Law v. Siegel

Last updated

Law v. Siegel
Seal of the United States Supreme Court.svg
Supreme Court of the United States
Argued January 13, 2014
Decided March 4, 2014
Full case nameStephen Law, Petitioner v. Alfred H. Siegel, Chapter 7 Trustee
Docket no. 12-5196
Citations571 U.S. 415 ( more )
134 S. Ct. 1188; 188 L. Ed. 2d 146
Argument Oral argument
Case history
PriorLaw v. Siegel (In re Law), 435Fed. App'x697 (9th Cir.2011)., affirming In re Law,2009WL7751415(9th Cir. B.A.P.2009)., affirming In re Law, 401B.R.447 (Bkrtcy. Ct. CD Cal.2009)., cert. granted, 570 U.S. 904(2013).
Holding
Whatever other sanctions a bankruptcy court may impose on a dishonest debtor, it may not contravene express provisions of the Bankruptcy Code by ordering that the debtor’s exempt property be used to pay debts and expenses for which that property is not liable under the Code.
Court membership
Chief Justice
John Roberts
Associate Justices
Antonin Scalia  · Anthony Kennedy
Clarence Thomas  · Ruth Bader Ginsburg
Stephen Breyer  · Samuel Alito
Sonia Sotomayor  · Elena Kagan
Case opinion
MajorityScalia, joined by unanimous
Laws applied
11 U.S.C.   § 105 (power of the bankruptcy court), 11 U.S.C.   § 522 (exemptions from bankrupt estate)

Law v. Siegel, 571 U.S. 415 (2014), is a ruling of the Supreme Court of the United States that describes the extent of the powers of bankruptcy courts in dealing with the bad faith of debtors.

Contents

Background

When Law filed for Chapter 7 bankruptcy in 2004, his sole asset was a home in Hacienda Heights, California that was said to be worth $363,000. [1] He declared that:

  • there was a first mortgage lien (deed of trust) of $150,000 owing to a bank, and a second for $168,000 owing to "Lin’s Mortgage & Associates"
  • there were three judgment liens also registered against the property
  • as the value of the two mortgage liens, together with California's homestead exemption of $75,000, was greater than the value of the house, there was nothing available for distribution to Law's general creditors.

It was discovered in subsequent litigation [lower-alpha 1] that the second mortgage lien did not exist. The house sold for about $680,000, [1] and only one creditor timely filed a proof of claim which was settled for $120,000. [1] The trustee sought to surcharge the homestead exemption in order to be reimbursed for his legal expenses in the matter.

The courts below

The United States Bankruptcy Court for the Central District of California, in accordance with existing jurisprudence within the Ninth Circuit, [lower-alpha 2] ordered that Law's homestead must be surcharged in its entirety. This was affirmed by the Bankruptcy Appeals Panel, and subsequently by the United States Court of Appeals for the Ninth Circuit.

At the Supreme Court

The Ninth Circuit ruling was reversed. In a unanimous ruling, Justice Scalia noted that: [2]

  • 11 U.S.C.   § 105(a) grants a bankruptcy court authority to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of" the Bankruptcy Code,
  • the court also has inherent power to sanction abusive litigation practice, [3] but
  • a bankruptcy court may not contravene specific statutory provisions.

As 11 U.S.C.   § 522(k) expressly states that a homestead exemption is "not liable for payment of any administrative expense," the court exceeded the limits of its authority under §105(a) and its inherent powers. The Court's ruling in Marrama [3] would not have led to a different result, as its dictum only "suggests that in some circumstances a bankruptcy court may be authorized to dispense with futile procedural niceties in order to reach more expeditiously an end result required by the Code." [4]

The bankruptcy court still has various sanctions available to enforce its judgments: [5]

  • 11 U.S.C.   § 727(a) outlines circumstances where the court can deny a discharge from bankruptcy
  • Federal Rules of Bankruptcy Procedure §9011 authorizes the court to impose sanctions for bad-faith litigation conduct
  • it may also possess further sanctioning authority under either 11 U.S.C.   § 105(a) or its inherent powers [6]
  • 11 U.S.C.   § 727(b) provides that a bankruptcy court's monetary sanction survives the bankruptcy case and is thereafter enforceable through the normal procedures for collecting money judgments
  • Fraudulent conduct in a bankruptcy case may also subject a debtor to criminal prosecution under 18 U.S.C.   § 152, which carries a maximum penalty of five years' imprisonment

Justice Scalia acknowledged the seeming unfairness of the result:

