Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-06-00122/USCOURTS-ca10-06-00122-0/pdf.json

Parties Involved:
John D. Mashburn
Appellee
Angelique Pisano
Appellant
Toby Scrivner
Appellant

Document Text:

* The parties did not request oral argument, and after examining the briefs

and appellate record, the Court has determined unanimously that oral argument

would not materially assist in the determination of this appeal. See Fed. R.

Bankr. P. 8012. The case is therefore ordered submitted without oral argument.

FILED

U.S. Bankruptcy Appellate Panel

of the Tenth Circuit

June 20, 2007

Barbara A. Schermerhorn

Clerk PUBLISH

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE TENTH CIRCUIT

IN RE TOBY SCRIVNER and

ANGELIQUE PISANO,

Debtors.

BAP No. WO-06-122

TOBY SCRIVNER and ANGELIQUE

PISANO,

Appellants,

Bankr. No. 05-30226-WV

 Chapter 7

v. OPINION

JOHN D. MASHBURN, Trustee,

Appellee.

Appeal from the United States Bankruptcy Court

for the Western District of Oklahoma

Submitted on the briefs:*

Sam George Caporal and Mark W. Hayes, Oklahoma City, Oklahoma, for

Appellants.

John D. Mashburn, pro se.

Before McFEELEY, Chief Judge, CLARK, and THURMAN, Bankruptcy Judges.

THURMAN, Bankruptcy Judge.

Toby Scrivner and Angelique Pisano (the “Debtors”) appeal an order

authorizing the trustee to “surcharge” the Debtors’ exempt assets to collect the

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 1 of 25
1 It appears from the record submitted on appeal that the first time the

Debtors asserted an exemption in the income received from Cheaters was in

response to the Trustee’s Motion to Surcharge exempt assets, filed after the

Debtors failed to comply with the Turnover Order. It does not appear that the

Debtors have amended their Bankruptcy Schedules to formally claim this

exemption. 

2 See Response to Trustee’s Motion for Order of Contempt and Motion to

(continued...)

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value of property of the estate not turned over pursuant to an earlier court order. 

For the reasons stated below, the decision of the bankruptcy court is AFFIRMED.

I. FACTUAL BACKGROUND

The Debtors filed for Chapter 7 bankruptcy relief on October 14, 2005. 

John Mashburn, the Appellee in this case, was appointed the Chapter 7 trustee

(the “Trustee”). At the time of filing, the Debtors’ only significant source of

income was funds received each month for a .5% interest in a television show

called “Cheaters,” which they disclosed on their Bankruptcy Schedules. They did

not initially claim an exemption for their interest in Cheaters, and on June 1,

2006, after notice and hearing, the bankruptcy court issued an Order Granting

Trustee’s Motion to Turn Over (the “Turnover Order”) requiring the Debtors to

turn over the income received from Cheaters post-petition (the “Cheaters

Funds”).1

 

The Debtors did not appeal the Turnover Order and failed to surrender the

Cheaters Funds (approximately $17,000), some $13,000 of which was received

after the Debtors received notice of the Trustee’s Turnover Motion. In response,

the Trustee served the producer of Cheaters with a copy of the Turnover Order

and demanded that Cheaters begin paying the monthly payments directly to the

Trustee. The Trustee also filed a Motion for Contempt and to Surcharge Debtor’s

Exemptions (the “Surcharge Motion”). The Debtors filed a written objection and

the Court conducted a contested hearing on the Surcharge Motion on October 17,

2006, upon proper notice.2

 The bankruptcy court issued an Order granting the

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 2 of 25
2 (...continued)

Surcharge Debtor’s [sic] Exemptions for Failure to Comply with Order for

Turnover Brief in Support, in Appellant’s [sic] Appendix at 78.

3 Order on Trustee’s Motion for Order of Contempt and Motion to Surcharge

Debtors’ Exemptions for Failure to Comply with Order for Turnover at 2,

in Appellant’s [sic] Appendix at 88.

4 The Debtors’ Notice of Appeal refers to an order issued on October 17, 2006 requiring the “turnover of $17,424.75.” Appellant’s Appendix at 90. 

Because the original Turnover Order was issued on June 1, 2006, and the Debtors’

Statement of Issues encompasses the merits of the Surcharge Order, the Court

(continued...)

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Surcharge Motion (the “Surcharge Order”) on October 24, 2006. Specifically,

the bankruptcy court ordered the Debtors to surrender and turn over to the

Trustee $17,424.75 plus interest and $1,300 as a “reasonable attorney fee

incurred by the Trustee in bringing this Motion.”

The Order further provided:

5. In the event said funds are not delivered to the Trustee by

November 6, 2006, then the Trustee may surcharge and is

hereby granted a surcharge against the Debtors’ exempt

property, including Debtors’ retirement funds, to the extent

necessary to satisfy the sums owed under paragraphs 1

through 3 above.

6. Said surcharge shall be in the amount necessary to net to the

Estate and Trustee the payment of the sums owed under

paragraphs 1 through 3 above and that any taxes, penalties or

fees incurred by reason of the withdrawal or borrowing of said

retirement accounts shall be born by the Debtors. The Estate

and Trustee shall bear such tax liability as would have been

incurred for receipt of the distributions from Debtors’

ownership of the Limited Partnership in the Cheaters LLC TV

Show as if such funds had been turned over to the Trustee

without surcharge of the exempt assets.3

The Debtors failed to pay the Cheaters Funds to the Trustee by November 6,

2006.

The Debtors timely appeal the Surcharge Order, arguing that the funds at

issue are exempt under Oklahoma law, that the bankruptcy court lacked authority

to surcharge their exempt property, and that the bankruptcy court followed

improper procedure in considering and issuing the Surcharge Order.4

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 3 of 25
4 (...continued)

treats this appeal as relating to the Surcharge Order only, issued on October 24,

2006. 

5 28 U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed. R. Bankr. P. 8002.

6 In re Am. Ready Mix, Inc., 14 F.3d 1497, 1499 n.2 (10th Cir. 1994)

(internal quotation marks omitted).

7 Elder v. Holloway, 510 U.S. 510, 516 (1994).

8 Nardei v. Maughan (In re Maughan), 340 F.3d 337, 344 (6th Cir. 2003).

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II. JURISDICTION

This Court has jurisdiction to hear timely appeals from final judgments,

orders, and decrees of bankruptcy courts within the Tenth Circuit, unless one of

the parties elects to have the appeal heard by a district court.5

 Neither party

elected to have this appeal heard by the United States District Court for Western

District of Oklahoma. 

A decision is considered final if it “disposes of a particular adversary

proceeding or discrete controversy pursued within the broader framework cast by

the petition.”6

 In this case, the Surcharge Order ended the controversy of the

Trustee’s attempts to recover the Cheaters Funds. Thus, the Surcharge Order is a

final order and the Court determines that jurisdiction over this appeal is

appropriate. 

III. ANALYSIS

A. Standard of Review

None of the factual determinations underlying the Surcharge Order are in

dispute. The Court will review the bankruptcy court’s authority to issue the

Surcharge Order under de novo review,7

 and will review the bankruptcy court’s

decision to apply that authority for an abuse of discretion.8

B. Propriety of the Turnover Order 

At the outset, the Debtors argue that the bankruptcy court abused its

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 4 of 25
9 Concrete Works of Colo., Inc. v. City and County of Denver, 321 F.3d 950,

992 (10th Cir. 2003) (quoting Capps v. Sullivan, 13 F.3d 350, 353 (10th Cir.

1993)).

10 Guidry v. Sheet Metal Workers Int’l Ass’n, Local No. 9, 10 F.3d 700, 705

(10th Cir. 1993) (citation omitted).

11 Fowler v. Shadel, 400 F.3d 1016, 1017 (7th Cir. 2005).

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discretion in ordering them to turn over the income received from Cheaters

because they believe that those funds are exempt. The Trustee argues that the

Debtors are barred by the doctrine of Law of the Case from arguing their right to

assert an exemption in the Cheaters funds. We agree. 

Under the doctrine of Law of the Case, “‘[a] legal decision made at one

stage of litigation, unchallenged in a subsequent appeal when the opportunity to

do so existed, becomes the law of the case for future stages of the same litigation,

and the parties are deemed to have waived the right to challenge that decision at

a later time.’”9

 “The doctrine applies to issues previously decided, either

explicitly or by necessary implication.”10 A debtor’s entitlement to an exemption

is a question of law.11

In the course of issuing the Turnover Order, the bankruptcy court

implicitly determined that the Cheaters Funds were property of the estate and not

exempt from the Trustee’s administration in this case. The Debtors did not

appeal the Turnover Order so the determination that the Cheaters funds were

property of the estate became Law of the Case. The Debtors may not argue the

merits of the legal determinations underlying the Turnover Order in this appeal.

C. Election of Remedies Defense and Procedure of the Bankruptcy

Court

The Debtors further argue that the Trustee is estopped from seeking

turnover of the Cheaters Funds they received post-petition under the Election of

Remedies doctrine. They argue that by demanding that Cheaters make payments

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 5 of 25
12 Whereas these arguments may have been raised orally below, the Debtors

failed to provide the Court with a transcript of the hearing on the Surcharge

Motion. See 10th Cir. BAP L.R. 8009-1(b)(5) (“The appendix must contain all

transcripts, or portions of transcripts, necessary for the court’s review.”). Even if

we were to address the merits of Debtors’ arguments relating to Rule 9014, we

would dismiss them outright. Rule 9014(b) requires service of a contested motion

pursuant to Rule 7004. It does not require the service of a summons.

13 See Walker v. Mather (In re Mather), 959 F.2d 894, 896 (10th Cir. 1992);

Tele-Commc’ns, Inc. v. Comm’r, 104 F.3d 1229, 1233 (10th Cir. 1997) (citing

Anschutz Land & Livestock Co. v. Union Pac. R.R. C., 820 F.2d 338, 344 n.5

(10th Cir. 1987)) (Appellate courts “should not be considered a ‘second shot’

forum . . . where secondary, back-up theories may be mounted for the first

time.”).

14 All statutory references herein are to the Bankruptcy Code, unless stated

otherwise. Because the Debtors filed for Chapter 7 relief before October 17,

2005, the provisions of the Bankruptcy Code which apply in this case were those

in effect before the Bankruptcy Abuse Prevention and Consumer Protection Act of

2005. 

15 11 U.S.C. § 521(3).

16 11 U.S.C. § 521(4).

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to the Trustee, he may not choose a different remedy to enforce the Turnover

Order. They also argue that the Surcharge Motion was procedurally faulty

because the Trustee failed to serve a summons on the Debtors and their counsel

and they contend service of a summons is required under Bankruptcy Rule 9014. 

These issues were not raised by the Debtors in objecting to the Trustee’s

Surcharge Motion,12 and they may not raise it for the first time on appeal.13

D. Bankruptcy Courts Have Authority to Surcharge Exemptions

The crux of this appeal is whether the bankruptcy court had authority to

issue the Surcharge Order. We hold that it did. 

Under 11 U.S.C. § 704(1)14, a Chapter 7 trustee is required to “collect and

reduce to money the property of the estate . . . .” Likewise, a Chapter 7 debtor is

required to “cooperate with the trustee as necessary to enable the trustee to

perform the trustee’s duties under this title”15 and “surrender to the trustee all

property of the estate[.]”16 Failure of the debtor to honor these responsibilities

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 6 of 25
17 See 11 U.S.C. § 727.

