of the meeting, parking and driving time instructions; 4  Review redemption agreements, if any; 5  Prepare requests to creditors for any needed reaffirmation agreements or lease assumptions;  Review any reaffirmation agreements or lease assumptions;  Prepare Domestic Support Declaration, if applicable;  Prepare Declaration re 60 Day Income of Debtor;  Timely transmit to Trustee required tax returns and other documents requested by the Chapter 7 trustee;  Remind me of required credit education course and e-file such course when I have completed it;  Follow-through with case administration and monitoring;  Make available, at no additional cost to me, an on-line 6 week post-discharge credit re-establishment course. 1 2 3 6 7 8 9 10 11 12 13 14 15 2) I may seek or retain other legal counsel; OR 16 3) I may proceed without legal representation (pro se). Although I am not prohibited from proceeding pro se, I recognize that choosing this option may result in my proceeding without any legal representation for some portion of my bankruptcy case. If I choose this option the Law Firm may seek to withdraw from my representation, but will continue to represent me until such time when the court enters an order authorizing the Law Firm to withdraw as my attorney in the bankruptcy case, or my bankruptcy case is closed or dismissed. 17 18 19 20 21 22 23 I shall have ten (10) days from the date of my bankruptcy case is filed to retain the Law Firm for the post-petition services in this case. If I do not formally retain the Law Firm within that period, then I agree and consent to the Law Firm’s withdrawal as counsel in this case. 24 38. The Pre-Petition Services Contract does not disclose that the Ashcraft Firm had executed 25 the Accounts Receivable Agreement with BK Billing. 26 39. 27 Plaintiff is informed and believes that Ms. Gilmore did not understand “bifurcation” to mean that the Ashcraft Firm’s pre-petition legal services were “free:” 28 8 Case 6:17-ap-01271 1 4 5 6 7 8 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 11 of 147 Desc Main Q: [D]id you have any concept or idea that all of the work that was done before your bankruptcy case was filed was free, and it wasn't going to cost you anything? A: No. Q: Okay. So you had an understanding that it would cost you something? A: Right. Q: How much did you believe, prior to your case being filed, how much did you believe it would cost you for attorney's fees and costs? A: Two-hundred-and-fifty dollars a month for one year. 2 3 Doc 1 Exhibit “5” at 10: 13-24. 9 2. The Post-Petition Services Contract 10 40. 11 12 On May 2, 2017, Ms. Gilmore also signed a contract for post-petition legal services (“Post-Petition Services Contract”). A true and correct copy of the Post-Petition Services Contract is attached hereto as Exhibit “6” and is incorporated herein by reference. 13 41. The Post-Petition Services Contract generally follows the form of the Sample Contract 14 for post-petition legal services that BK Billings provided to the Ashcraft Firm. 15 42. The Post-Petition Services Contract provides in pertinent part: 16 17 18 19 I hereby retain the Law Offices of Gregory C. Ashcraft to represent my legal interest in the post-petition proceeds of my bankruptcy case filed under Chapter 7 of the United States Bankruptcy Code. I promise to pay attorney’s fees in the amount of $3000 (plus any necessary post-petition costs) as a non-refundable flat fee for the Law Firm to represent me, which representation includes the following services:  Prepare and file my Statement of Financial Affairs and Schedules; 20  Prepare for and attend at my Section 341a Meeting of Creditors; 21  Provide me with written instructions as to what to bring to the 341a, directions to the place of the meeting, parking and driving time instructions; 23  Review redemption agreements, if