We acknowledge that our ruling forces Siegel to shoulder a heavy financial burden resulting from Law's egregious misconduct, and that it may produce inequitable results for trustees and creditors in other cases. We have recognized, however, that in crafting the provisions of §522, "Congress balanced the difficult choices that exemption limits impose on debtors with the economic harm that exemptions visit on creditors." [7] The same can be said of the limits imposed on recovery of administrative expenses by trustees. For the reasons we have explained, it is not for courts to alter the balance struck by the statute. [8]

Impact

The decision is described as "brisk and workmanlike," and "[t]he absence of qualifications or quibbles in its description of the relevant principles make it just the kind of opinion that is likely to be cited frequently in future briefs to the Court." [9] Law is also seen as forcing trustees and creditors to be more aggressive, early in the case, either to object to exemptions or file a motion to extend the time to object to exemptions in order to provide enough time for investigation. [10]

Justice Scalia did not note another sanction that is available under FRBP §4003 which provides that a trustee may still file an objection to a debtor’s claim of exemption "at any time prior to one year after the closing of the case, if the debtor fraudulently asserted the claim of exemption." However, this provision only came into effect in 2008, and therefore was not applicable in this case. [10]

While equitable subordination is authorized under 11 U.S.C.   § 502(b) as a remedy to ensure that creditors acting in bad faith will not be paid until other valid creditors are paid in full, the Bankruptcy Code does not explicitly provide for a similar "equitable disallowance" remedy with respect to debtors acting in bad faith. Although several of the lower courts had previously ruled in favour of such a remedy, [lower-alpha 3] it appears that Law strongly supports the conclusion that equitable disallowance does not exist under the Code. [11]

Law, together with Stern v. Marshall , can also be seen as another limitation on the bankruptcy courts' inherent authority under §105, thereby reducing the courts' flexibility and discretion that are necessary for the proper functioning of the bankruptcy system. [12]

Notes

  1. ↑ Law appealed orders of the Bankruptcy Court over a dozen times to the Bankruptcy Appeal Panel and seven times to the Court of Appeals. [1]
  2. ↑ Latman v. Burdette, 366F. 3d774 (9th Cir.2004). and In Re Onubah,375B.R.549(9th Cir. BAP2007).
  3. ↑ Relying on Pepper v. Litton , 308 U.S. 295 (1939).

Related Research Articles

Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.

Chapter 7 of Title 11 U.S. Code is the bankruptcy code that governs the process of liquidation under the bankruptcy laws of the U.S. In contrast to bankruptcy under Chapter 11 and Chapter 13, which govern the process of reorganization of a debtor, Chapter 7 bankruptcy is the most common form of bankruptcy in the U.S.

A lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation. The owner of the property, who grants the lien, is referred to as the lienee and the person who has the benefit of the lien is referred to as the lienor or lien holder.

<span class="mw-page-title-main">Foreclosure</span> Legal process where a lender recoups an unpaid loan by forcing the borrower to sell the collateral

Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.

A creditor or lender is a party that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property and service. The second party is frequently called a debtor or borrower. The first party is called the creditor, which is the lender of property, service, or money.

<span class="mw-page-title-main">Bankruptcy in the United States</span> Overview of bankruptcy in the United States of America

In the United States, bankruptcy is largely governed by federal law, commonly referred to as the "Bankruptcy Code" ("Code"). The United States Constitution authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States". Congress has exercised this authority several times since 1801, including through adoption of the Bankruptcy Reform Act of 1978, as amended, codified in Title 11 of the United States Code and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).

<span class="mw-page-title-main">Bankruptcy Abuse Prevention and Consumer Protection Act</span> 2005 American bill

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) is a legislative act that made several significant changes to the United States Bankruptcy Code.

A bankruptcy discharge is a court order that releases an individual or business from specific debts and obligations they owe to creditors. In other words, it's a legal process that eliminates the debtor's liability to pay certain types of debts they owe before filing the bankruptcy case.

<span class="mw-page-title-main">Security interest</span> Legal right between a debtor and creditor over the debtors property (collateral)

In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property which enables the creditor to have recourse to the property if the debtor defaults in making payment or otherwise performing the secured obligations. One of the most common examples of a security interest is a mortgage: a person borrows money from the bank to buy a house, and they grant a mortgage over the house so that if they default in repaying the loan, the bank can sell the house and apply the proceeds to the outstanding loan.

An unfair preference is a legal term arising in bankruptcy law where a person or company transfers assets or pays a debt to a creditor shortly before going into bankruptcy, that payment or transfer can be set aside on the application of the liquidator or trustee in bankruptcy as an unfair preference or simply a preference.

Subordination in banking and finance refers to the order of priorities in claims for ownership or interest in various assets.

Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007), is a United States Supreme Court case about bad faith in bankruptcy.