18 Latman v. Burdette, 366 F.3d 774, 785-86 (9th Cir. 2004); In re Mazon, No. 9:05-BK-04213-MGW, 2007 WL 1437370, at *4 (Bankr. M.D. Fla. May 11,

2007); In re Koss, 319 B.R. 317, 322-23 (Bankr. D. Mass. 2005); In re Hamblen, 354 B.R. 322, 325-26 (Bankr. N.D. Ga. 2006); In re Karl, 313 B.R. 827, 830

(Bankr. W.D. Mo. 2004).

19 A broad interpretation of the Supreme Court’s recent decision in In re

Marrama, 127 S.Ct. 1105, 1112 (2007) further suggests that a bankruptcy court’s

authority under § 105(a) and general principles of equity is sufficient to issue

orders (such as surcharge orders) necessary to avoid an abuse of the bankruptcy

process. See also Christopher W. Frost, Marrama v. Citizens Bank of

Massachusetts: Strict Construction Versus Inherent Authority, 27 No. 4 Bankr.

Law Letter 1 (April 2007) (“Marrama may signify the Court’s willingness . . . to

consider the systematic limitations of the bankruptcy process and the authority of

the bankruptcy judge to guard against its abuse.”).

20 See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988)

(holding that whatever equitable powers remain in the bankruptcy courts must and

can only be exercised within the confines of the Bankruptcy Code).

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may lead to judgments against the debtor requiring turnover or barring the

debtor’s Chapter 7 discharge.17

To enforce these continuing obligations, a majority of courts hold that a

bankruptcy court is empowered under § 105(a) to authorize the trustee to

“surcharge” the debtor’s exempt assets to compensate the estate for property of

the estate which the debtor refuses to surrender.18 We agree. Section 105(a)

provides that “[t]he court may issue any order, process, or judgment that is

necessary or appropriate to carry out the provisions of this title.” Section 704

and 521 of the Bankruptcy Code require the debtor to turn over property of the

estate to a Chapter 7 trustee. In authorizing a Chapter 7 trustee to enforce these

obligations against exempt property, a bankruptcy court does nothing more than

issue an order “that is necessary or appropriate to carry out the provisions” of the

Bankruptcy Code.19 To that end, courts issuing surcharge orders are not using

Section 105(a) in the abstract to create new law, but are using it to augment those

obligations found elsewhere in the Bankruptcy Code.20

The Court finds persuasive the analysis in In re Mazon, wherein the court

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 7 of 25
21 In re Mazon, No. 9:05-BK-04213-MGW, 2007 WL 1437370, at *2 (Bankr.

M.D. Fla. May 11, 2007)

22 Id. at * 3. The Court notes that Mazon involved debtors who both

concealed and failed to turn over property of the estate, whereas the Debtors in

the present case disclosed the Cheaters Funds from the outset of their case. 

Despite this distinction, the Court believes the analysis in Mazon relating to a

court’s authority to issue a surcharge order is insightful and relevant to this case. 

23 Latman v. Burdette, 366 F.3d 774, 785 (9th Cir. 2004).

24 Id. at 783.

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explained that concealing and failing to turn over assets to a Chapter 7 trustee is

tantamount to claiming an additional and unauthorized exemption “because the

concealment and dissipation prevents administration of the assets by a trustee for

the benefit of creditors.”21 The Mazon court reasoned that a court’s ability to

issue surcharge orders is necessary to “prevent what would otherwise be a fraud

on the court and on creditors caused by the debtor’s failure to schedule and turn

over estate assets.”22

As the Ninth Circuit Court of Appeals stated in In re Latman, authorizing a

surcharge of exempt property is not punitive in nature.23 Where a debtor deserves

to be punished for failing to turn over property of the estate, a trustee should file

an adversary proceeding to bar or revoke the debtor’s discharge. The result of a

judgment barring a debtor’s discharge is that property of the estate is still subject

to the trustee’s administration and the debtor does not receive the benefit of a

discharge.24 But even when a debtor’s discharge is revoked, the debtor is still

required to surrender, and the trustee is still required to pursue, property of the

estate. As such, revoking the debtor’s discharge does little to benefit the estate. 

A debtor whose discharge is revoked is likely to be even more recalcitrant in

responding to a trustee’s efforts to recover property of the estate. In contrast,

surcharging a debtor’s exemption is aimed at the administration of the estate

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 8 of 25
25 Id. at 786 (“[S]urcharge may be the only means fairly to ensure that debtors

retain their statutory ‘fresh start,’ while also permitting creditors access to

property in excess of that which is properly exempted under the Bankruptcy

Code.”).

26 Id. at 785.

27 There may be other situations where a surcharge order would be

appropriate, but we need not discuss those in this appeal. 

28 See U.S. v. Energy Res. Co., 495 U.S. 545, 549 (1990); In re Smart World

Techs., LLC, 423 F.3d 166, 184 (2d Cir. 2005) (“The equitable power

conferred . . . by section 105(a) is the power to exercise equity in carrying out the

provisions of the Bankruptcy Code, rather than to further the purposes of the

Code generally, or otherwise to do the right thing.”) (quoting In re Dairy Mart

Convenience Stores, Inc., 351 F.3d 86, 92 (2d Cir. 2003). 

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only, and does not punish the debtor.25 In essence, surcharging the debtor’s

exempt property is a way to accomplish what the debtor was required to do in the

first place — provide specific value to the estate. Where the property withheld

by the debtor is definite, there is no reason why a court cannot reach that same

amount of exempt property. As the Latman court recognized, to hold otherwise

would allow the debtor a windfall in that the debtor’s recalcitrance would grant

the debtor an avenue to steal from the estate.26 The debtor would leave

bankruptcy with exempt assets plus the assets which he or she failed to turn over

to the trustee. This result would be inequitable and at odds with specific

provisions of the Bankruptcy Code. It is precisely the kind of situation § 105(a)

was designed to remedy. 