any; 24  Prepare requests to creditors for any needed reaffirmation agreements or lease assumptions;  Review any reaffirmation agreements or lease assumptions;  Prepare Domestic Support Declaration, if applicable;  Prepare Declaration re 60 Day Income of Debtor; 22 25 26 27 28 9 Case 6:17-ap-01271 1 2 3 4 5 6 7 8 9 10 Doc 1 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 12 of 147 Desc Main  Timely transmit to Trustee required tax returns and other documents requested by the Chapter 7 trustee;  Remind me of required credit education course and e-file such course when I have completed it;  Follow-through with case administration and monitoring;  Make available, at no additional cost to me, an on-line 6 week postdischarge credit re-establishment course. I further understand and agree that additional professional legal services will result in additional fees that are due to the Law Firm; such as: Representation in an Adversary Proceeding ($300/hour); Adding additional creditors to your schedules ($30 per creditor); and Motions to Reopen and Avoid Liens ($1510 per lien). I acknowledge and agree that all of these fees are for post-petition services and they are not dischargeable in my Chapter 7 case. In the event of nonpayment of the agreed-upon fees, the Law Firm may commence legal proceedings for collection. I agree to submit to the personal jurisdictions of the California Courts with respect to such action, and California law will apply. If such collection procedures shall become necessary, I agree to pay all reasonable costs of such collection, including reasonable attorney fees. 11 43. The Post-Petition Services Contract obligated Ms. Gilmore to pay a flat fee of $3,000. 12 44. The Plaintiff is informed and believes that the Defendants charged Ms. Gilmore interest 13 14 in addition to attorney’s fees. This was also Ms. Gilmore’s understanding of the arrangement: Q: Okay. So, the name of the entity that you owe the money to, to the best of your knowledge is it the lawyer that you owe the money to? A: No. No, it's a third party. 15 16 *** 17 18 Q: Okay. Why do you think that you would owe money to a third party instead of the attorney that's rendering services on your behalf? A: What she told me, that they -- to the best of my recollection, was that there's a new law that came into effect that say that they can actually find a third party to loan the money for a bankruptcy. And it just came into effect. So, like within a month or so. And this is the first time they're -- within the last couple weeks was the first time they used it. And so, what-- they only get a part of that. The rest of the monies come from -- the rest of the money is interest that I'm paying to this second party. 19 20 21 22 23 24 Exhibit “5” at 18: 22-25, 19:1-15. 25 3. 26 27 28 45. The Direct-Debit Agreement In addition to the Pre-Petition Services Contract and the Post-Petition Services Contract, on May 2, 2017, Ms. Gilmore also signed a recurring payment authorization and consent form (“Direct10 Case 6:17-ap-01271 Doc 1 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 13 of 147 Desc Main 1 Debit Agreement”), which authorized automated clearing house (“ACH”) payments directly from Ms. 2 Gilmore’s bank account. A true and correct copy of the Direct-Debit Agreement is attached hereto as 3 Exhibit “7,” and is incorporated herein by reference. 4 46. The Direct-Debit agreement was not executed by the Ashcraft Firm. 5 47. The Direct-Debit Agreement generally follows the form of the sample recurring payment 6 authorization and consent form provided by BK Billings to the Ashcraft Firm. 7 48. 