On March 4, 2014, the United States Supreme Court decided Law v. Siegel, No. 12-5196. The Court held that the bankruptcy court violated the express terms of § 522 of the Bankruptcy Code when it ordered that the $75,000 protected by a debtor's homestead exemption be available to pay a trustee's attorney's fees as an administrative expense. The order exceeded the limits of the bankruptcy court's authority under § 105(a) of the Code and its inherent powers.
The debtor, petitioner Stephen Law, filed for Chapter 7 bankruptcy; his only significant asset was his house, which he valued at $363,348. He claimed that $75,000 was covered by California's homestead exemption, and that the house was subject to two voluntary liens – one of which was a note and deed of trust in favor of Lin's Mortgage & Associates. Law claimed that there was no equity in his house that could be recovered for his other creditors because the sum of the two liens exceeded the house's nonexempt value. Alfred H. Siegel, the Chapter 7 Trustee, initiated an adversary proceeding alleging that the lien in favor of Lin's Mortgage & Associates was fraudulent. After lengthy litigation, the bankruptcy court concluded that "the loan was a fiction, meant to preserve Law's equity in his residence beyond what he was entitled to exempt by perpetrating a fraud on his creditors and the court." The court granted Siegel's motion to "surcharge" Law's $75,000 homestead exemption, making those funds available to defray Siegel's attorney's fees. The Ninth Circuit Bankruptcy Appellate Panel and the Ninth Circuit affirmed.
The Supreme Court reversed in a unanimous decision, reiterating that "whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code." The "surcharge" contravened § 522 of the Code, which made the homestead exemption "not liable for payment of any administrative expense," including the reasonable attorney's fees incurred by Siegel. The Court noted that the Code's "meticulous…enumeration of exemptions and exceptions to those exemptions confirms that courts are not authorized to create additional exceptions." "[F]ederal law provides no authority for bankruptcy courts to deny an exemption on a ground not specified in the Code." The Court noted that there is "ample authority to deny the dishonest debtor a discharge" as well as authority to "impose sanctions for bad-faith litigation conduct" or criminal prosecution for fraudulent conduct in a bankruptcy case.
Justice Scalia delivered the opinion for the unanimous Court.