To that end, we agree with the holding of Latman and hold that a

bankruptcy court may authorize a trustee to “surcharge” a debtor’s exempt

property to the extent necessary to make the estate whole where a debtor fails to

turn over non-exempt property of the estate after being ordered to do so.27 A

bankruptcy court authorizing a “surcharge” need not make a finding of fraud or

hold the debtor in contempt. Of course, a court’s use § 105(a) is discretionary

and equitable in nature,28 so a “surcharge” should be authorized only where it is

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 9 of 25
29 We are aware that the Latman court pointed to a more definite two part test

for authorizing a “surcharge,” but the authority for this test is unclear. 366 F.3d

at 786. Section 105(a) is at heart a provision based in equity. We see no reason

to unnecessarily bind a court’s discretion. 

30 503 U.S. 638 (1992).

31 The Court notes that even the Taylor Court did not address whether a

(continued...)

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necessary to further the provisions of the Bankruptcy Code and where such an

order is equitable.29

In this case, the bankruptcy court’s Turnover Order implicitly found that

the Cheaters Funds were property of the estate and not exempt, ordering the

Debtors to turn those funds over to the Trustee. The Debtors failed to comply

with the Turnover Order so the Surcharge Order ensued. From the record on

appeal, we cannot say that the bankruptcy court abused its discretion in issuing

the Surcharge Order. 

The Debtors argue that even if the Surcharge Order was appropriate, it had

the effect of a “double surcharge” because it required the Debtors to pay the

taxes and fees associated with liquidating their exempt retirement accounts. We

disagree. The goal of a surcharge is to make the estate whole for a debtor’s

failure to turn over property of the estate. The estate should be in the same

position as it would have been if the debtor had timely complied with the

trustee’s turnover requests. In this case, if the estate was forced to pay the fees

for liquidating the exempt retirement accounts, the estate would not be made

whole. It would be compensated for the amount of the Cheaters Funds, but

would be decreased by the amount of the fees and penalties incurred to liquidate

the retirement funds. 

It may be argued that a debtor’s exemptions are sacrosanct under cases

such as Taylor v. Freeland & Kronz,

30 and that today’s decision infringes on a

debtor’s right to protect exempt property.31 We believe this argument goes too

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 10 of 25
31 (...continued)

bankruptcy court may employ authority under § 105(a) to disallow a claimed

exemption after the time period had expired to object to the claimed exemptions.

32 In re Cogliano, 355 B.R. 792 (9th Cir. BAP 2006).

33 In re Kaelin, 308 F.3d 885 (8th Cir. 2002). 

34 504 U.S. 753 (1992). 

35 See supra n.13.

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far. A debtor’s right to exempt property from the bankruptcy estate is significant

and should be protected by a bankruptcy court. But that right is not absolute. 

Bankruptcy courts may impact a debtor’s exemption in a variety of contexts, such

as attempts to conceal property32 or where amendments to exemption claims are

made in bad faith or prejudice third parties.33 Unlike those situations, today’s

decision has only a minimal impact on a debtor’s exemptions since it impacts the

form but not the value thereof. Because a surcharge should only be for the value

of property the debtor withheld from the estate, the debtor will leave the

bankruptcy case with the property of the same value as if he had timely

surrendered property of the estate and retained only exempt property.

An argument might be made that the bankruptcy court lacked jurisdiction

to issue the Surcharge Order because the funds in the retirement account may

have never been property of the estate under Patterson v. Shumate.

34 The record

on appeal does not indicate whether the Debtors’ retirement account was

qualified under the Employee Retirement Income Security Act (“ERISA”), nor

did the Debtors argue this issue before the bankruptcy court or on appeal. They

argue only that the retirement funds were exempt property. As such, the Debtors

have waived their right to argue that the bankruptcy court lacked jurisdiction

over the retirement account under Patterson.

35 To be sure, if the Debtors had

argued this issue before the bankruptcy court and if the evidence on appeal

established that the retirement account was ERISA qualified, our holding might

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 11 of 25
36 See In re Hamblen, 354 B.R. 322, 329-330 (Bankr. N.D. Ga. 2006); see

also Wal-Mart Stores, Inc. v. Carpenter (In re Carpenter), 245 B.R. 39, 52 (Bankr.

E.D. Va.), aff’d, 252 B.R. 905 (E.D. Va. 2000), aff’d, 36 F. App’x 80 (4th Cir.

2002) (“Although the exempt property is no longer property of the estate, the

court still retains jurisdiction over the property[.]”); In re Stinson, 221 B.R. 726,

730 (Bankr. E.D. Mich. 1998). 

37 In re Karl, 313 B.R. 827, 831 (Bankr. W.D. Mo. 2004).

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be different. But without such arguments and facts before us, we can only

conclude that the retirement account was exempt property — property that was

initially property of the estate but then became exempt. This is an important

distinction because bankruptcy courts have jurisdiction over exempt property but

lack jurisdiction over property which was never property of the estate in the first

place.36 Since the Debtors argue only that the retirement funds are exempt

property and do not address ERISA issues, we believe the bankruptcy court had

jurisdiction to issue the Surcharge Order. 