8 I, Mary Ann Gilmore, authorize the Law Offices of Gregory C. Ashcraft, APC (the “Law Firm”), or BK Billing, LLC (“BK Billing), an independent billing company, to charge by debit card or bank account indicated below for: $250.00, starting on the 2rd [sic] day of June 2017 and recurring . . . Monthly until the amount of $3,000 is paid in full. 9 10 11 12 13 49. The Direct-Debit Agreement states in pertinent part: The Direct-Debit Agreement does not disclose that the Ashcraft Firm had executed an assignment agreement with BK Billing. D. THE DEFENDANTS FILE FALSE AND/OR INACCURATE INITIAL BANKRUPTCY 14 15 DOCUMENTS FOR MARY ANN GILMORE 50. On May 2, 2017, the same day she executed the Pre-Petition Services Contract, Post- 16 Petition Services Contract, and Direct-Debit Agreement, Ms. Gilmore provided information to the 17 Ashcraft Firm about her assets and liabilities. 18 51. In particular, Ms. Gilmore disclosed to the Ashcraft Firm that she owned clothing, two 19 cars, televisions, laptop computers, household furniture, a washer and dryer, a bank account, a 401(k) 20 account, and other personal property. 21 52. Based on the information provided by Ms. Gilmore, the Ashcraft Firm prepared 22 bankruptcy schedules of Ms. Gilmore’s assets and liabilities, which Ms. Gilmore reviewed and signed 23 on May 2, 2017. 24 53. On May 2, 2017, the Ashcraft Firm, by and through Ms. Ashcraft, filed a voluntary 25 Chapter 7 bankruptcy petition (“Petition”), schedules (each an “Initial Schedule” and together the 26 “Initial Schedules”), Statement of Financial Affairs (“Initial SOFA”), Statement of Intention for 27 Individuals Filing Under Chapter 7 (“Initial Statement of Intention”), and Chapter 7 Statement of Your 28 11 Case 6:17-ap-01271 Doc 1 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 14 of 147 Desc Main 1 Current Monthly Income (“Initial Form 122A-1”) (collectively, “Initial Bankruptcy Documents”) on 2 behalf of Ms. Gilmore. True and correct copies of the Initial Bankruptcy Documents are attached as 3 Exhibit “8,”and incorporated herein by reference. 4 54. Ms. Ashcraft signed the Petition, which contains a certification that, “In a case in which 5 § 707(b)(4)(D) applies, this signature also constitutes a certification that the attorney has no knowledge 6 after an inquiry that the information in the schedules is incorrect.” 7 8 55. Ms. Gilmore’s electronic signature, /s/ Mary Ann Gilmore, dated May 2, 2017, appears on the Initial Bankruptcy Documents. 9 56. According to Initial Schedule A/B, Ms. Gilmore owns no personal property. 10 57. According to Initial Schedule C, Ms. Gilmore claimed no exemptions. 11 58. According to Initial Schedule E/F, Ms. Gilmore had no obligations to the Ashcraft Firm 12 on the date of filing. 13 14 59. The Ashcraft Firm failed to disclose its $335 pre-petition claim against Ms. Gilmore in Schedule E/F. 15 60. According to Initial Schedule G, Ms. Gilmore has no executory contracts or unexpired 17 61. According to Initial Schedule I, Ms. Gilmore has total monthly income of $0. 18 62. According to Initial Schedule J, Ms. Gilmore has total monthly expenses of $0, including 16 leases. 19 no monthly payment to BK Billing or the Ashcraft Firm under the Post-Petition Services Contract and 20 Direct Debit Agreement. 21 22 63. filing for bankruptcy relief. 23 24 According to the Initial SOFA, Ms. Gilmore received no income in the two years prior to 64. According to the Initial SOFA, Ms. Gilmore made no payments or transfers in the two years prior to filing for bankruptcy relief. 25 65. According to the Initial Statement of Intention, Ms. Gilmore owns no property which she 26 intended to either surrender or retain. 27 // 28 12 Case 6:17-ap-01271 1 E. Doc 1 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 15 of 147 THE DEFENDANTS FILE AMENDED BANKRUPTCY DOCUMENTS FOR MARY 2 3 Desc Main ANN GILMORE 66. On May 3, 2017, the Ashcraft Firm, by and through Ms. Ashcraft, filed amended 4 schedules (each an “Amended Schedule” and together, the “Amended Schedules”), Statement of 5 Financial Affairs (“Amended SOFA”), Statement of Intention for Individuals Filing Under Chapter 7 6 (“Amended Statement of Intention”), and Amended Chapter 7 Statement of Your Current Monthly 7 Income (“Amended Form 122A-1”) (collectively, “Amended Bankruptcy Documents”) on behalf of Ms. 8 Gilmore. 