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New Law on Exemption Surcharging

posted by John Pottow

Get it?

Anyway, Law v. Siegel is now out, with a 9-0 opinion that shouldn't surprise anyone.  It finally gave Justice Scalia a chance to write a strongly textualist bankruptcy opinion for the Court, getting him out of the gulag of concurrences and dissents.  It helped, of course, that he cited myriad other ways to punish debtors than surcharing exemptions.  He wouldn't want to be accused of going soft.


It would not be helpful to Law v. Siegel, but it may not be the true end for Federal law based denial of exemptions for concealing assets. Courts may simply switch to using res judicata -- if an asset is concealed, then the Debtor previously took the legal position that there was no asset, the Court relied on that and found that there was no asset, and now the Debtor says that there is an asset but it's exempt. If you take the position that a thing does not exist, how can you claim that you are legally entitled to that very thing? Certainly this decision does not throw out res judicata as a basis for denying a claimed exemption, though I am sure it's more commonly used when the Debtor attempts to re-litigate a claim of exemption in other contexts.

As I said, it would not apply in Law because he admitted the home existed and claimed it exempt. But to the extent Yonikus and Doan are out, they may be effectively revived at a later date. Of course, if State law provides a bad faith or concealment based reason for denying exemptions, such as hiding an asset during a citation to discover assets, that's still the best way to go about getting the exemption denied.

Justice Scalia opinion is a clear check on the excess of the bankruptcy courts who feel that they have an, "inherent power"[improperly imputed for bankruptcy courts are auxiliary courts and not a court of plenary/independent jurisdiction]. Also, bankruptcy courts are not to be feeding fodder for the chapter 7 trustees, who are constantly abusing the system to make money out of helpless debtors. More important decision to wait and watch will perhaps be Bellingham, which will once again check the excess of article I courts.

"More important decision to wait and watch" - and to predict.

There will be a new majority under Executive Benefits with Alito going to the minority holding that everything is consented to absent objection, and Ginsberg joining the Stern majority establishing that consent must be knowing or explicitly required and noticed under the statute in order to be implied.

So is it now safe to presume that the bankruptcy court does not have constitutional authority to decide (dismiss) common law claims for actual fraudulent conveyance no matter where the fraud occurred, inside or outside bankruptcy, nor against whomever, the debtor, creditor, or a third party?

Bellingham, I feel, its going to be decision by Chief Judge with justices Sotomayor,Kennedy, Scalia, Thomas, Ginsberg backing him and rest will be rest in minority.
The decision will be resurrecting the famous admonition of Justice Brennan from Northern Pipeline, that constitutionality must be maintained at and in all stages of proceeding. Denovo review alone is not enough to cure article III omission. Also reinforced shall be another view of Marathon, bankruptcy judges are not magistrates to pass constitutional muster. Decision is going to be on a structural premise and not on consent or lack of consent which is more of a subset of functional or balancing test. This is my observation from I could gather from the arguments.

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