Law v. Siegel
571 U.S. ___ (2014)

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Justia Opinion Summary
Law filed for Chapter 7 bankruptcy. He valued his home at $363,348, claiming that $75,000 of the value was covered by California’s homestead exemption and exempt from the bankruptcy estate under 11 U.S.C. 522(b)(3)(A). He claimed that the sum of two liens, including a mortgage in favor of Lin, exceeded the home’s nonexempt value, leaving no equity for other creditors. Siegel, the bankruptcy trustee, challenged the Lin lien in an adversary proceeding. Protracted litigation followed when “Lili Lin” in China claimed to be the beneficiary of Law’s deed of trust. The Bankruptcy Court concluded that the loan was a fiction created to preserve equity in the house and granted Siegel’s motion to “surcharge” Law’s $75,000 homestead exemption, to defray fees incurred in challenging Law’s misrepresentations. The Ninth Circuit Bankruptcy Appellate Panel and the Ninth Circuit affirmed. The Supreme Court reversed. A bankruptcy court may not exercise its authority to carry out the provisions of the Code, 11 U.S.C. 105(a), or its inherent power to sanction abusive litigation practices by taking action prohibited elsewhere in the Code; the “surcharge” contravened section 522, which (by reference to California law) entitled Law to exempt $75,000 of equity in his home and which made that $75,000 “not liable for payment of any administrative expense,” including attorney’s fees. An argument that equated the surcharge with denial of Law’s homestead exemption was not supported by the history of the case. No one timely objected to the exemption, so it became final before the surcharge was imposed. In addition, federal law provides no authority for denial of an exemption on a ground not specified in the Code. The Court acknowledged that its ruling may produce inequitable results, but noted that ample authority remains to address debtor misconduct, including denial of discharge, sanctions for bad-faith litigation conduct, or enforcement of monetary sanctions through the normal procedures for collecting judgments.

NOTE: Where it is feasible, a syllabus (headnote) will be released, as is being done in connection with this case, at the time the opinion is issued.The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience of the reader.See United States v. Detroit Timber & Lumber Co., 200 U. S. 321 .

SUPREME COURT OF THE UNITED STATES

Syllabus

LAW v. SIEGEL, CHAPTER 7 TRUSTEE

certiorari to the united states court of appeals for the ninth circuit

No. 12–5196. Argued January 13, 2014—Decided March 4, 2014

Petitioner Law filed for Chapter 7 bankruptcy. He valued his California home at $363,348, claiming that $75,000 of that value was covered by California’s homestead exemption and thus was exempt from the bankruptcy estate. See 11 U. S. C. §522(b)(3)(A). He also claimed that the sum of two voluntary liens—one of which was in favor of “Lin’s Mortgage & Associates”—exceeded the home’s nonexempt value, leaving no equity recoverable for his other creditors. Respondent Siegel, the bankruptcy estate trustee, challenged the “Lin” lien in an adversary proceeding, but protracted and expensive litigation ensued when a supposed “Lili Lin” in China claimed to be the beneficiary of Law’s deed of trust. Ultimately, the Bankruptcy Court concluded that the loan was a fiction created by Law to preserve his equity in the house. It thus granted Siegel’s motion to “surcharge” Law’s $75,000 homestead exemption, making those funds available to defray attorney’s fees incurred by Siegel in overcoming Law’s fraudulent misrepresentations. The Ninth Circuit Bankruptcy Appellate Panel and the Ninth Circuit affirmed.

Held: The Bankruptcy Court exceeded the limits of its authority when it ordered that the $75,000 protected by Law’s homestead exemption be made available to pay Siegel’s attorney’s fees. Pp. 5–12.

     (a) A bankruptcy court may not exercise its authority to “carry out” the provisions of the Code, 11 U. S. C. §105(a), or its “inherent power . . . to sanction ‘abusive litigation practices,’ ” Marrama v. Citizens Bank of Mass., 549 U. S. 365 –376, by taking action prohibited elsewhere in the Code. Here, the Bankruptcy Court’s “surcharge” contravened §522, which (by reference to California law) entitled Law to exempt $75,000 of equity in his home from the bankruptcy estate, §522(b)(3)(A), and which made that $75,000 “not liable for payment of any administrative expense,” §522(k), including attorney’s fees, see §503(b)(2). The surcharge thus exceeded the limits of both the court’s authority under §105(a) and its inherent powers. Pp. 5–7.

     (b) Siegel argues that an equitable power to deny an exemption by “surcharging” exempt property in response to a debtor’s misconduct can coexist with §522. But insofar as that argument equates the surcharge with an outright denial of Law’s homestead exemption, it founders on this case’s procedural history. The Bankruptcy Appellate Panel recognized that because no one timely objected to the homestead exemption, it became final before the surcharge was imposed. And a trustee who fails to make a timely objection cannot challenge an exemption. Taylor v. Freeland & Kronz, 503 U. S. 638 –644. Assuming the Bankruptcy Court could have revisited Law’s entitlement to the exemption, §522 specifies the criteria that render property exempt, and a court may not refuse to honor a debtor’s invocation of an exemption without a valid statutory basis. Federal courts may apply state law to disallow state-created exemptions, but federal law itself provides no authority for bankruptcy courts to deny an exemption on a ground not specified in the Code. Pp. 7–10.

     (c) Neither the holding of Marrama v. Citizens Bank nor its dictum points toward a different result. There, the debtor’s bad faith kept him from converting his bankruptcy from a Chapter 7 liquidation to a Chapter 13 reorganization as permitted by §706(a). But that was because his conduct prevented him from qualifying under Chapter 13, and thus he could not satisfy §706(d), which expressly conditions conversion on the debtor’s ability to qualify under Chapter 13. Pp. 10–11.

     (d) This ruling forces Siegel to shoulder a heavy financial burden due to Law’s egregious misconduct and may produce inequitable results for other trustees and creditors, but it is not for courts to alter the balance that Congress struck in crafting §522. Cf. Guidry v. Sheet Metal Workers National Pension Fund, 493 U. S. 365 –377. P. 11.

     (e) Ample authority remains to address debtor misconduct, including denial of discharge, see §727(a)(2)–(6); sanctions for bad-faith litigation conduct under the Bankruptcy Rules, §105(a), or a bankruptcy court’s inherent powers; enforcement of monetary sanctions through the normal procedures for collecting money judgments, see §727(b); or possible prosecution under 18 U. S. C. §152. Pp. 11–12.

435 Fed. Appx. 697, reversed and remanded.

     Scalia, J., delivered the opinion for a unanimous Court.

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Primary Holding

A bankruptcy court lacks statutory and inherent authority to impose a "surcharge" against a debtor filing for bankruptcy when the imposition of such action is prohibited elsewhere in the Bankruptcy Code.