CHAPTER 7

Law v. Siegel

Issues: 

If a debtor in bankruptcy commits misconduct during bankruptcy proceedings, can statutory exemptions previously granted to him be revoked as punishment for his misbehavior?

Stephen Law filed for Chapter 7 bankruptcy, and Alfred Siegel was appointed as his bankruptcy trustee. Law filed for and was granted an exemption for a value of $75,000 in equity for his home under § 522 of the Bankruptcy Code. Throughout the bankruptcy proceedings, however, Law was uncooperative, and ultimately defrauded the court and Siegel. After Law fraudulently claimed a second mortgage on his home, the court granted Siegel’s request to revoke the previously granted exemption in order to pay administrative expenses for the proceedings. Law argues that by granting the revocation, the court frustrated Congress’s intent to give debtors sufficient funds to support themselves when they emerge from bankruptcy. Siegel responds that courts have the power to protect the judicial process through equitable revocation of exemptions when dishonest and misbehaving debtors act to damage the judicial process. The Supreme Court will decide whether bankruptcy courts have the power to revoke congressionally granted exemptions for debtors’ assets as punishment for debtor misconduct. The decision will impact debtors in bankruptcy and the security of the minimal assets they might retain after proceedings. 

Questions as Framed for the Court by the Parties: 
  1. Whether § 105 empowers a bankruptcy court to eliminate an exemption that § 522 guarantees to the debtor?
  2. Whether a bankruptcy court may—under § 105(a) or its inherent sanctioning powers—order the equitable forfeiture of a claim to an exemption based on the debtor’s egregious misconduct in seeking to wrongly withhold non-exempt assets from the estate? 

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Facts

In January 2004, Stephen Law filed a Chapter 7 petition for bankruptcy. See Law v. Siegel, No. CC-10-1499-MkLaPa, at *2 (B.A.P. 9th Cir.). Alfred H. Siegel acted as the Chapter 7 trustee.

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