9 10 11 12 13 67. True and correct copies of the Amended Bankruptcy Documents are attached as Exhibit “9,”and incorporated herein by reference. 68. Each of the Amended Bankruptcy Documents includes a scanned image of Ms. Gilmore’s original signature. 69. According to Amended A/B, Ms. Gilmore owns personal property with a combined value 14 of $27,199, including two cars, household goods, electronics, clothing, deposits of money, a retirement 15 account, and a tax refund. 16 17 18 19 70. On Amended Schedule C, Ms. Gilmore claims an exemption for each of the categories of personal property disclosed on Amended Schedule A/B. 71. According to Amended Schedule G, Ms. Gilmore has an unexpired purchase contract with Ally Finance for a 2010 Cadillac CTS. 20 72. According to Amended Schedule I, Ms. Gilmore has total monthly income of $4,430.67. 21 73. According to Amended Schedule J, Ms. Gilmore has total monthly expenses of $4,411. 22 74. According to the Amended SOFA, Ms. Gilmore received gross income of $15,148.49 23 from January 1, 2017, until May 2, 2017; $52,019 from January 1, 2016, until December 31, 2016; and 24 $58,864.87 from January 1, 2015, until December 31, 2015. 25 26 27 75. According to the Amended SOFA, Ms. Gilmore made payments to the Ashcraft Firm within one year before filing for bankruptcy. 76. Plaintiff is informed and believes that Ms. Ashcraft certified and filed the Petition 28 13 Case 6:17-ap-01271 1 77. 78. 79. 10 80. 13 The Defendants filed the Initial Schedules, Initial SOFA, and Initial Statement of Plaintiff is informed and believes that a judgment (“Judgment”) was entered against Ms. Gilmore shortly before she contacted the Defendants, and that she disclosed the Judgment to the Defendants during the process of preparing her bankruptcy documents. 11 12 Plaintiff is informed and believes that Ms. Gilmore reviewed and signed only one set of Intention without Ms. Gilmore’s knowledge or consent. 8 9 Plaintiff is informed and believes that Ms. Gilmore was not aware that the Initial schedules, those that the Defendants filed as the Amended Schedules. 6 7 Desc Main Schedules disclosed that she owned no personal property. 4 5 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 16 of 147 knowing that the Initial Bankruptcy Documents were materially inaccurate. 2 3 Doc 1 81. The Defendants failed to disclose the Judgment in the Initial SOFA or the Amended 82. Amended Schedule J, which had been prepared and filed on behalf of Ms. Gilmore by the SOFA. 14 Defendants, failed to disclose that Ms. Gilmore had a $250 monthly obligation to pay BK Billing even 15 though the monthly expense resulted from Defendants’ financial arrangements with Ms. Gilmore. 16 F. THE DEFENDANTS DO NOT IDENTIFY BK BILLING IN THEIR FEE 17 18 DISCLOSURES 83. The Defendants represent in the Disclosure of Compensation of Attorney for Debtor(s) 19 (“Initial Fee Disclosure”) filed with the Initial Bankruptcy Documents, certified and filed by Ms. 20 Ashcraft on May 2, 2017, that the Ashcraft Firm agreed to accept $0 for legal services, received $0 for 21 legal services prior to filing Ms. Gilmore’s case, and $0 remained due. 22 23 24 25 26 27 84. The Defendants represent in the Initial Fee Disclosure that $0 of the filing fee had been paid as of May 2, 2017. 85. The Defendants do not disclose in the Initial Fee Disclosure that the Ashcraft Firm advanced the filing fee on Ms. Gilmore’s behalf. 