Tuesday, June 18, 2013

Supreme Court to Consider Pro Se Challenge to Exemption Surcharge

In an unusual move, the Supreme Court granted cert yesterday to consider the petition of a California man who filed a pro se petition for cert seeking to review the decision of a bankruptcy court to surcharge his homestead exemption under section 105.   No. 12-5196, Law v. Siegel.   The petition for cert and other documents can be found here courtesy of scotusblog.com.  

The case involves a debtor who filed bankruptcy on January 5, 2004 and claimed that his homestead was subject to two liens which consumed all of its nonexempt value.    The Trustee was skeptical about a second lien in the name of Lilli Lin and filed an adversary proceeding seeking its avoidance.   After a default judgment was granted, an attorney appeared representing a Chinese national named Lili Lin.   The Trustee also served a Lilli Lin of Artesia, California who filed a stipulated judgment that she had never loaned any money to the debtor.    Indeed, Lin of California stated that she was an acquaintance of the Debtor and that he had approached her about concocting a fake lien on his property.  Meanwhile, Lin of China, who did not speak English, filed declarations in English which supported the Debtor's position and were similar to his writing style.    

The lien was avoided and the property was sold.    The Trustee then sought to "surcharge" the Debtor's homestead exemption to recover some of his expenses incurred in setting aside the bogus lien.   The Trustee claimed that he had incurred attorney's fees of $456,000, far in excess of the Debtor's exemption of $75,000.  Without citing any legal authority whatsoever, the Bankruptcy Court surcharged the Debtor's exemption to cover a portion of the Trustee's costs.   In re Law, 401 B.R. 447 (Bankr. C.D. Cal. 2009).   

The Ninth Circuit BAP affirmed citing Ninth Circuit precedent allowing exemptions to be surcharged "when reasonably necessary to protect the integrity of the bankruptcy process."    Law v. Siegel (In re Law), 2009 Bankr. LEXIS 4542 (9th Cir. BAP 2009).   The Ninth Circuit affirmed with a vague reference to discovery sanctions, a factor that had not been mentioned in either of the lower court opinions.   Law v. Siegel (In re Law), 435 Fed. Appx. 635 (9th Cir. 2011).   

Undeterred, Stephen Law filed a pro se petition in the Supreme Court and requested permission to proceed in forma pauperis.   The Trustee objected to the petition and the Solicitor General opined that while it might be appropriate to consider surcharges under section 105, this was not the right case.   Nevertheless, the Supreme Court granted the petition on June 17, 2013.

To say this grant of cert is remarkable would be an understatement.   The Supreme Court receives over 7,000 petitions for cert each year, most of which are in forma pauperis petitions  (According to Chief Justice Roberts, 6,160 cases out of a total of 7,713 filed in the 2011 term were IFP cases).   So far, the Court has accepted 32 cases for next year, only three of which are IFP petitions.   (Extrapolating this out, the chance of an IFP case being granted is about one-tenth of one percent).   The Court also tends not to accept many bankruptcy petitions, considering anywhere from one to four in recent terms.   Thus, the probability of accepting an IFP case concerning bankruptcy is astronomical.    Given the vague rationales in the lower courts, it is hard to guess what the Supreme Court may be thinking.    However, here are a few possibilities:

a.   The conservatives on the Court want to squelch the use of sec. 105 to do things that aren't authorized by the literal language of the Code.
b.   The Court wants to slap the Ninth Circuit.
c.   The Court wants to make a statement about bad debtors.
d.   The Court wants to scold Trustees who run up big legal bills.   
 e.   All of the above.

Come this time next year we should know the answer.    


Anonymous said...

so interesting - thanks for the breaking news!

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Brett Bodie said...

I just found this blog, it's fantastic. Very good read. I can only imagine the look on the Tee's face when the Supreme Court granted cert... Obviously nobody wants dishonest debtors to benefit from fraudulent behavior, but I think the lower courts went a step too far to just abdicate his exemption in its entirety solely based on sec 105.