Today’s decision has less to do with the protections afforded a debtor’s

exemptions than it has to do with enforcing the provisions of the Bankruptcy

Code and avoiding manipulation of the estate. As one court stated, “the purpose

is not to ‘punish’ the debtor, but to reach an equitable result by preserving the

spirit of the Bankruptcy Code and the creditors’ reasonable expectations in the

event of liquidation.”37 We are sensitive to the notion that bankruptcy courts

have an obligation to protect a debtor’s right to exemptions. In determining

whether a surcharge is appropriate, bankruptcy courts should balance the concern

for protecting exemptions with the need to enforce the debtor’s responsibilities

under the Code. We also recognize that the facts of each case will pose distinct

and different concerns for a bankruptcy court. We hold that in this case the

bankruptcy court did not abuse its discretion in determining that a surcharge was

appropriate. 

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 12 of 25
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IV. CONCLUSION

The decision of the bankruptcy court is AFFIRMED.

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 13 of 25
1 The operation of § 522(c) is limited in scope and goes nowhere near as far

as the majority proposes with the Surcharge Order. Section 522(c) provides that

property exempted under § 522 is not liable during or after the case for any debt

with the exception of debts arising under § 523(a)(1) or (5), debts secured by

certain liens, a debt specified in § 523(a)(4) or (6) owed by an institutionaffiliated party of an insured depository institution, or debts in connection with

fraud in the obtaining of student loans. Because the surcharge approved by the

majority goes well beyond the remedy provided under § 522(c), the majority’s

opinion leaves § 522(c) creditors to look to the remains the debtor’s exempt assets

after the trustee has satisfied his surcharge. The surcharge will defeat the

statutory treatment of § 522(c) creditors by reducing § 522(c) creditors to a

second priority behind the trustee’s surcharge. The “categorical reordering of

priorities that takes place at the legislative level of consideration is beyond the

scope of judicial authority.” United States v. Reorganized CF&I Fabricators of

Utah, Inc., 518 U.S. 213, 229 (1996).

CLARK, Bankruptcy Judge, dissenting.

The majority has approved the creation of a new remedy for debtor

misconduct - invading the Debtors’ pension plan and exemptions. New remedies

such as this should be created by Congress, not the courts.

I agree with the majority’s opinion that the “Cheaters” stream of income is

not exempt. I agree that the Turnover Order is a final order from which no

timely appeal was taken, and I agree that the Trustee is not estopped from

seeking alternative remedies. I disagree with respect to the “surcharge” of

Debtors’ exemptions.

The Majority Should Not Use § 105

to Create a Remedy that is Unavailable Under § 522(c)

Section 522(c) of the Bankruptcy Code specifically defines the instances

where a debtor’s exempt property my be surcharged.1

 Failure to turnover

property of the estate and failure to obey a court order do not fall within any of

the enumerated sections of § 522(c). The majority should not be permitted to use

§ 105 to judicially amend § 522(c). Section 522(c) is a detailed and specific

statute. Section 105 is a general statute. A precisely drawn, detailed statute

preempts more general remedies, and it braces the preemption claim when the

general remedy extends the limits of the specific statute. EC Terms of Years

Trust v. United States, 127 S.Ct. 1763, 1767 (2007). Where Congress explicitly

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 14 of 25
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enumerates certain exceptions to a general prohibition, additional exceptions are

not to be implied in the absence of evidence of a contrary legislative intent. 

TRW Inc. v. Andrews, 534 U.S. 19, 28 (2001) (quoting Andrus v. Glover Constr.

Co., 446 U.S. 608, 616-617 (1980)).

The Power of § 105 is Limited

The majority argues that § 105 authorizes the surcharge of Debtors’

exempt property in order “to augment those obligations found elsewhere in the

Bankruptcy Code.” See Majority Opinion at 7. The word “augment” is defined

to mean “[t]o make greater in size, number, amount, degree, etc.; to increase,

enlarge, extend.” Oxford English Dictionary Online (2007). Bankruptcy courts

must use the equitable powers under § 105 within the confines of the Bankruptcy

Code and must not increase, enlarge or extend those powers through judicial fiat. 

“[W]hatever equitable powers remain in the bankruptcy courts must and can only

be exercised within the confines of the Bankruptcy Code.” Norwest Bank

Worthington v. Ahlers, 485 U.S. 197, 206 (1988). The majority cites at 7 n.19 to

In re Marrama,127 S.Ct. 1105 (2007) (5-4 decision), for the proposition that

general principles of equity are sufficient to issue the surcharge order. Marrama

does not go so far. The Marrama Court allows the use of § 105 to authorize the

immediate denial of a motion to convert filed under § 706 in lieu of a conversion

order “that merely postpones the allowance of equivalent relief[.]” 127 S.Ct. at

1112. Marrama does not increase, enlarge, or extend the power of § 105 beyond

the confines of the Bankruptcy Code. What Marrama does is allow the use of

§ 105 to provide an immediate remedy as opposed to an equivalent, but

postponed remedy. 

The Surcharge Fails the Latman Test

The majority identifies five published opinions to support the concept of

surcharging a debtor’s exemptions, and from that argues that “a majority of

courts hold that a bankruptcy court is empowered under § 105(a) to authorize the

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 15 of 25
2 Id. at 786.

3 Under Latman, a surcharge of the debtor’s exempt assets is only

permissible when it is necessary to ensure that the debtor exempts an amount no

greater than what is permitted by the exemption scheme of the Bankruptcy Code. 

In the present case, no one is suggesting that the exemptions to be surcharged are

excessive.

4 Perhaps the majority is suggesting to the lower courts that a “surcharge” is

available where it is easier than the statutory remedies.

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trustee to ‘surcharge’ the debtor’s exempt assets[.]” Majority Opinion at 7. 

