Restructuring & Bankruptcy Alert - March 2014

U.S. Supreme Court Eliminates Equitable Surcharge on Exemption

A Chapter 7 debtor creates a fraudulent mortgage on his residence to cheat creditors and his Chapter 7 trustee.  One would expect that the courts would penalize the debtor for such flagrant misconduct.  But in a recent decision, Law v. Siegel,¹ the Supreme Court reversed lower court rulings that had imposed the judge-made remedy of "equitable surcharge" against the debtor's statutory exemptions, and held that the Bankruptcy Code does not give bankruptcy courts the power to sanction debtors unless the Bankruptcy Code expressly authorizes such a remedy.  While the result is unexpected, the decision fits squarely within the Supreme Court's "plain meaning" doctrine and its clear intent to restrict the equitable discretion of the bankruptcy courts.²