Bankruptcy Law

James Cole, Esquire

Section 105 and inherent powers cannot be utilized to surcharge debtor’s exempt property for costs to estate incurred by debtor’s fraudulent conduct during a bankruptcy case. Law v. Siegel, U. S. Supreme Court No. 12-5196 (Mar. 4, 2014).

Debtor Law scheduled a fictitious claim of $156,929 secured by a junior mortgage on his residence in order to soak up all the equity remaining after the senior mortgage claim and his homestead exemption of $75,000. After several years of litigation with the chapter 7 trustee, the Bankruptcy Court found that Law went further: he himself created and filed papers on behalf of the fictitious creditor in order to obstruct the trustee’s efforts to sell the property. The estate’s legal bill exceeded $500,000 in these efforts. The Bankruptcy Court surcharged the entire homestead exemption in favor of the estate as an equitable remedy for the debtor’s misconduct. The intermediate appellate courts affirmed.

Held: Unanimously reversed.
The reach of § 105 (all writs provision) and the inherent powers of the Bankruptcy Court cannot contravene specific statutory provisions. Section 522(k) generally provides that exempt property is not liable for any administrative expense, and neither specific exception listed in § 522(k) applied. 

Sanctions against attorney under § 105 and inherent powers for making misrepresentations in court hearing were reversed for lack of advance notice. In re Jonathan Michael Young, U.S. Bankruptcy Appellate Panel, 8th Circuit, no. 13-6054 (Mar. 12, 2014).

Debtor did not correctly schedule his delinquent alimony obligations when he filed under chapter 7. In further proceedings after it was converted to chapter 13, he further failed to disclose post-petition delinquencies while continuing to list the alimony as an ongoing monthly expense, and he filed a misleading certification on the status of payments to obtain confirmation of an amended plan. The Bankruptcy Court issued an order to show cause why Debtor’s counsel should not be sanctioned under Rule 9011 for certain specified violations in connection with these lapses. At the hearing, among other sanctions, the Bankruptcy Court fined counsel and suspended her from practice in the bankruptcy court for six months. In addition, finding that counsel made misrepresentations at the show cause hearing, the Court imposed sanctions under § 105 and under its inherent powers.

  The Bankruptcy Appellate Panel affirmed the Rule 9011 sanctions. It reversed the sanctions for misrepresentations at the show cause hearing because counsel did not have (and could not have had) prior notice that such sanctions would be in issue. The case was remanded to allow the Bankruptcy Court, if it desired, to pursue the sanctions upon specific notice and an opportunity to be heard.