Law v. Siegel - Prediction: Supreme Court Will Lay Down the Law
The 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 manyobservers 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.
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).
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Senior Bankruptcy Attorney Mark Schnitzer provided valuable assistance with this article.
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