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Supreme Court Holds that Exempt Assets Stay That Way, Even After Fraud
On March 4, 2014, Justice Antonin Scalia delivered the Supreme Court’s opinion in Law v. Siegel, originally a bankruptcy case from the Central District of California. The Supreme Court’s decision unanimously reversed the decision of the Ninth Circuit Court of Appeals. This case is particularly interesting because it involves issues of fraud and property exemptions in Chapter 7 Bankruptcy, both topics which have been discussed in other posts on this blog.
The Court’s decision shows that bankruptcy law is always changing. In order to provide the best possible assistance to our clients, our Oakland Bankruptcy Attorneys stay informed about this and other new developments in bankruptcy law.
Facts of the Case
In 2004, Stephen Law filed for Chapter 7 Bankruptcy in California. His largest asset was a house located in Hacienda Heights, which he claimed was worth about $360,000. Using California’s “System 1” exemptions, Law claimed $75,000 worth of exempt equity in the home. He also claimed that the home had two liens owed on it, which took up the rest of the home’s value, leaving no equity for creditors to reach in bankruptcy.
After extensive investigation (to the cost of $450,000), the bankruptcy trustee argued that one of the liens, supposedly held by a woman named Lili Lin who lived in China, was fraudulent. The bankruptcy court agreed, and granted the trustee’s motion to surcharge Law’s exempt home equity in order to recoup some of the investigation and litigation expenses. In justifying its decision, the bankruptcy court cited Section 105 of the bankruptcy code, a general section which allows the court to “take any action necessary or appropriate to carry out [the code]”. On appeal, the Ninth Circuit Court of Appeals affirmed the court’s decision to grant the motion.
Supreme Court’s Decision
The Supreme Court reversed the Ninth Circuit and held that the $75,000 exemption in the house could not be reached by the bankruptcy court to pay for the Trustee’s investigation expenses. The Court held that a literal interpretation of several provisions of the bankruptcy code limited Section 105, and that bankruptcy courts do not have the authority to withhold exemptions based on whatever considerations they deem appropriate. Specifically, Section 522(k) of the bankruptcy code clearly states clearly that exempt assets are not liable for payment of administrative expenses.
What Does This Mean for California Bankruptcy Law?
Property exemptions are an important part of Chapter 7 and Chapter 13 bankruptcy. These exemptions help the debtor keep some of their assets, making it easier for them to find a fresh start after bankruptcy. The Court’s decision held that even in extreme, flagrant instances of fraud, the bankruptcy court cannot reach exempt assets in order to pay for things like administrative and legal fees. Once exempt, these assets are the property of the bankruptcy filer, and cannot be touched.
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