Law v. Siegel

March 4, 2014 by Justia

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. View "Law v. Siegel" on Justia Law