Given the length of time that the Bankruptcy Code has been in existence and

given the number of courts faced with situations where a debtor fails to turnover

property of the estate, five opinions is hardly a majority. The majority’s leading

case, Latman v. Burdette, 366 F.3d 774 (9th Cir. 2004), holds that a bankruptcy

court “may equitably surcharge a debtor’s statutory exemptions when reasonably

necessary both to protect the integrity of the bankruptcy process and to ensure

that a debtor exempts an amount no greater than what is permitted by the

exemption scheme of the Bankruptcy Code.”2

 If the test defined in Latman is

applied to the facts of this case, the surcharge of Debtors’ exempt assets would

be prohibited.3

Other Remedies are Available

Congress created a variety of remedies to deal with situations where a

debtor fails to turnover property of the estate or fails to obey a court order. A

trustee has turnover powers under § 542, a trustee is vested with certain rights

and avoiding powers under § 544, a trustee may avoid preferences under § 547,

fraudulent transfers under § 548, postpetition transfers under § 549, and transfers

to third parties under § 550. A trustee may bring an action under § 727 to have

the debtor’s discharge denied or revoked.4

 If a trustee believes that a bankruptcy

crime has been committed, the trustee is duty bound under 18 U.S.C. § 3057 to

report the facts and circumstances to the United States Attorney for criminal

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 16 of 25
5 The deadline for filing complaints objecting to the Debtors’ discharge was

February 13, 2006. Debtors received their discharge on March 7, 2006.

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prosecution. Section 523(a)(13) specifically carves out any order of restitution

issued under Title 18 of the United States Code from a debtor’s discharge. 

Congress knew how to fashion remedies for the estate, and chose not to surcharge

a debtor’s exempt assets as a remedy for the failure to turnover property or the

failure to obey a court order. A trustee is armed with a panoply of remedies

under the existing Bankruptcy Code. Where an alternate remedy exists at law,

equitable relief is not available. Switzer v. Coan, 261 F.3d 985, 991 (10th Cir.

2001). It is fundamental that equity will not grant relief if the complaining party

has, or by exercising proper diligence would have had, an adequate remedy at

law, or by proceedings in the original action. Winfield Assocs., Inc. v.

Stonecipher, 429 F.2d 1087, 1090 (10th Cir. 1970). Here, there is no evidence in

the record that the Trustee made any effort to diligently recover the stream of

income until some five months after the petition date. The equitable powers of

the court should not be utilized to save a less-than-diligent trustee from the

consequences of his errors.

Another remedy is available to compensate this estate for its loss. The

Debtors filed Chapter 7 bankruptcy on October 14, 2005. With the filing, the

Debtors disclosed their interest in the Limited Partnership in the Cheaters

television show, and they disclosed a monthly income ranging from $700.00 to

$1,700.00 from the limited partnership. The Debtors did not claim the proceeds

to be exempt in the original schedules or statements. For reasons unknown and

unexplained in the record, with full knowledge that the Debtors were receiving,

and not turning over, between $700.00 and $1,700.00 per month in nonexempt

income, the Trustee failed to timely object to, or seek an extension of time to

object to, the Debtors’ discharge5

 under § 727. Even more inexplicably the

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 17 of 25
6 Nowhere in the Trustee’s Motion for Turnover, and nowhere in the

Trustee’s Motion for Surcharge, does the Trustee allege that he made any demand

that the Debtors turnover the income stream prior to the March, 2006 Turnover

Motion.

7 Pursuant to Bankruptcy Rule 2010, all trustees must carry a bond

conditioned upon the faithful performance of the trustee’s official duties.

8 It is not clear from the record whether or not the Debtors’ pension plans are

ERISA qualified or whether they contain anti-assignment or anti-alienation

provisions. For purposes of this argument, it is assumed that the Debtors’ pension

plans are ERISA qualified plans, or contain anti-assignment or anti-alienation

provisions.

9 An audit indicated that over $998,000.00 was missing from the Union

funds. 

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Chapter 7 Trustee failed to file a motion for turnover of the proceeds until late

March 2006, more than 5 months after the petition date.6

 It is the trustee’s duty

to collect and reduce to money the property of the estate and to close the estate as

expeditiously as is compatible with the best interests of the parties. For a

Chapter 7 trustee to fail to take action to collect a stream of nonexempt income

for over 5 months smacks of dereliction and invites a further inquiry. Certainly,

fault lies with the Debtors, but to the extent that the Trustee contributed to this

problem, the Trustee should contribute to the solution - with cash.7

 It seems

rather disingenuous for the Trustee to seek an “equitable” remedy from the court,

given the facts of this case and the apparent failings by the Trustee.

Courts May Not Equitably Surcharge a Debtor’s Pension

Equitable grounds are insufficient to support the surcharge of a debtor’s

pension8

 - even a debtor who has misbehaved. See Guidry v. Sheet Metal

Workers Nat’l Pension Fund, 493 U.S. 365 (1990). Guidry was the chief

executive officer of the Sheet Metal Workers International Association, Local 9

(the “Union”), and a trustee of the Union’s pension fund. Guidry’s employment

made him eligible to receive benefits from the Union pension funds. Guidry

embezzled substantial sums of money9

 from the Union. After discovery of the

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 18 of 25
10 If an ERISA qualified plan’s anti-assignment provision is violated by

payment directly to a trustee, the plan may lose both its ERISA qualification and

its tax exempt status. See McLean v. Cent. States, Se. & Sw. Area Pension Fund, 762 F.2d 1204, 1206 (4th Cir. 1985); see also Anderson v. Raine (In re Moore),

(continued...)

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embezzlement, Guidry stipulated to a judgment of $275,000.00 against himself

and in favor of the Union. Eventually, Guidry plead guilty to embezzling more

than $377,000.00 and began serving a prison sentence. While still incarcerated,

Guidry filed a complaint against the Union alleging that the Union had

wrongfully refused to pay him the pension benefits to which he was alleged to be

entitled. The Union, among other things, argued that Guidry breached his

fiduciary duty owed to the Union, and that the Union was entitled to various

remedies under the theories of conversion, fraud, equitable restitution, and

constructive trust. It argued that Guidry forfeited his right to receive benefits as

a result of his criminal misconduct, and that if Guidry were found to have a right

to benefits, those benefits should be paid to the Union rather than to Guidry. The

dispute between Guidry and the Union involved two pools of money. One pool

of money consisted of Guidry’s interest in the Union’s ERISA qualified pension

plan and payable to Guidry over the term of his retirement (the “Plan Funds”). 