86. The Defendants represent in the Initial Fee Disclosure that the Defendants have “not agreed to share the above-disclosed compensation with any other person unless they are members and 28 14 Case 6:17-ap-01271 1 Doc 1 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 17 of 147 Desc Main associates of my law firm.” 2 87. On May 3, 2017, the Ashcraft Firm, by and through Ms. Ashcraft, filed an amended 3 Disclosure of Compensation of Attorney for Debtor(s) (“Amended Fee Disclosure) filed with the 4 Amended Bankruptcy Documents, certified by Ms. Ashcraft on May 2, 2017. 5 88. The Defendants represents in the Amended Fee Disclosure that the Ashcraft Firm agreed 6 to accept $3,000 for legal services, received $0 from Ms. Gilmore prior to filing the Amended Fee 7 Disclosure, and $3,000 remained due. 8 9 10 89. the filing fee, as well as the costs associated with debt counseling and obtaining Ms. Gilmore’s credit report. 11 12 The Defendants represented in the Amended Fee Disclosure that the Ashcraft Firm paid 90. The Defendants represented in the Amended Fee Disclosure that the “source of compensation paid to me is . . . Debtor.” 13 91. The Defendants represented in the Amended Fee Disclosure that the Defendants have 14 “not agreed to share the above-disclosed compensation with any other person unless they are members 15 and associates of my law firm.” 16 G. THE ASHCRAFT FIRM SELLS THE RIGHT TO COLLECT THE FEES DUE FROM 17 18 19 20 21 22 23 MS. GILMORE TO BK BILLING. 92. Plaintiff is informed and believes that, shortly after filing Ms. Gilmore’s case, the Ashcraft Firm assigned to BK Billing the right to collect the balance of unpaid fees from Ms. Gilmore. 93. The Plaintiff is informed and believes that the Ashcraft Firm received $2,100 from BK Billing in exchange for the right to collect the balance of unpaid fees from Ms. Gilmore. 94. Ms. Gilmore remains obligated to pay $3,000, representing $2,100 in attorneys’ fees, and a $900 undisclosed finance/interest charge in favor of BK Billing. 24 95. 25 from BK Billing. 26 96. 27 The Ashcraft Firm has never filed any document disclosing the $2,100 payment received On or about June 2, 2017, BK Billing withdrew $250 by performing an ACH withdrawal from Ms. Gilmore’s bank account pursuant to the Direct-Debit Agreement. 28 15 Case 6:17-ap-01271 1 H. 4 5 6 7 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 18 of 147 Desc Main THE ASHCRAFT FIRM HAS INCREASED ITS RATES SINCE IMPLEMENTING THE 2 3 Doc 1 ZERO DOWN MODEL 97. According to Court records, from January 1, 2017, until March 31, 2017, the Ashcraft Firm filed 23 consumer Chapter 7 bankruptcy cases in the Central District of California. 98. According to Court records, the Ashcraft Firm charged an average fee of $1,165 in the Chapter 7 cases it filed from January 1, 2017, until March 31, 2017, in the Central District of California. 99. Since implementing the Zero Down Model in or around April 2017, the Ashcraft Firm 8 has filed substantially more consumer bankruptcy cases compared to the preceding months, filing 90 9 consumer Chapter 7 cases in the Central District of California between May 1, 2017 and June 30, 2017. 10 100. The Ashcraft Firm has more than doubled its fee for filing a Chapter 7 case since 11 implementing the Zero Down Model, charging an average fee of $2,410.51 in the Chapter 7 cases it filed 12 from May 1, 2017, until June 30, 2017, in the Central District of California.. 13 101. Upon information and belief, the Ashcraft Firm has engaged in misconduct similar to that 14 described herein in at least fifty other bankruptcy cases they filed in the year 2017 in the Central District 15 of California, including but not limited to: (1) In re Dresser, case number 6:17-bk-14345-MJ; (2) In re 16 Virga, case number 6:17-bk-14357-MJ; (3) In re Wimer, case number 6:17-bk-14507-MJ; (4) In re 17 Haywood, case number 6:17-bk-14659-MJ; (5) In re Hoffman, case number 6:17-bk-14733-MJ; and (6) 18 In re Hiatt, case number 6:17-bk-14911-MJ (collectively, “Zero Money Down Cases”). 