U.S. High Court Reverses; Assets Cannot Be Used to Pay Bankruptcy Trustee’s Attorney Fees

 WASHINGTON, D.C. — (Mealey’s) In a unanimous decision, the U.S. Supreme Court today reversed a Ninth Circuit U.S. Court of Appeals ruling and held that a bankruptcy court exceeded the limits of its authority when it ruled that $75,000 that was protected under the homestead exemption in a Chapter 7 bankruptcy should be used to pay the trustee’s attorney fees (Stephen Law v. Alfred Siegel, No. 12-5196, Chapter 7, U.S. Sup.; See 1/22/14) (lexis.com subscribers may access Supreme Court briefs and the opinion for this case).

Bankruptcy

In 2004, Stephen Law filed for Chapter 7 bankruptcy in the U.S. Bankruptcy Court for the Central District of California and sought a homestead exemption for his home property valued at $363,348.

The Chapter 7 trustee, Alfred Siegel, did not object to the homestead exemption, but two years later, he moved to surcharge Law's homestead exemption $75,000.

The Bankruptcy Court granted the surcharge, but the U.S. Bankruptcy Appellate Panel (BAP) for the Ninth Circuit reversed the surcharge order, concluding that it was "not warranted."

Surcharge

The trustee appealed to the Ninth Circuit, which reversed the BAP's ruling and determined that the surcharge was proper.Law appealed to the Supreme Court.

Writing for the Supreme Court, Justice Antonin Scalia said that a bankruptcy court may not exercise its authority to “carry out” the provisions of 11 U.S. Code Section 105(a), and he said the Bankruptcy Court’s “surcharge” in the case at hand contravened 11 U.S. Code Section 522, which entitled Law to exempt the $75,000 in question.

The Supreme Court said that it has long held that “whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of” the Bankruptcy Code.

11 U.S. Code Section 522

Siegel had argued that even though attorney fees incurred responding to a debtor’s fraud qualify as “administrative expenses” for purposes of determining the trustee’s right to reimbursement under 11 U.S. Code Section 503(b), they do not so qualify for purposes of 11 U.S. Code Section 522(k).

The Supreme Court held, however, that Siegel gave no reason to depart from the “normal rule of statutory construction” that words repeated in different parts of the same statute generally have the same meaning.

“But even assuming the Bankruptcy Court could have revisited Law’s entitlement to the exemption,” the Supreme Court said, 11 U.S. Code Section 522 “does not give courts discretion to grant or withhold exemptions based on whatever considerations they deem appropriate.”

The Supreme Court added that its decision “does not denude bankruptcy courts of the essential ‘authority to respond to debtor misconduct with meaningful sanctions.’”

However, the Supreme Court said, “Whatever other sanctions a bankruptcy court may impose on a dishonest debtor, it may not contravene express provisions of the Bankruptcy Code by ordering that the debtor’s exempt property be used to pay debts and expenses for which that property is not liable under the Code.”

Law is represented by Matthew Hellman of Jenner & Block in Washington.Siegel is represented by Neil K. Katyal of Hogan Lovells in Washington.

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