## Facts

- Stephen Law filed a Chapter 7 bankruptcy case and claimed a $75,000 California homestead exemption in his residence.
- Law scheduled a first mortgage and a purported second deed of trust in favor of “Lili Lin,” making the property appear to have no nonexempt equity.
- The Chapter 7 trustee, Alfred H. Siegel, litigated the validity of the Lin lien and proved it was fraudulent and supported by false documents and imposters.
- The trustee sold the home for substantially more than Law’s scheduled value; after paying valid secured debt, the estate would have had equity for creditors.
- The litigation to defeat the fraudulent lien generated over $500,000 in attorney’s fees and expenses, which the bankruptcy court attributed to Law’s misconduct.
- To reimburse those administrative expenses, the bankruptcy court ordered an “equitable surcharge” against Law’s homestead exemption, effectively eliminating it.

## Issues

1. Whether a bankruptcy court may, under 11 U.S.C. § 105(a) or its inherent powers, order that a debtor’s exempt property be used to pay administrative expenses caused by the debtor’s bad-faith misconduct, despite 11 U.S.C. § 522’s protections for exempt property.

## Decision

- The Supreme Court unanimously reversed and remanded.
- The Court held the surcharge was impermissible because § 522(c) and § 522(k) make exempt property not liable for administrative expenses such as the trustee’s attorney’s fees, subject only to statutory exceptions not applicable here.
- The Court held § 105(a) does not authorize relief that conflicts with explicit provisions of the Bankruptcy Code.
- The Court held a bankruptcy court’s inherent power to sanction misconduct likewise cannot be exercised in a way that contravenes the Code.
- The Court rejected treating the surcharge as a belated denial of the exemption, noting the exemption had become final after the objection period expired and the Code does not authorize disallowance of exemptions on a general “bad faith” ground.

## Legal Principles

- Exempt property is generally “not liable” for payment of administrative expenses; courts may not impose remedies that make exempt property liable unless the Code provides an applicable exception.
- Section 105(a) is a limited grant of authority to carry out the Code; it cannot be used to override the Code’s express commands.
- A bankruptcy court’s inherent sanctioning powers exist, but they cannot be used to impose sanctions that contradict statutory limits.
- Courts may address debtor fraud through Code-consistent tools (e.g., denial or revocation of discharge, monetary sanctions collectible from nonexempt assets, and other lawful remedies), not by reallocating protected exemptions.

## Conclusion

The Court held that even in response to egregious debtor fraud, a bankruptcy court may not surcharge an allowed exemption to pay administrative expenses when § 522 shields exempt property from such liability; equitable and inherent powers must operate within the Bankruptcy Code’s express limits.


Law v. Siegel, 571 U.S. 415 (2014)