The other pool of money consisted of funds paid to Guidry from the pension plan

and held in Guidry’s personal bank account (the “Bank Account Funds”). The

Bank Account Funds had not been commingled with other funds and were

claimed exempt by Guidry under state law. 

In ruling that because the Union’s claims did not override ERISA’s antialienation provisions, the Court reasoned that were it to accept the Union’s

position, ERISA’s anti-alienation provision would be inapplicable whenever a

judgment creditor relied on the remedial provisions of a federal statute, and that

such an approach would eviscerate the protections of ERISA’s prohibition on

assignment or alienation of pension benefits.10 

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 19 of 25
10 (...continued)

907 F.2d 1476, 1480-81 (4th Cir. 1990) (“[A] plan’s ERISA-qualification and tax

exempt status depend on compliance with the anti-assignment provisions in 26

U.S.C. § 401(a)(13) and 29 U.S.C. § 1056(d)(1).”).

-7-

With respect to the Union’s equitable arguments, the Court stated, at 493

U.S. 376-377 (footnote omitted), that:

Nor do we think it appropriate to approve any generalized equitable

exception-either for employee malfeasance or for criminal

misconduct-to ERISA’s prohibition on the assignment or alienation

of pension benefits. Section 206(d) reflects a considered

congressional policy choice, a decision to safeguard a stream of

income for pensioners (and their dependents, who may be, and

perhaps usually are, blameless), even if that decision prevents others

from securing relief for the wrongs done them. If exceptions to this

policy are to be made, it is for Congress to undertake that task. 

As a general matter, courts should be loath to announce equitable

exceptions to legislative requirements or prohibitions that are

unqualified by the statutory text. The creation of such exceptions, in

our view, would be especially problematic in the context of an

antigarnishment provision. Such a provision acts, by definition, to

hinder the collection of a lawful debt. A restriction on garnishment

therefore can be defended only on the view that the effectuation of

certain broad social policies sometimes takes precedence over the

desire to do equity between particular parties. It makes little sense

to adopt such a policy and then to refuse enforcement whenever

enforcement appears inequitable. A court attempting to carve out an

exception that would not swallow the rule would be forced to

determine whether application of the rule in particular circumstances

would be ‘especially’ inequitable. The impracticability of defining

such a standard reinforces our conclusion that the identification of

any exception should be left to Congress.

Pension funds that are protected by anti-alienation or anti-garnishment

provisions are not available for surcharge. “Indeed, this Court itself vigorously

has enforced ERISA’s prohibition on the assignment or alienation of pension

benefits, declining to recognize any implied exceptions to the broad statutory

bar.” Patterson v. Shumate, 504 U.S. 753, 759 (1992) (citing Guidry, 493 U.S.

365).

Courts May Not Equitably Surcharge a Debtor’s Exemptions

The question with respect to the “Bank Account Funds” which was not

addressed by the Court in Guidry, 493 U.S. 365, was later taken up by the Tenth

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 20 of 25
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Circuit Court of Appeals in Guidry v. Sheet Metal Workers Nat’l Pension Fund,

39 F.3d 1078 (1994) (rh’g en banc). The dissent is noteworthy because it

reminds us that even courts of equity must follow the law, and must not be

permitted the luxury of creating their own remedies in the name of equity. The

dissent states at 39 F.3d 1087:

The rain it raineth on the just

And also on the unjust fella:

But chiefly on the just, because

The unjust steals the just’s umbrella.

Charles Bowen, Thad Stem Jr., and Alan Butler, Sam Ervin’s Best

Short Stories, (1973).

The majority today has ruled that a thief is free to keep the fruits of his

crime under Colorado law.

The dissent goes on at 39 F.3d 1089 (footnote omitted) to argue that:

The majority has concluded a faithless servant, an embezzler, a man

who steals from the hard earned labors of the workers, is entitled to

keep the fruits of his crime. I do not believe the Colorado

legislature or the Colorado courts would permit such an

unconscionable result. It is nonsensical to assume Colorado would

want a thief to keep ill-gotten gains. Like Mr. Bumble of Oliver

Twist, I believe “[i]f the law supposes that . . . the law is a ass- a

idiot,” and I am not willing to believe Colorado law to be either. 

Despite a vigorous dissent, the majority found Guidry’s Bank Account

Funds to be exempt under the Colorado exemption statute. The majority’s ruling

was in keeping with the rule that exemptions must be construed liberally and it is

assumed that, in the absence of specific language in the statute limiting the extent

of an exemption, the legislature did not intend to impose a limitation. Under

Guidry, the law of this Circuit is that absent specific statutory language to the

contrary, state exemption law will not be limited regardless of the equities of the

case.

The Surcharge of Debtors’ Exemptions

Impermissibly Invades State Law 

When enacting the bankruptcy laws under Title 11 of the United States

Code, Congress chose not to preempt state exemption law. In fact, Congress did

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 21 of 25
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the opposite. Congress gave the decision to the individual states concerning

which exemptions may be elected by their citizens. The State of Oklahoma opted

out of the federal exemption list pursuant to § 522(b)(1). The exemptions that

the majority would permit to be surcharged are exemptions enacted by the State

of Oklahoma for the people of Oklahoma. The Bankruptcy Court for the Western

District of Oklahoma lacks the power to modify Oklahoma state law. 

