Law v. Siegel: From Tiny Acorns

The scope of Bankruptcy Court powers is again before the Supreme Court this term, although no former Playmates or wealthy octogenarians are involved this time around. The Court granted certiorari to review the Ninth Circuit's decision, Law v. Siegel, which affirmed use of Bankruptcy Code Section 105 to "surcharge" the exempt homestead property of an individual debtor - in effect eliminating the statutory exemption — because the debtor had concocted a fictitious lien on the property, thereby causing the estate to incur overwhelming litigation costs in exposing the fraud. No. 12-5196 (to be argued Jan. 13, 2014).

There is arguably a circuit split on the use of Section 105 to negate statutory exemptions, with the First and Ninth Circuits holding (with qualifications) that a Bankruptcy Court has power to surcharge exempt property in appropriate circumstances, while the Tenth Circuit holds that it does not. Compare Latman v. Burdette, 366 F.3d 774, 785 (9th Cir. 2004), and In re Malley v. Agin, 693 F.3d 28 (1st Cir. 2012) (Souter, J.) with Scrivner v. Mashburn (In re Scrivner), 535 F.3d 1258 (10th Cir. 2008), cert. denied, 129 S. Ct. 1613 (2009).

Still, the Court's decision to review the Ninth Circuit's decision—which was unpublished—came as a surprise. The petition was filed pro se by the individual debtor whose efforts to frustrate creditors included invention of a non-existent lender in China and fabrication of physical evidence of the purported lien on the homestead. The petition did not mention the circuit split, but mainly sought to assert the debtor's innocence in the face of massive evidence of wrongdoing, and to point out that the excess value of the debtor's homestead, which was ultimately sold for more than enough to pay even the fictitious lien, would now go to the Chapter 7 trustee's legal fees, while still leaving the estate administratively insolvent. Litigation over the validity of a $157,000 lien has now cost over $450,000 in administrative costs, with fees still mounting.

The Court solicited the input of the Solicitor General's Office ("SGO"), which took the position that the case was not appropriate for review, for reasons that, in hindsight, may not have been well-chosen. Relying on a decision by Justice Souter sitting by designation on an appeal to the First Circuit, the SGO first argued that the Ninth Circuit was correct that imposition of an "equitable surcharge" was within the Section 105 power of the Bankruptcy Court...