A cram down or cramdown is the involuntary imposition by a court of a reorganization plan over the objection of some classes of creditors.

The collection of judgments in Virginia may be accomplished under a number of routes provided under Virginia law, depending on the amount of the judgment and the particular assets that the judgment creditor wishes to pursue.

<span class="mw-page-title-main">Doctrine of marshalling</span>

Marshalling is an equitable doctrine applied in the context of lending. It was described by Lord Hoffmann as:

[A] principle for doing equity between two or more creditors, each of whom are owed debts by the same debtor, but one of whom can enforce his claim against more than one security or fund and the other can resort to only one. It gives the latter an equity to require that the first creditor satisfy himself so far as possible out of the security or fund to which the latter has no claim.

Ransom v. FIA Card Services, N. A., 562 U.S. 61 (2011), is a decision by the Supreme Court of the United States involving the means test in Chapter 13 of the United States Bankruptcy Code. The means test had been adopted by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, and Ransom is one of several cases in which the Supreme Court addressed provisions of that act.

Stern v. Marshall, 564 U.S. 462 (2011), was a United States Supreme Court case in which the Court held that a bankruptcy court, as a non-Article III court lacked constitutional authority under Article III of the United States Constitution to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim, even though Congress purported to grant such statutory authority under 28 U.S.C. § 157(b)2(C). The case drew an unusual amount of interest because the petitioner was the estate of former Playboy Playmate and celebrity Anna Nicole Smith. Smith died in 2007, before the Court decided the case, which her estate lost.

Bankruptcy in Florida is made under title 11 of the United States Code, which is referred to as the Bankruptcy Code. Although bankruptcy is a federal procedure, in certain regards, it looks to state law, such as to exemptions and to define property rights. The Bankruptcy Code provides that each state has the choice whether to "opt in" and use the federal exemptions or to "opt out" and to apply the state law exemptions. Florida is an "opt out" state in regard to exemptions. Bankruptcy in the United States is provided for under federal law as provided in the United States Constitution. Under the federal constitution, there are no state bankruptcy courts. The bankruptcy laws are primarily contained in 11 U.S.C. 101, et seq. The Bankruptcy Code underwent a substantial amendment in 2005 with the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005", often referred to as "BAPCPA". The Bankruptcy Code provides for a set of federal bankruptcy exemptions, but each states is allowed is choose whether it will "opt in" or "opt out" of the federal exemptions. In the event that a state opts out of the federal exemptions, the exemptions are provided for the particular exemption laws of the state with the application with certain federal exemptions.

Anguillan bankruptcy law regulates the position of individuals and companies who are unable to meet their financial obligations.

Bank of America, N. A. v. Caulkett, 575 U.S. 790, 135 S. Ct. 1995 (2015), is a bankruptcy law case decided by the Supreme Court of the United States on June 1, 2015. In Caulkett, the Court held that 11 U.S.C. § 506(d) does not permit a Chapter 7 debtor to void a junior mortgage on the debtor's property when the amount of the debt secured by the senior mortgage on that property exceeds the property's current market value.

References

  1. 1 2 3 4 In re Stephen Law, CC-10-1499-MkLaPa (9th Cir. B.A.P.2012).
  2. ↑ USSC, at II.A.
  3. 1 2 Marrama v. Citizens Bank of Massachusetts , 549 U.S. 365 (2007)
  4. ↑ USSC, at II.C.
  5. ↑ USSC, at II.D.
  6. ↑ Chambers v. NASCO, Inc., 501 U.S. 32 (1991)
  7. ↑ Schwab v. Reilly, 560 U.S. 770 (2010).
  8. ↑ Guidry v. Sheet Metal Workers Nat. Pension Fund, 493 U.S. 365, 376-77 (1990).
  9. ↑ Ronald Mann (March 4, 2014). "Opinion analysis: Justices stick with Bankruptcy Code text, rejecting Ninth Circuit's creative punishment of lying bankrupt". SCOTUSblog.
  10. 1 2 Kevin C. McGee (March 5, 2014). "Exemptions, Objections, and Law v. Siegel". impudentbankruptcylawyer.
  11. ↑ Philip D. Anker; Craig Goldblatt; Andrew N. Goldman; Danielle Spinelli; Lisa E. Ewart (March 6, 2014). "Law v. Siegel: The End of Equitable Disallowance?". WilmerHale.
  12. ↑ Robert S. Westermann; David K. Spiro; Sheila de La Cruz; Rachel A. Greenleaf (March 5, 2014). "Law v. Siegel: Chapter 7 Trustees and Bankruptcy Courts Lose, While Debtor's Fraudulent Behavior Goes Unpunished". Hirschler Fleischer.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.