Law v. Siegel, - U.S. -, 134 S.Ct. 1188 (2014), holds that bankruptcy courts may not use their equitable powers to contravene the express requirements of the Bankruptcy Code. In re Brown, 851 F.3d 619, 625 (6th Cir. 2017); Netzer v. Office of Lawyer Regulation, 851 F.3d 647, 649 (7th Cir. 2017). More specifically, Siegel overruled case law authorizing bankruptcy courts to disallow or surcharge exemptions pursuant to the equitable powers in Section 105(a). At the same time, however, Siegel made clear that state-created exemptions can be disallowed if they could be disallowed under state law. The Court wrote:
[Trustee Siegel] suggests that those decisions reflect a general, equitable power in bankruptcy courts to deny exemptions based on a debtor’s bad-faith conduct. For the reasons we have given, the Bankruptcy Code admits no such power. It is of course true that when a debtor claims a state-created exemption, the exemption’s scope is determined by state law, which may provide that certain types of debtor misconduct warrant denial of the exemption.
Siegel, 134 S.Ct. at 1196-97.
The bankruptcy court for the Central District of California subsequently held that under California law a California homestead exemption can be disallowed on grounds of equitable estoppel. SeeIn re Lua, 529 B.R. 766 (Bankr. C.D. Cal. 2015). A determination to disallow Lua's homestead exemption claim on that basis was affirmed by the district court. In re Lua, 551 B.R. 448 (C.D. Cal. 2015).
Debtor Lua appealed, asking the Ninth Circuit to hold that state law, and particularly state case law, could not be used to disallow a homestead exemption. She also argued the bankruptcy court had erred in its application of equitable estoppel to disallow her exemption claim.
The decision of the bankruptcy court has now been reversed by the Ninth Circuit. SeeIn re Lua, 2017 WL 2799989 (9th Cir. June 27, 2017). Following the rule that an appellate court will generally not address an argument raised for the first time on appeal, the panel limited its review to the bankruptcy court’s application of equitable estoppel as formulated in Behnke v. State Farm Gen. Ins. Co., 196 Cal. App. 4th 1443, 1462 (2011). In a 2-1 decision, the panel concluded the bankruptcy court had not properly applied the doctrine to the case facts. It reversed and remanded with instructions that the bankruptcy court allow Lua’s claimed homestead exemption.
The decision leaves intact the conclusion that a bankruptcy court can disallow a California debtor’s homestead exemption claim on grounds of equitable estoppel. On the date of the Ninth Circuit’s decision in Lua, Judge Kwan (U.S. Bankruptcy Court, C.D. California) denied a homestead exemption claim on grounds of equitable estoppel. SeeIn re Gonzalez, 2017 WL 2787594 (Bankr. C.D. Cal. June 27, 2017). The issue may be addressed in In re Gilman, No. 16-55436, which is expected to be argued in the Ninth Circuit in November 2017.
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