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0 12 US 5196

United States Supreme Court
No. 12-5196
Argued: January 13, 2014 Decided: March 4, 2014

Petitioner Law filed for Chapter 7 bankruptcy. He valued his California home at $363,348, claiming that $75,000 of that value was covered by Californias homestead exemption and thus was exempt from the bankruptcy estate. See 11 U. S. C. §522(b)(3)(A). He also claimed that the sum of two voluntary liens--one of which was in favor of "Lins Mortgage & Associates"--exceeded the homes nonexempt value, leaving no equity recoverable for his other creditors. Respondent Siegel, the bankruptcy estate trustee, challenged the "Lin" lien in an adversary proceeding, but protracted and expensive litigation ensued when a supposed "Lili Lin" in China claimed to be the beneficiary of Laws deed of trust. Ultimately, the Bankruptcy Court concluded that the loan was a fiction created by Law to preserve his equity in the house. It thus granted Siegels motion to "surcharge" Laws $75,000 homestead exemption, making those funds available to defray attorneys fees incurred by Siegel in overcoming Laws fraudulent misrepresentations. The Ninth Circuit Bankruptcy Appellate Panel and the Ninth Circuit affirmed.

Held: The Bankruptcy Court exceeded the limits of its authority when it ordered that the $75,000 protected by Laws homestead exemption be made available to pay Siegels attorneys fees. Pp. 5-12.

(a) A bankruptcy court may not exercise its authority to "carry out" the provisions of the Code, 11 U. S. C. §105(a), or its "inherent power . . . to sanction abusive litigation practices, " Marrama v. Citizens Bank of Mass., 549 U. S. 365, 375-376, by taking action prohibited elsewhere in the Code. Here, the Bankruptcy Courts "surcharge" contravened §522, which (by reference to California law) entitled Law to exempt $75,000 of equity in his home from the bankruptcy estate, §522(b)(3)(A), and which made that $75,000 "not liable for payment of any administrative expense," §522(k), including attorneys fees, see §503(b)(2). The surcharge thus exceeded the limits of both the courts authority under §105(a) and its inherent powers. Pp. 5-7.

(b) Siegel argues that an equitable power to deny an exemption by "surcharging" exempt property in response to a debtors misconduct can coexist with §522. But insofar as that argument equates the surcharge with an outright denial of Laws homestead exemption, it founders on this cases procedural history. The Bankruptcy Appellate Panel recognized that because no one timely objected to the homestead exemption, it became final before the surcharge was imposed. And a trustee who fails to make a timely objection cannot challenge an exemption. Taylor v. Freeland & Kronz, 503 U. S. 638, 643-644. Assuming the Bankruptcy Court could have revisited Laws entitlement to the exemption, §522 specifies the criteria that render property exempt, and a court may not refuse to honor a debtors invocation of an exemption without a valid statutory basis. Federal courts may apply state law to disallow state-created exemptions, but federal law itself provides no authority for bankruptcy courts to deny an exemption on a ground not specified in the Code. Pp. 7-10.

(c) Neither the holding of Marrama v. Citizens Bank nor its dictum points toward a different result. There, the debtors bad faith kept him from converting his bankruptcy from a Chapter 7 liquidation to a Chapter 13 reorganization as permitted by §706(a). But that was because his conduct prevented him from qualifying under Chapter 13, and thus he could not satisfy §706(d), which expressly conditions conversion on the debtors ability to qualify under Chapter 13. Pp. 10-11.

(d) This ruling forces Siegel to shoulder a heavy financial burden due to Laws egregious misconduct and may produce inequitable results for other trustees and creditors, but it is not for courts to alter the balance that Congress struck in crafting §522. Cf. Guidry v. Sheet Metal Workers National Pension Fund, 493 U. S. 365, 376-377. P. 11.

(e) Ample authority remains to address debtor misconduct, including denial of discharge, see §727(a)(2)-(6); sanctions for bad-faith litigation conduct under the Bankruptcy Rules, §105(a), or a bankruptcy courts inherent powers; enforcement of monetary sanctions through the normal procedures for collecting money judgments, see §727(b); or possible prosecution under 18 U. S. C. §152. Pp. 11-12.

435 Fed. Appx. 697, reversed and remanded.

Scalia, J., delivered the opinion for a unanimous Court.

Opinion of the Court

 571 U. S. ____ (2014)

NOTICE: This opinion is subject to formal revision before publication in the preliminary print of the United States Reports. Readers are requested to notify the Reporter of Decisions, Supreme Court of the United States, Washington, D. C. 20543, of any typographical or other formal errors, in order that corrections may be made before the preliminary print goes to press.

No. 12-5196

chapter 7 trustee

on writ of certiorari to the united states court of appeals for the ninth circuit

[March 4, 2014]

Justice Scalia delivered the opinion of the Court.

The Bankruptcy Code provides that a debtor may exempt certain assets from the bankruptcy estate. It further provides that exempt assets generally are not liable for any expenses associated with administering the estate. In this case, we consider whether a bankruptcy court nonetheless may order that a debtors exempt assets be used to pay administrative expenses incurred as a result of the debtors misconduct.

I. Background


Chapter 7 of the Bankruptcy Code gives an insolvent debtor the opportunity to discharge his debts by liquidating his assets to pay his creditors. 11 U. S. C. §§704(a)(1), 726, 727. The filing of a bankruptcy petition under Chapter 7 creates a bankruptcy "estate" generally comprising all of the debtors property. §541(a)(1). The estate is placed under the control of a trustee, who is responsible for managing liquidation of the estates assets and distribution of the proceeds. §704(a)(1). The Code authorizes the debtor to "exempt," however, certain kinds of property from the estate, enabling him to retain those assets postbankruptcy. §522(b)(1). Except in particular situations specified in the Code, exempt property "is not liable" for the payment of "any [prepetition] debt" or "any administrative expense." §522(c), (k).

Section 522(d) of the Code provides a number of exemptions unless they are specifically prohibited by state law. §522(b)(2), (d). One, commonly known as the "homestead exemption," protects up to $22,975 in equity in the debtors residence. §522(d)(1) and note following §522; see Owen v. Owen, 500 U. S. 305, 310 (1991). The debtor may elec

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