United States: 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Still, the Court's decision to review the Ninth Circuit's decision—which was unpublished—came as a surprise.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, even though it is not among the remedies for debtor misconduct enumerated in the Bankruptcy Code.  Second, it argued that there was not a true circuit split on the precise issue presented, as the prior cases dealt with sanctions for non-disclosure of assets rather than litigation fraud.  Finally, the SGO argued that the Supreme Court's decision in Marrama v. Citizens Bank, 549 U.S. 365 (2007), which upheld use of the Section 105 power to limit debtor-initiated conversion of Chapter 7 cases, supports the broad reading of Section 105 adopted by the Ninth Circuit.

The Court's decision to hear the case despite the seemingly egregious nature of the debtor's misconduct and the contrary recommendation of the SGO invites the question of what exactly the Court wants to address in taking this case.

Section 105:  Age Cannot Wither nor Custom Stale its Infinite Variety

Bankruptcy Courts have traditionally been described as courts of equity, and Bankruptcy Code Section 105(a) is said to codify their equitable powers:

The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.

Still, the bankruptcy practitioner is seldom sorry to see invocation of Section 105 in the Bankruptcy Court applications of adversaries, as it probably means that there is no statutory authority for the relief sought.  Indeed, the permissible uses and limits of this section (and its predecessor statutes and principles) have been fruitful sources of dispute and litigation. 1The modern view, as stated by the Supreme Court in Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988), is that is that the equitable powers of Bankruptcy Courts "must and can only be exercised within the confines of the Bankruptcy Code."  This means that equitable principles may not be used to negate express terms of the Bankruptcy Code, or to create rights and remedies beyond those created by the statute.

Against this background, the SGO may have been waving the proverbial red flag before the bull when it argued in its amicus brief that the Court's 2007 decision in Marrama should be read to justify the Ninth Circuit's use of equitable principles to extinguish property rights that are seemingly guaranteed by Section 522 of the Bankruptcy Code.  Marrama itself is not so broad – the use of Section 105 in that case did not negate a property right, but merely affirmed denial of an attempted conversion to Chapter 7 as a bad faith tactic.  The Supreme Court may wish to use this occasion to explain the limits of Marrama.

The Arithmetic:  $450,000 to Expunge a $157,000 Lien?

It may be questioned whether the bankruptcy forum creates incentives to engage in litigation that would be deemed uneconomic in an ordinary two-party dispute.  In this case, the homestead sold for more than enough to satisfy the undisputed first lien, to pay actual creditors, satisfy the $75,000 homestead exemption, pay the fictitious second lien, pay administrative costs—and then return a surplus to the miscreant debtor.  In other words, if the fraudulent character of the fictitious lien had simply been ignored, no creditor injury would have occurred.

Adding $450,000 in administrative cost to this equation, however, changes everything.  The estate may be administratively insolvent, with or without use of the $75,000 homestead exemption to defray administrative cost.  The Supreme Court may question whether intervention at some point in the proceedings, whether by the Bankruptcy Judge, the Bankruptcy Appellate Panel (which saw the case many times) or the United States Trustee's office could have avoided administrative cost that appears out of proportion to the true economic interests at stake.

Merits briefing is now complete, with arguments focusing on Section 105, the inherent powers of the Bankruptcy Court to punish fraudulent litigation tactics, and deference owed to statutory text where it falls short of producing a result that the Bankruptcy Court  views as just.  From the seemingly humdrum, small-time debtor fraud that provided the factual record in this case, a significant Supreme Court precedent may yet emerge.

Footnotes

1. See, e.g., Caldwell v. Unified Capital Corp. (In re Rainbow Magazine, Inc.), 77 F.3d 278, 284 (9th Cir. 1996) (Section 105(a) provides bankruptcy courts inherent power to sanction vexatious conduct); Jamo v. Katahdin Fed. Credit Union (In re Jamo), 283 F.3d 392, 403 (1st Cir. 2002) (Section 105(a) not a "roving writ"); GAF Corp. v. Johns-Manville Corp. (In re Johns-Manville Corp.), 26 B.R. 405, 409-10 (Bankr. S.D.N.Y. 1983) Section 105 "does not permit the court to ignore, supersede, suspend or even misconstrue the statute itself or the rules."); Walls v. Wells Fargo Bank, 276 F.3d 502, 506-07 (9th Cir. 2002) (Section 105 does not provide an implied private right of action); Bair v. United States (In re Bair), 240 B.R. 247, 254 (Bankr. W.D. Tex. 1999) (exercising authority under Section 105(a) to equitably toll a statute of limitations period).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Herrick, Feinstein LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Herrick, Feinstein LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions