Bankruptcy courts across the country have embraced the electronic filing of court pleadings since 2001. This system, known as Electronic Case Files or “ECF”, allows attorneys to sign and file documents with an electronic signature instead of using “wet ink” signatures on paper. The system is a great improvement over the older paper file system it replaced. Back in the old days we used to make five photocopies of a bankruptcy petition (one for our files, one for the Trustee, one for the US Trustee, one for the national archives, and one for the court) and then rush to the federal courthouse to file the case before a garnishment or foreclosure took place. ECF made it possible to file cases and motions 24 hours a day and almost every day of the year. It also made it possible for anyone to view court records electronically.
But even though this new electronic filing system allowed attorneys to sign documents electronically, debtors were still required to sign paper petitions with a wet ink signature. Attorneys are required to maintain this document until the case is over and typically for a few years thereafter. Upon request of the court or an interested party, the debtor’s attorney must produce the original document. Such requests are exceedingly rare (I’ve never had to produce an originally signed document since the ECF system was established in Nebraska), but in cases where a debtor has hidden assets and is subject to criminal prosecution for bankruptcy fraud, it is common for federal prosecutors to request the originally singed pleadings.
Since the ECF system was introduced in 2001 a new technology has grown in the area of Digital Signatures. A digital signature is a an electronic signature that has been secured by a process know as cryptography. Once a document is signed digitally, the contents of the document are encrypted and secured. A digital document is typically stamped with an alpha-numeric code on the top margin of every page of the document. If the document is changed in any way the digital signature panel warns viewers that the signatures are no longer valid. Documents that have not been altered typically flash a green check-mark symbol, but altered documents commonly display a red X mark. The leading company in the digital signature industry is DocuSign.
Department of Justice prosecutors worry that individuals who commit bankruptcy fraud by failing to disclose assets, income or property transfers may attempt to avoid liability by denying that they signed a bankruptcy petition digitally. What if a debtor denies clicking on a “Sign Here” button? What if a debtor’s roommate or child clicks on the digital document? How can prosecutors be sure a debtor signs a bankruptcy petition digitally?
And this is the problem. Because the DOJ is worried that digital signatures may compromise their prosecution efforts they are throwing down a roadblock before the bankruptcy rules committee. Without DOJ acquiesce to the use of this technology, courts are reluctant to adopt this convenient signature method.
The ironic aspect of the DOJ opposition is that these same prosecutors seem to have no problem obtaining tax fraud convictions against taxpayers who file tax returns electronically. This is especially confusing since taxpayers do not enter a federal courthouse shortly after filing tax returns to testify under oath that they signed the tax return electronically, but bankruptcy debtors do just that in every case filed. How can the DOJ convict individuals for tax fraud without any sworn testimony about how a tax return was signed but not convict debtors of bankruptcy fraud when such testimony is present? Fears raised by the DOJ to digital signatures seem exaggerated and disingenuous.
THE REAL PROBLEM: ATTORNEYS ALTERING SIGNED DOCUMENTS
What the DOJ should really be concerned about is the fact that bankruptcy attorneys commonly alter bankruptcy schedules after they have been signed. Why does this occur? Because attorneys who prepare bankruptcy cases are under constant pressure to file cases to stop paycheck garnishments or home foreclosures and their clients generally have not supplied them with all the necessary tax returns, paycheck stubs, bank statements, and creditor statements to completely prepare a case prior to the signing.
Bankruptcy clients frequently are slow to provide documents to their attorney until garnishments strike. And when those garnishments hit, debtors flock to their bankruptcy attorney to file cases in a panic. Of course, signing a case under such circumstances is frequently disorganized and messy.
Under pressure to stop creditor activity an alarming number of bankruptcy attorneys have clients sign incomplete petitions or just have clients sign blank signatures pages. After clients leave the office the attorney then completes the petition and files it electronically with the court.
This process has been documented by the United States Trustee. In the case of In re Harmon the US Trustee found that debtor attorneys made material alteration to signed bankruptcy petitions in 82% of the files it audited. In a report prepared by the bankruptcy practices committee, bankruptcy trustees complained that debtors are frequently asked to sign petitions they have not reviewed.
Unfortunately, there is an attorney in my district [who] does not think his clients need to review the petition, schedules, financial affairs before filing and sign these documents with a wet signature. I have reported his practice to the US Trustee with proof.
This is the real problem the DOJ should be worried about. It is well documented in multiple cases that attorneys frequently change the contents of signed bankruptcy petitions or that they do not allow their client to preview what they sign. If a person charged with bankruptcy fraud can establish the existence of unauthorized changes made after the petition is signed the prosecutor is going to have a problem. Identifying such alterations is not difficult. One such indicator of document tampering is the bank account balance reported. If a case is signed on the 5th day of the month but the case is not filed until the 20th day yet the bank account balance reported exactly matches what was on deposit on the 20th day, it is clear the petition was altered. (Bankruptcy attorneys frequently call clients on the day the case is filed to update the bank account balance.)
If debtors can prove that the document they signed was altered the DOJ will have a problem prosecuting bankruptcy fraud. Paper documents are inherently unsecured and unreliable. The only thing a wet ink signature on paper proves is that a debtor singed a signature page. It is not proof that the rest of the document was not materially altered.
HOW DIGITALLY SIGNED DOCUMENTS HELP THE DOJ PROSECUTE BANKRUPTCY FRAUD
If a debtor were allowed to bankruptcy petition digitally, the DOJ would have a much easier time of prosecuting a bankruptcy fraud case.
- Debtors have the opportunity to review documents before they are signed.
- Every page of a digitally signed document is stamped with an alpha-numeric code which makes it nearly impossible to make alterations to the document after it is signed.
- Debtors get an immediate copy of what they sign digitally. They have proof of what they signed and that discourages the other party to change the contents of the signed document.
- Digitally signed documents are encrypted and secured. The paper schedules of a bankruptcy petition are not secured by anything and are frequently altered.
- Debtors must attend a meeting with the bankruptcy trustee about one month after cases are filed. At such meetings the debtor must testify that they signed the digital documents.
- Digitally signed documents provide an “audit trail” showing when the document was signed, how long a debtor reviewed the document, the IP address of the signers and other information that helps prosecutors prove that a document was signed.
The fear that debtors may deny signing a document digitally is understandable. But if courts update their local rules to add sensible safeguards to the signing process these concerns can addressed. Such safeguards may include:
- Requiring debtor attorneys to file a copy of the digitally signed petition with the court so that court is not dependent on the debtor’s attorney for safeguarding the petition.
- Requiring debtor attorneys to mail a hard copy of the digital document to the debtor with a cover letter to advise of the digital signing.
- Sending a copy of the digital document to the appointed trustee so they may ask additional questions at the court hearing about how the document was signed.
- Require debtors to sign an Authorization form, similar to to IRS Form 8879, with a wet ink signature on paper.
Digitally signed bankruptcy petitions are coming. It is time for the bankruptcy court system to craft new procedures to balance the needs of debtor attorneys to obtain updated signatures quickly with the need of the courts and DOJ to have confidence in the integrity of the bankruptcy documents.
Image courtesy of Flickr and Ged Carroll