The consequences of the U.S. Supreme Court’s recent unanimous ruling in a bankruptcy case aren’t that monumental for debtors considering New York bankruptcy. However, Law v. Siegel illustrates a few important points about exemptions that are worth knowing.
Here are the facts: Petitioner Stephen Law (don’t let the surname confuse you) filed chapter 7 bankruptcy in California in 2004 (yes, bankruptcy cases can take that long to wind their way to the Supreme Court). He took the $75,000 homestead exemption that state offers, but claimed that he had no other equity in the house due to two mortgage liens, one of which in fact turned out to be fraudulent. After the trustee, Alfred Siegel, spent $500,000 to determine there was equity in the house, he sold it and sought to obtain the $75,000 exemption as a “surcharge” from the bankruptcy court via its equitable powers granted to it by the Bankruptcy Code (11 U.S.C. § 105(a)). Law lost all his appeals up to the Supreme Court.
The Supreme Court heard the case and held that all the lower courts were in error. Its reason was that a bankruptcy court’s equitable powers are limited by other statutes in the Bankruptcy Code, here § 522(k), which lists the only two situations in which exempt property can be used to pay administrative expenses, like trustee’s fees. They are when the trustee spends money to avoid a transfer of an asset—not costs incurred by investigating bankruptcy fraud. Thus, the exemption shields the $75,000 from the trustee.
Does this open the door to bankruptcy fraud? Of course not. Law’s unlawful acts can be investigated and punished through other mechanisms, examples include: denial of discharge; bankruptcy court-imposed sanctions for bad-faith conduct, which can be full attorney’s fees that are nondischargeable post-petition debts; and of course, criminal prosecution, which can land a debtor in prison for up to five years. If anything, the existing punishments ought to be more than enough for Siegel to recover his fees.
The Court’s opinion can be found here (PDF)
For typical New York bankruptcy debtors, Law v. Siegel is a legalistic ruling and won’t have much impact on anyone’s cases. There are two lessons, though. The first is that exempt property is in fact exempt, no matter the debtor’s fraudulent behavior. The second is that while going alone on a fraudulent bankruptcy petition can get you a day in front of the Supreme Court, it will cost a lot more than hiring an experienced New York bankruptcy attorney in the first place and doing it right the first time.
For answers to more questions about bankruptcy, exemptions, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced fair debt collection practices act Bruce Weiner for a free initial consultation.
