As usual, when the Supreme Court rules on a bankruptcy matter, there are always nuggets of insight that goes beyond the exact issue being decided. In Law v Siegel, decided on March 4, 2014, the Court issued a unanimous decision, which in and of itself has become something of an anomaly in recent bankruptcy cases, where the Court has been strongly divided.
The Court held that a bankruptcy court cannot surcharge a debtor’s exemptions to pay chapter 7 trustee administrative expenses, even when the expenses were incurred as a result of the debtor’s fraudulent misrepresentations in the case. Nothing too out of the ordinary there, as the Court has evidenced its “strict construction” interpretation of the Code’s statutory language many times before. The Court held that 11 U.S.C. Section 522(k)’s explicit wording prohibits surcharge upon exempt assets.
The Court also reiterated something it has said before: bankruptcy courts cannot use their “general equitable powers” in Section 105 to override specific language in other Code sections. This issue is more far reaching, and is often litigated in many different settings, including the most complex business chapter 11 cases. In the last few paragraphs of the Opinion, the Court pointed out that bankruptcy courts have a number of options to address misconduct in cases, listing several of them specifically. The Law case may strengthen arguments that, so long as Section 105 does not directly contradict some specific language found elsewhere in the Code, it remains a broad equitable remedy for courts to utilize. What is certain is that the case will begin to be cited as authority in a number of settings far removed from the world of exemptions.
Laura Day DelCotto is the founding member of DelCotto Law Group. Her practice of law focuses on helping business owners rehabilitate or sell their companies. Outside of Chapter 11 bankruptcies Laura Day also dedicates her time to educating Kentucky municipalities on ways to avoid Chapter 9 insolvency.