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Jenner & Block won a victory before the U. S. Supreme Court on March 4, 2014. The firm’s client, Stephen Law, filed for Chapter 7 bankruptcy in 2004 and claimed that $75,000 of the value of his $363,348 home was covered by California’s homestead exemption. Two years later, the bankruptcy trustee, Alfred H. Siegel, moved to surcharge that $75,000 to pay his legal fees, arguing that Mr. Law had filed a false lien against his property to prevent his creditors from seizing it. Mr. Law maintained that although a court may be able to levy other sanctions, the Code expressly prohibited using a debtor’s exempt property to satisfy the legal fees of the trustee. The bankruptcy court disagreed and held that it could award the $75,000 to the trustee as a matter of equitable discretion. That determination was then affirmed by the Ninth Circuit.
The firm became involved at the cert petition stage in the Supreme Court. In oral argument in January, Partner Matthew S. Hellman said, “[t]he bankruptcy court was not free to override [the Code’s] express and specific prohibition in the name of equity.” Instead, he argued, “Congress made the judgment that debtors and their dependents, even dishonest debtors, ought not be deprived of their exempt property” so that they may emerge from bankruptcy with some basic property.
In its opinion, the Court held that the Bankruptcy Court “exceeded the limits of its authority when it ordered that the $75,000 protected by Law’s homestead exemption be made available to pay Siegel’s attorney’s fees.” The Court also said that “whatever other sanctions a bankruptcy court may impose on a dishonest debtor, it may not contravene express provisions of the Bankruptcy Code by ordering that the debtor’s exempt property be used to pay debts and expenses for which that property is not liable under the Code.”