19 20 102. Plaintiff is informed and believes that the debtors in the Zero Money Down Cases are assisted persons within the definition of 11 U.S.C. § 101(3). 21 FIRST CLAIM FOR RELIEF 22 11 U.S.C §§ 526(c)(1), 528 23 (Contract Voidance for Violation of 11 U.S.C. § 528(a)(1)(B)) 24 25 26 27 103. Plaintiff re-alleges and incorporates by reference each of the allegations contained in paragraphs 1 through 102 above, inclusive, as if set forth fully at this point. 104. The Defendants did not clearly and conspicuously disclose to Ms. Gilmore that collection on pre-petition claims consisting of attorney’s fees and the filing fee violates the discharge injunction 28 16 Case 6:17-ap-01271 1 2 Doc 1 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 19 of 147 Desc Main and/or automatic stay. 105. The Defendants did not clearly and conspicuously disclose to Ms. Gilmore that under the 3 Zero Down Model she would be charged an interest rate exceeding 40% of her fees. The total amount 4 of the interest payments, or that the rate of interest charged to her, exceeds the maximum interest rate 5 permissible under applicable California law. 6 7 8 9 106. The Pre- and Post-Petition Services Contracts fail to comply with the material requirements of 11 U.S.C. § 528(a)(1)(B), and the Ashcraft Firm knew or should have known this. 107. The Court should void the Pre-Petition Services Contract and the Post-Petition Services Contract pursuant to 11 U.S.C. §§ 526(c)(1). 10 SECOND CLAIM FOR RELIEF 11 11 U.S.C. § 329(b) and Fed. R. Bankr. P. 2017 12 (Disgorgement of Fees and Cancellation of Contract) 13 14 15 108. Plaintiff re-alleges and incorporates by reference each of the allegations contained in paragraphs 1 through 107 above, inclusive, as if set forth fully at this point. 109. Plaintiff is informed and believes that the Defendants consulted with Ms. Gilmore pre- 16 petition, completed Ms. Gilmore’s bankruptcy documents pre-petition, and used appearance counsel to 17 represent Ms. Gilmore at her initial 341(a) meeting of creditors. 18 19 20 110. The $3,000 that Ms. Gilmore is paying to the Defendants for post-petition services exceeds the reasonable value of the services provided to Ms. Gilmore. 111. The Court should cancel the Pre-and Post-Petition Contracts and order the Defendants, 21 jointly and severally, to disgorge all fees back to the Debtor and determine that no further fees are owed 22 by Ms. Gilmore pursuant to 11 U.S.C. § 329(b) and Fed. R. Bankr. P. 2017. 23 24 25 26 27 28 17 Case 6:17-ap-01271 Doc 1 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 20 of 147 1 THIRD CLAIM FOR RELIEF 2 11 U.S.C. §§ 105(a) and 329(a) and Fed. R. Bankr. P. 2016 3 (Disgorgement of Fees for Failure to Disclose Compensation) 4 5 6 112. Desc Main Plaintiff re-alleges and incorporates by reference each of the allegations contained in paragraphs 1 through 111 above, inclusive, as if set forth fully at this point. 113. The Defendants failed to accurately disclose in either the Initial Fee Disclosure or the 7 Amended Fee Disclosure, without limitation:(a) the Ashcraft Firm’s advance of the filing fee to Ms. 8 Gilmore; (b) Ms. Gilmore’s financing charges; (c) the delineation between pre- and post-petition 9 services; and (d) the Ashcraft Firm’s agreement with BK Billing, including their financing. 10 114. The Court should order the Defendants, jointly and severally, to disgorge the entirety of 11 any payments that they received from Ms. Gilmore pursuant to 11 U.S.C. §§ 105(a) and 329(a), and Fed. 12 R. Bankr. P. 2016. 13 FOURTH CLAIM FOR RELIEF 14 11 U.S.C §§ 526(a)(3)(B), 526(c)(5) 15 (Civil Penalties for Misrepresenting Services that Will be Provided) 16 17 18 19 20 115. Plaintiff re-alleges and incorporates by reference each of the allegations contained in paragraphs 1 through 114 above, inclusive, as if set forth fully at this point. 