A California BK Court sua sponte vacated its prior orders denying the claimed homestead exemption claim as a bad faith attempt to frustrate a pending sale. The Court examined the application of the U.S. Supreme Court case which examined the protection of exemptions.
The relevant portions of the CA BK Court case follows:
Impact of Law v. Siegel. However, the reach of § 105(a) has seemingly been curtailed after the Supreme Court's decision in
Law v. Siegel. This court must therefore decide whether the power to disallow amended exemptions based on bad faith and prejudice, utilizing § 105(a), survives after
Law.
In
Law, the Supreme Court addressed the scope and application of § 105(a) to remedy an egregious case of bad-faith conduct by the debtor in litigation of an adversary proceeding.
See 134 S. Ct. at 1194-95. The Court acknowledged that, in addition to the statutory power under § 105(a) to carry out the provisions of the Code, the
bankruptcy court "may
[16] also possess 'inherent power . . . to sanction abusive litigation practices.'"
Id. at 1194 (quoting
Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375-76 (2007)). The Court then admonished, "But in exercising those statutory and inherent powers, a
bankruptcy court may not contravene specific statutory provisions . . . . Section 105(a) confers authority to 'carry' out the provisions of the Code, but it is quite impossible to do that by taking action that the Code prohibits."
Id.
In the proceeding below, the Ninth Circuit had followed the precedent established in
Latman v. Burdette (In re Latman), 366 F.3d 774 (9th Cir. 2004), a decision now abrogated by
Law. See Law v. Siegel, 435 F. App'x 697, 698 (9th Cir. 2011). The Ninth Circuit applied § 105(a) to bestow upon the
bankruptcy court the general equitable power to surcharge the debtor's $75,000 homestead exemption to partially compensate the
bankruptcy estate for over $500,000 in administrative expenses resulting from the debtor's bad-faith conduct.
See id. In effect, this amounted to a disallowance of the debtor's homestead exemption.
The Supreme Court, however, rejected all of the arguments for such a remedy, finding that surcharging
[17] an exemption contravened specific provisions in the
Bankruptcy Code and that there was also no statutory basis in the Code for allowing the surcharge on equitable grounds.
See 134 S. Ct. at 1195-96. The Court noted that the surcharge conflicted with two subsections of
§ 522:
§ 522(b), which allows a debtor to exempt property in the first place, and
§ 522(k), which expressly limits the use of exempt property to pay for administrative expenses.
See id. at 1195. The Court noted that
§ 522, with its "carefully calibrated exceptions and limitations," did "not give courts discretion to grant or withhold exemptions based on whatever considerations they deem appropriate," such as the debtor's bad-faith conduct.
Id. at 1196. Further, outside of
§ 522, the Court concluded the Code did not admit "a general, equitable power in
bankruptcy courts to deny exemptions based on a debtor's bad-faith conduct."
Id. at 1197. Although the holding in
Law might initially appear to be quite narrow—applicable only to the equitable surcharge of an exemption—the reasoning behind the
Law decision compels the
bankruptcy courts to reexamine the traditional theories and assumptions upon which they have previously
[18] utilized the equitable powers of § 105(a). That call is particularly pertinent here where the ultimate issue, as in
Law, relates to the debtor's homestead exemption.
Turning to this case, the court concludes that the same rationale in
Law, that prohibited the equitable surcharge of exemptions, must also be applied to the disallowance of amended exemptions based on the equitable powers of § 105(a). Relying solely on the
Bankruptcy Code, a court can no longer disallow an amended exemption on the grounds that the debtor acted in bad faith or that creditors would be prejudiced because there is no "valid statutory basis for doing so."
Id. at 1196.
