Supreme Court of the United States - SealThe Supreme Court’s decision to grant certiorari in Law v. Siegel to a self-represented bankruptcy debtor who committed numerous frauds on the court and filed over 25 appeals took many observers by surprise. As explained herein, the High Court may (and would be well-advised to) use this case to explain the extent of a bankruptcy court’s authority to sanction a debtor’s fraud and misconduct.

Factual & Procedural History of Law v. Siegel

The case arose when California resident Stephen Law filed for Chapter 7 bankruptcy in 2004.  The Debtor attempted to claim a homestead exemption on his California residence, thereby protecting $75,000 of the equity in his home. The Debtor also claimed that his homestead was subject to two liens which consumed all of its nonexempt value, leaving nothing for creditors.

Skeptical about the second lien in favor of “Lilli Lin,” the Trustee filed an adversary proceeding against “Lilli Lin,” a California resident who admitted she knew the Debtor and that he had approached her about concocting a fake lien on his property. Despite the Debtor’s opposition claiming that his lien is in favor of a purported “Lili Lin” of China, the adversary resulted in a default judgment, thereby avoiding the fraudulent lien. Thereafter, the property was sold for $998,577.80.

The Trustee then filed a motion to surcharge the Debtor’s $75,000 homestead exemption to recover the extraordinary fees incurred by the Trustee’s counsel in exposing and litigating the Debtor’s fraudulent scheme. The first such motion was denied, which was affirmed on appeal, finding that the Trustee may renew his motion so long as appropriate the factual and legal bases exist.

The Trustee then filed a second surcharge motion based on debtor’s fraudulent scheme, perjury and the creation of the apparently fictitious “Lily Lin of China” to frustrate the Trustee’s efforts. The second surcharge motion was granted.

In 2009, this second surcharge order was affirmed by the Ninth Circuit Bankruptcy Appellate Panel, which found that exemptions may be surcharged “when reasonably necessary to protect the integrity of the bankruptcy process . . . .” In 2011, the Ninth Circuit Court of Appeals summarily affirmed the BAP opinion.

In 2012, the Debtor drafted and filed a petition for writ of certiorari to the Supreme Court. This petition was granted, causing many to wonder what the High Court has in mind for this case.

Theories on why the Supreme Court granted review

One blogger posited five theories on why review was granted:

  1. 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.
  2. The Court wants to slap the Ninth Circuit.
  3. The Court wants to make a statement about bad debtors.
  4. The Court wants to scold Trustees who run up big legal bills.
  5. All of the above.

Another blogger speculated that:

the Supreme Court will be loathe to rule the courts lacked any power to sanction the debtor’s conduct. At the same time, the current justices do not seem fans of unbridled judicial discretion. They very well could use the case to set out some guidelines and restrictions on the appropriate use of section 105.

Law v. Siegel will be used to scold dishonest debtors

This author predicts that the High Court will use Law v. Siegel to affirm the lower court’s decision and explain the proper use of a bankruptcy court’s authority under 11 U.S.C. section 105(a).

The High Court has shown an interest in scolding unusually dishonest and manipulative debtors. Notably, the Supreme Court’s 2007 decision in Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007) outlined the ability of bankruptcy courts to sanction debtors who commit bad faith. The debtor in that case made a number of misleading statements about the value of his house, which he transferred to a trust shortly before filing bankruptcy to hide the asset from his creditors.

Much like Marrama, Law v. Siegel involves what commentators are calling “egregious facts” of debtor misconduct, an unusually litigious debtor, and questions as to the extent of a bankruptcy court’s authority to sanction debtor misconduct. Perhaps the High Court will hold Mr. Law out as an example in the same way they did with Mr. Marrama.

In fact, the Supreme Court seemed to show judicial restraint when the contours of Section 105(a) were raised in Taylor v. Freeland & Kronz, 503 U.S. 638 (1992). Instead, the High Court “decline[d] to consider § 105(a) . . . because [the Trustee] raised the argument for the first time in his opening brief on the merits,” rather than raising the issue in the petition for certiorari as required by Supreme Court Rule 14.1(a).

This theory is bolstered by the fact that there is no circuit split for the Supreme Court to clarify, as the Solicitor General’s brief explained. Rather, the courts have uniformly allowed the surcharging of an exemption under facts similar to those in Law v. Siegel. (But see Debtor’s Supplemental Brief filed by newly engaged counsel, claiming that a circuit split exists.)

Moreover, it is hard to imagine the Supreme Court finding the issues raised by the Debtor’s pro per brief to be compelling. Raising questionable legal issues, the brief concludes with a final argument as to why Mr. Law’s appeals are “not bad faith or frivolous or misconduct” [sic]. This seems to suggest that whatever legal issues the High Court found intriguing may require further interpretation of the petitioner’s writ of certiorari.

The Debtor is this case attempted to pull a fraud on the bankruptcy court, the Trustee and his creditors. His failed efforts resulted in an order that he compensate his victims, namely the Trustee and the Trustee’s counsel. These facts present a unique opportunity for the High Court to explain the contours of a court’s authority to remedy such misconduct pursuant to 11 U.S.C. section 105(a).

For up to date information on this case, follow SCOTUSblog.

Scott Talkov is a bankruptcy, real estate and business litigation attorney at Reid & Hellyer in California. His practice has included Chapter 7 trustee representation in homestead litigation before the Ninth Circuit Bankruptcy Appellate Panel. He may be reached at stalkov@rhlaw.com or (951) 682-1771.

Senior Bankruptcy Attorney Mark Schnitzer provided valuable assistance with this article.

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About Scott Talkov

Scott Talkov is a Shareholder in the Riverside office of Reid & Hellyer, one of the Inland Empire's oldest law firms. He practices real estate, business and bankruptcy litigation. He has been repeatedly named a Rising Star by Super Lawyers Magazine.

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About Mark C. Schnitzer

Mark C. Schnitzer is a Senior Attorney with the Riverside law firm of Reid & Hellyer. A bankruptcy attorney serving San Bernardino and Riverside, he is the founding president of the Inland Empire Chapter of the Federal Bar Association and is a member of the American Bankruptcy Institute. He served on the board of directors for the Inland Empire Bankruptcy Forum from 1992 to 2007 and served on the board of directors for the California Bankruptcy Forum from 1993 to 1998.

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Comments

  1. avatar
    William Bender

    Law v Siegel:
    Current Trustee issue of similar issues is being restricted to me by denying
    “”TFR” -on demand.
    Does your firm have someone willing to pursue this issue in the Az. Bankruptcy court?

    Reply
    • avatar
      Admin

      William- We do not practice in Arizona but can refer you to an Arizona attorney if you would like to contact us by phone at (951) 682-1771.

      Reply

 

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