116. The Defendants failed to disclose to Ms. Gilmore that they would file an incomplete set of bankruptcy documents. 117. The Defendants failed to disclose to Ms. Gilmore that they would represent to the Court 21 that Ms. Gilmore certified in the Initial Schedules that she held no personal property, among other 22 deficiencies in the Initial Schedules. 23 118. The Ashcraft Firm misrepresented to Ms. Gilmore, directly or indirectly, affirmatively or 24 by material omission: (1) that they would use Ms. Gilmore’s electronic signature to certify false 25 information about her assets and liabilities in the Initial Schedules; and (2) the risks they imposed on her 26 by filing false information about her assets and liabilities. 27 119. Plaintiff is informed and believes that the Defendants made similar misrepresentations 28 18 Case 6:17-ap-01271 Doc 1 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 21 of 147 Desc Main 1 and/or non-disclosures to all or nearly all of the debtors in the Zero Down Model Cases directly or 2 indirectly, affirmatively or by material omission. 3 4 120. The Defendants’ misrepresentations and/or nondisclosures were intentional and/or part of a clear and consistent pattern or practice. 5 121. The Court should enjoin the Defendants from further violations of 11 U.S.C. § 526(a)(3) 6 as specified in the Complaint, and assess against the Defendants, jointly and severally, a civil penalty in 7 an amount to be determined at trial. 8 FIFTH CLAIM FOR RELIEF 9 11 U.S.C §§ 526(a)(2), 526(c)(5) 10 (Civil Penalties for Intentional and/or Pattern and Practice of Untrue and Misleading Statements 11 in Documents Filed with the Court) 122. 12 13 Plaintiff re-alleges and incorporates by reference each of the allegations contained in paragraphs 1 through 121 above, inclusive, as if set forth fully at this point. 14 123. The Defendants made and/or caused to be made untrue and misleading statements in 15 documents filed in Ms. Gilmore’s case including without limitation: (a) Initial Schedule A/B; (c) Initial 16 Schedule C; (d) Initial Schedule E/F; (e) Initial Schedule G; (f) Initial Schedule I; (g) Initial Schedule J; 17 (h) Initial SOFA; (i) the Initial Statement of Intention; (j) Amended Form 122A-1; (k) the Amended 18 Statement of Intention; (l) the Initial Fee Disclosure; and (m) the Amended Fee Disclosure (the “Untrue 19 and Misleading Statements”). 20 21 124. The Defendants made the Untrue and Misleading Statements intentionally and/or as part of a consistent pattern or practice in Ms. Gilmore’s case and in the Zero Down Model Cases. 22 125. The Court should enjoin the Defendants from further violations of 11 U.S.C. § 526(a)(2) 23 as specified in the Complaint, and assess against the Defendants, jointly and severally, a civil penalty in 24 an amount to be determined at trial. 25 // 26 // 27 // 28 19 Case 6:17-ap-01271 1 Doc 1 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 22 of 147 Desc Main SIXTH CLAIM FOR RELIEF 2 11 U.S.C. § 105(a), Inherent Authority of the Court 3 (Monetary Sanctions for the Filing of Documents Not Properly Executed) 4 5 6 7 8 9 126. Plaintiff re-alleges and incorporates by reference each of the allegations contained in paragraphs 1 through 125 above, inclusive, as if set forth fully herein. 127. Plaintiff is informed and believes that the Defendants filed the Initial Schedules, Initial SOFA, and Initial Statement of Intention without obtaining Ms. Gilmore’s informed consent. 128. Pursuant to 11 U.S.C. § 105(a), Local Bankruptcy Rule 5005-4(a), and the Court’s inherent authority, the Court should impose monetary sanctions in an amount to be determined at trial 10 against the Defendants, jointly and severally, for filing documents with the Court without Ms. Gilmore’s 11 signature. 