Page 9 - John Hundley 2014

Bankruptcy Law Roundup

Sharp Thinking

No. 111 Perspectives on Developments in the Law from The Sharp Law Firm, P.C. March 2014

Exempt Assets Can’t Be Surcharged Due To Debtor Misconduct

A bankruptcy court may not order that a debtor’s exempt assets be used to pay administrative
expenses incurred as a result of the debtor’s misconduct, the U.S. Supreme Court has held.

In Law v. Siegel, 571 U.S. __, 2014 WL 813702 (March 4, 2014), the bankruptcy court had found that
the debtor had caused a fraudulent lien to be put against his home, giving the impression there was no
non-exempt equity therein. It also believed that the debtor had authored and forged court papers from the
putative creditor contesting the trustee’s attempt to have the lien declared fraudulent. The bankruptcy
court determined it was appropriate to surcharge the entirety of the $75,000 California home exemption
because of the expense which had been caused to the bankruptcy trustee.

The Court ruled that the bankruptcy court’s surcharge was unauthorized because it “contravened a
specific provision of the [Bankruptcy] Code.” It reasoned that 11 U.S.C. § 522(b)(3)(A) and state law
incorporated therein gave the debtor a $75,000 exemption in the home, and that § 522(k) said the
exemption was “not liable for payment of any administrative expense.” The trustee’s attorney’s fees were
an administrative expense, and ordering that they be paid from exempt assets thus violated § 522(k).

Citing 11 U.S.C. § 105(a) and prior case law, the court said a bankruptcy court has “statutory authority
to ‘issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of’
the Bankruptcy Code” and “may also possess ‘inherent power . . . to sanction “‘abusive litigation
practices”’”, but “in exercising those statutory and inherent powers, a bankruptcy court may not
contravene specific statutory provisions.” “The Code’s meticulous – not to say mind-numbingly detailed –
enumeration of exemptions and exceptions to those exemptions confirms that courts are not authorized to
create additional exemptions,” it said.

Sanctions For False-Statement Counseling Affirmed

Sanctions may be awarded for counseling a client to make a false or incomplete statement in a
bankruptcy filing even if the client ultimately does not do so, a U.S. District Court judge in Missouri has
held. The court said 11 U.S.C. § 562(a)(2) “is directed toward improper advice or counseling” and “the
success of the bad counseling would seem to be a matter that at most goes to punishment. The
misconduct is complete when it occurs, although a document filing is essential to the offense.” In re Clink,
497 B.R. 44 (W.D. Mo. 2013).

Bankruptcy Courts Must Implement Code As Written

Bankruptcy courts must “implement the Bankruptcy Code as written, rather than make changes that
they see as improvements,” the Seventh Circuit Court of Appeals has twice intoned already this year.

In In re New Energy Corp., 739 F.3d 1077 (7th Cir. 2014), the court made the admonition in refusing
to find that the Code permitted a prospective competitor at a bankruptcy sale to protest alleged collusion
at that sale. Then in In re Equipment Acquisition Resources, Inc., 742 F.3d 743 (7th Cir. 2014), the court

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