The US Supreme Court ruled [opinion, PDF] unanimously Tuesday in Law v. Siegel [SCOTUSblog backgrounder] that a bankruptcy court improperly exceeded its authority by ordering legally exempt funds to be used to pay attorney's costs. The case revolved around a Chapter 7 bankruptcy claim filed by California resident Stephen Law, in which his home was valued at over $300,000, with $75,000 of that amount being legally exempt from bankruptcy proceedings under California law. Alfred Siegel was appointed trustee of the bankruptcy claim. He later discovered that Law had fraudulently represented certain liens on the property in order to protect the $75000, and claimed the money as compensation for the added costs of discovering the fraud. The bankruptcy court agreed, and its decision was affirmed by the US Court of Appeals for the Ninth Circuit. The Supreme Court reversed, saying that the bankruptcy court exceeded its authority by using it to "sanction abusive litigation practices." The court held [AP report] that the bankruptcy court had no authority to override a state law exemption to penalize a dishonest party.
The court heard oral arguments [JURIST report] in the case in January. Law argued that § 522 [text] of the Bankruptcy Code shows a congressional intent to exempt certain assets from bankruptcy collection, regardless of whether the debtor has acted in bad faith. Siegel contended that bankruptcy courts may revoke such exemptions to prevent abuses of the judicial process. The court granted certiorari [JURIST report] in the case last June.