12 SEVENTH CLAIM FOR RELIEF 13 (Injunctive Relief Against Ashcraft Firm for Failure to Make 14 Disclosures Required by 11 U.S.C. § 528 on the Ashcraft Website) 15 16 129. The Plaintiff re-alleges and incorporates by reference each of the allegations contained in paragraphs 1 through 128 above, inclusive, as if set forth fully herein. 17 130. The Ashcraft Website includes advertisements for bankruptcy services. 18 131. The Ashcraft Website is directed to the general public. 19 132. At all relevant times, the Ashcraft Website did not clearly and conspicuously use the 20 statement, “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy 21 Code.,” or a substantially similar statement. 22 23 133. Pursuant to 11 U.S.C. § 526(c)(5), the Ashcraft Firm is subject to an injunction enjoining the violations of 11 U.S.C. § 528 as specified in the complaint, and a civil penalty. 24 EIGHTH CLAIM FOR RELIEF 25 (Referral of the Ashcraft Firm and Ms. Ashcraft to the Central District Bankruptcy Court 26 27 Disciplinary Committee) 134. Plaintiff re-alleges and incorporates by reference each of the allegations contained in 28 20 Case 6:17-ap-01271 1 2 Doc 1 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 23 of 147 Desc Main paragraphs 1 through 133 above, inclusive, as if set forth fully herein. 135. Plaintiff requests that the Defendants each be referred by the Court to the Standing 3 Committee on Discipline under this Court’s General Order 96-05 and Central District Local Bankruptcy 4 Rule 83.3.1.1 on several grounds including, but not limited to, any and/or all of the following: 5 A. The violations of 11 U.S.C. § 526(a)(1), (a)(2), and (a)(3); 6 B. The failure to provide competent legal advice and/or legal services in violation of 7 8 9 10 11 12 13 14 California Rule of Professional Conduct 3-110; C. of Professional Conduct 4-210; D. 17 18 19 20 21 The charging of an unconscionable fee in violation of California Rule of Professional Conduct 4-200; E. Violating the duty of candor pursuant to California Business and Professions Code § 6068(d); and, F. 15 16 Restrictions against lending arrangements from attorney to client under California Rule As otherwise shown at the time of trial. PRAYER FOR RELIEF 1. For an order voiding the Pre- and Post-Petition Services Contract and Direct-Debit Agreement under 11 U.S.C. § 526(c)(1), and disallowing any fees or costs; 2. For an appropriate civil penalty against the Ashcraft Firm and/or Ms. Ashcraft pursuant to 11 U.S.C. § 526(c)(5)(B), in an amount to be established at the time of trial; 3. For a permanent injunction pursuant to 11 U.S.C. § 526(c)(5)(A) against the Ashcraft Firm and/or Ms. Ashcraft from future violation(s) of 11 U.S.C. § 526(a) and § 528; 22 4. For the cancellation of the Pre- and Post-Petition Contracts; 23 5. For disgorgement pursuant to 11 U.S.C. § 329 of any and all compensation received by 24 25 26 27 the Ashcraft Firm and Ms. Ashcraft from legal services provided in Ms. Gilmore’s case; 6. For sanctions against Ms. Ashcraft and the Ashcraft Firm pursuant to 11 U.S.C. §105(a), Local Bankruptcy Rule 5005-4(a) and the Court’s inherent authority; 7. For referral of the Ashcraft Firm and Ms. Ashcraft to the Standing Committee on 28 21 Case 6:17-ap-01271 1 Doc 1 Filed 12/12/17 Entered 12/12/17 09:46:04 Document Page 24 of 147 Discipline under this Court’s General Order 96-05 and Central District Local Bankruptcy Rule 83.3.1.1; 2 8. For attorney’s fees, to the extend allowed by applicable law; 3 9. For the costs of suit; and, 4 10. For such other and further relief as the Court deems just and proper. 5 6 7 8 Desc Main Dated: December 12, 2017 UNITED STATES TRUSTEE FOR THE CENTRAL DISTRICT OF CALIFORNIA REGION 16 By: 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 22 /s/ Mohammad Tehrani Mohammad Tehrani Attorney for the U.S. Trustee