NACBA advises that the Supreme Court will decide if the debtor's homestead exemption can by surcharged with costs incurred by the Ch. 7 trustee due to debtor's alleged misconduct, to resolve a split among the Circuits.

NACBA Defends Debtor's Homestead Exemption in U.S. Supreme Court

The NACBA membership filed an amicus brief in the case of Law v. Seigel (In re Law), No. 12-5196 (Sept 3, 2013), in defense of the debtor’s homestead exemption. In that case, the lower court, ostensibly pursuant to its power under section 105(a), imposed the surcharge to pay trustee fees resulting from litigation necessitated by debtor misconduct. See Law v. Siegel (In re Law), 435 Fed. Appx. 697, 2011 WL 2181198 (9th Cir. 2011).

The brief argues that while section 105(a) grants equitable power to the court to effectuate the terms of the Bankruptcy Code, it does not permit the court to contravene other sections of the Code or bypass its otherwise applicable provisions. In sections 522(c) and (k) Congress specified that exempt property cannot be used to pay pre-petition debts or administrative expenses. In addition, in sections 522(o) and (q), Congress specified conditions under which a homestead exemption may be compromised as a result of debtor’s misconduct. Section 105(a) permits a court to use its equitable power to “carry out the provisions” of the Code, not to override or contradict them. The brief points out that the court has other methods of sanctioning debtor misconduct. Section 727 contemplates denial or revocation of discharge of specific debts in the face of misconduct. Rule 9011 permits imposition of traditional litigation sanctions against a wayward debtor.

In the alternative, the brief seeks to minimize the damage of a potentially unfavorable decision by asking the Court to allow such equitable action by a lower court only under unusual circumstances where: “(1) the debtor has engaged in misconduct that actually injured one or more creditors by depriving them of estate assets to which they were entitled; (2) the misconduct involved an intentional effort to conceal or dissipate estate assets so as to keep them from creditors; (3) the surcharge is no greater than necessary to remedy the harm to creditors caused by the misconduct (i.e., is remedial rather than punitive); and (4) no other available remedy is adequate.”

The Supreme Court’s decision can be expected to resolve the split between the first and ninth circuits, see Malley v. Agin, 693 F.3d 28, 30 (1st Cir. 2012); Latman v. Burdette, 366 F.3d 774, 785 & n.8 (9th Cir. 2004) (permitting surcharge), and the tenth circuit, see In Re Scrivner, 535 F.3d 1258 (10th Cir.2008) (not permitting surcharge).

The National Consumer Bankruptcy Rights Center has been active in cases around the country – Read about these cases by clicking on the links below:

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