LOCATION: Bankruptcy Appellate Panel for the Ninth Circuit
DOCKET NO.: 12-5196
DECIDED BY: Roberts Court (2010-2016)
CITATION: 571 US (2014)
GRANTED: Jun 17, 2013
ARGUED: Jan 13, 2014
DECIDED: Mar 04, 2014
Facts of the case
On January 5, 2004, Stephen Law filed for bankruptcy. He claimed that there were two liens on his property consuming all of the property’s value beyond a homestead exemption. A homestead exemption protects equity in a house when filing for bankruptcy. One of these liens turned out to be a fictional construction involving a woman in China. Alfred Siegel (the Trustee) claimed that, in exposing the false lien, he incurred $465,000 in attorney fees. Because these costs resulted from Law’s misconduct and misrepresentation, the Bankruptcy Court added a surcharge equal to the full amount of Law’s homestead exemption to offset the Trustee’s costs.
Law appealed the decision to the Appellate Panel for the Ninth Circuit (BAP). Under the Bankruptcy Act of 1978, federal appeals courts may may create panels of judges to hear appeals from Bankruptcy Court. The BAP affirmed the order and held that the surcharge was necessary to protect the Bankruptcy Court’s integrity. Law appealed to the U.S. Court of Appeals for the Ninth Circuit, which affirmed the BAP decision.
When a debtor creates fictional liens to prevent a trustee from selling a property, should a Bankruptcy Court allow a surcharge to extend to normally exempted homestead property?
Media for Law v. Siegel
Audio Transcription for Opinion Announcement – March 04, 2014 in Law v. Siegel
Justice Scalia has our opinion in case 12-5196 Law versus Siegel.
This case is here on writ of certiorari to the United States Court of Appeals from the Ninth Circuit.
The petitioner Steven Law filed for Chapter 7 bankruptcy.
He valued his California home at roughly $360,000 and he claimed that $75,000 of its value was covered by California’s homestead exception and thus was except from the bankruptcy estate.
The Federal Bankruptcy Law allows an individual to use either a federal homestead exception or a state homestead exception, he had chosen California’s.
He also claimed that the home was subject to two liens including one in favor of someone named Lili Lin, L-I-L-I L-I-N.
The respondent Alfred Siegel was the trustees of Law’s bankruptcy estate.
He challenged the Lili Lin lien in an adversary proceeding but found himself drawn into protracted and expensive litigation with someone claiming to be Lili Lin.
Five years later, the Bankruptcy Court ruled that the Lili Lin lien was a fiction invented by Law to protect his home from creditors and that the legal papers supposedly filed from China by Lili Lin had most likely been filed by Law himself.
The Court then granted Siegel’s motion to surcharge Law’s $75,000 homestead exception making those funds available to defray the hundreds of thousands of dollars in attorney’s fees that Siegel had incurred in overcoming Law’s fraudulent misrepresentations.
The Ninth Circuit Bankruptcy Appellate Panel and the Ninth Circuit affirmed we granted certiorari.
Siegel argues that the surcharge order was justified under two sources of authority.
First, he relies on a statute 11 U. S. C. Section 104(a) which says that a Bankruptcy Court may issue any order that is necessary or appropriate to carry out the provisions of the Bankruptcy Code.
Second, he points to the inherent power of courts to sanction abusive litigation conduct.
But when a Bankruptcy Court acts under either Section 105(a) or its inherent powers, it may not take any action that is prohibited by statute.
As relevant here, the Bankruptcy Code provides that except property including homestead exception is not liable for any administrative expense which includes a trustee’s attorney’s fees.
When the Bankruptcy Court ordered that the except equity in Law’s home be used to pay Siegel’s attorney’s fees.
It violated that clear statutory prohibition.
Siegel argues when that a debtor engages in misconduct, the Bankruptcy Court can deny the debtor an exception to which he otherwise he would have been entitled.
That argument is misplaced here.
It comes too late since Siegel did not raise a timely objection to Law’s homestead exception.
He was given at it.
But even if he had objected, a Bankruptcy Court may not deny an exception on any ground not specified in the Bankruptcy Code.
Section 522 of the Code exhaustively specifies the criteria that will entitle property to the homestead exception and it spells out a number of carefully calibrated exceptions and limitations including some that are based on the debtor’s misconduct.
Courts are not authorized to create additional exceptions.
When Congress crafted the detailed provisions of Section 522 it struck a balance between the interest of trustees and creditors and the interest of debtors and their dependence who inhabit the homestead.
It is not for courts to alter the balance struck by the statute.Bankruptcy courts nonetheless retained ample authority to punish debtor misconduct in appropriate cases of dishonest debtor may be denied a discharge, he may be ordered to pay monetary sanctions, and even prosecuted criminally.
But whatever other sanctions of Bankruptcy Court may impose on a dishonest debtor, it may not contravene express provisions of the Bankruptcy Code by ordering that except property be used to pay debts and expenses for which that property is not liable under the Code.
The judgment of the Court of Appeals for the Ninth Circuit is reversed.
The Court’s decision is unanimous.