Law v. Siegel

Bankruptcy courts may only disallow statutory exemptions if permitted by statute, and lack any statutory or inherent power to directly or indirectly disallow exemptions by contradicting specific statutes.

Petitioner filed for Chapter 7 liquidation, and under § 522 claimed the California homestead exemption to protect $75,000 in equity on his house. Petitioner also claimed that two liens on his house exceeded the remainder of its value, making liquidation impractical since it would not provide Respondent, the bankruptcy trustee, any proceeds to distribute to other creditors. Respondent sought to avoid the liens through litigation. The bankruptcy court placed a “surcharge” on the $75,000 protected by the homestead exemption in order to pay Respondent’s attorney’s fees as a penalty against Petitioner. The Ninth Circuit Bankruptcy Appellate Panel affirmed, finding no abuse of discretion. The Ninth Circuit affirmed. The Supreme Court granted certiorari.

The Supreme Court reversed, remanded and held that, even where bad faith exists, bankruptcy courts lack inherent or equitable authority to contradict the wording of statutes, and must apply statutes such as § 522 as written. In this case, the bankruptcy court had no discretion to reject exemption claims both meeting the statute’s criteria and which are not subject to statutory exceptions to those exemptions. The bankruptcy court lacked authorization to order the “surcharge” to pay Respondent’s attorney’s fees.