The majority supports its decision to allow the surcharge of the Debtors’

state law exemptions citing to the broad equitable powers of 11 U.S.C. § 105. 

Even the broadest possible reading of § 105 cannot be interpreted to preempt

Oklahoma’s exemption laws. Federal law preempts state law in three

circumstances: (1) when Congress explicitly defines the extent to which the

enacted statute preempts state law, (2) when state law actually conflicts with

federal law, or (3) when state law attempts to regulate conduct in a field that

Congress intended the Federal Government to occupy exclusively. United States

v. Wagoner County Real Estate, 278 F.3d 1091, 1096 (10th Cir. 2002). In any

preemption analysis, congressional intent is the ultimate touchstone. Cipollone

v. Liggett Group, Inc., 505 U.S. 504, 516 (1992). Congress did not intend for the

Bankruptcy Code to pre-empt all state laws that otherwise constrain the exercise

of a trustee’s powers. Midlantic Nat’l Bank v. N.J. Dep’t Envtl. Prot., 474 U.S.

494 (1986). Because 11 U.S.C. § 105 does not preempt Oklahoma’s exemption

laws, the Bankruptcy Court must look to the rulings of the highest state court,

and, if no such rulings exist, must endeavor to predict how that high court would

rule. Johnson v. Riddle, 305 F.3d 1107, 1118 (10th Cir. 2002). 

Oklahoma State Law Prohibits the Surcharge of Exemptions

Bankruptcy courts must resort to state law for interpretation of state

exemption rights. In re Duncan, 329 F.3d 1195, 1198 (10th Cir. 2003). In

Oklahoma, a debtor’s exemptions cannot be surcharged for the payment of any

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 22 of 25
11 For example, Oklahoma’s statutory homestead provision, Oklahoma

Statutes title 31 § 1, states in part: “. . . the following property shall be reserved

to every person residing in the state, exempt from attachment or execution and

every other species of forced sale for the payment of debts, except as herein

provided[.]”

12 This same liberal approach is shared by the Bankruptcy Appellate Panel of

the Tenth Circuit. “When interpreting exemption statutes, the interpretation must

further the spirit of such laws. Specifically the court must be guided by the

general principle that exemption statutes are to be liberally construed so as to

effect their beneficent purposes.” In re Bechtoldt, 210 B.R. 599, 601 (10th Cir.

BAP 1997) (citing In re Pancratz, 175 B.R. 85, 93 (D. Wyo. 1994).

13 Certification to a state’s Supreme Court is appropriate where the

proceeding involves important questions of state law. Swink v. Sunwest Bank (In

re Fingado), 955 F.2d 31, 33 (10th Cir. 1992).

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debt.11 As with most states, Oklahoma has long construed its exemptions laws in

a liberal manner.12 “We have liberally construed our homestead exemption in the

interest of the family home.” State of Okla. v. Ten (10) Acres of Land, 877 P.2d

597, 601 (Okla. 1994) (citing First Nat’l Bank v. Burnett, 254 P. 95, 96 (Okla.

1927)). “Each member of the family residing upon the homestead and in good

faith making it a home is equally protected by the statute, and has such an

interest as will prevent its forcible seizure for the debts or liabilities of either.” 

Cassady v. Morris, 91 P. 888, 890 (Okla. Terr. 1907). In ruling that property

protected by Oklahoma’s exemption laws were not subject to forfeiture under

Oklahoma’s Uniform Controlled Dangerous Substance Act, the Supreme Court of

Oklahoma stated that “[w]e believe that the intent of our homestead exemption

statutes was primarily protection of the homestead. We cannot find that the

intent of Oklahoma’s homestead exemption statute is to apply only to forced

sales for the payment of debts and not otherwise.” State of Okla. v. Ten (10)

Acres of Land, 877 at 601. In a case certified13 by the United States Bankruptcy

Court for the Western District of Oklahoma, the Supreme Court of Oklahoma

stated that “we are committed to the rule that statutes exempting property from

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 23 of 25
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forced sale for the payment of debts are to be given a reasonable construction to

effect their intent and purpose. In cases of doubt, the doubt will be resolved in

favor of the exemption.” In re Anderson, 932 P.2d 1110, 1112 (Okla. 1997). 

Bankruptcy courts must interpret state exemption laws under the state’s rules of

statutory construction. In re Hodes, 308 B.R. 61, 68 (10th Cir. BAP 2004). In

another case certified by the United States Bankruptcy Court for the Western

District of Oklahoma, the Supreme Court of Oklahoma ruled that: 

Because Oklahoma has opted out of the federal scheme, debtors are

limited to the exemptions provided under state law. Exemptions are

intended to provide debtor’s [sic] with sufficient assets for a fresh

start and to keep bankrupts from becoming a charge on society. . . .It

is our duty to give effect to legislative acts, not to amend, repeal or

circumvent them.

In re Alexander, 980 P.2d 659, 664-665 (Okla. 1999) (footnotes omitted). 

In a State where even its own drug forfeiture laws cannot defeat a debtor’s

claimed exemptions, it is highly unlikely that the Supreme Court of Oklahoma

would permit a court, in the name of equity, to fashion a generalized remedy that

would amend, repeal, or circumvent the exemption laws of the State of

Oklahoma.

The Majority Cannot Do Indirectly 

That Which Is Prohibited Directly

The Trustee, by seeking to surcharge the Debtors’ exemptions is, in

essence, objecting to and seeking to disallow the Debtors’ claimed exemptions. 

The Trustee’s time for objecting to the Debtors’ exemptions expired, and the

Trustee should not be entitled to now object to the Debtors’ exemptions on

equitable grounds or on any other grounds. Without a timely objection, even

claimed exemptions that have no basis in state law cannot be denied. In re

Coones, 996 F.2d 250, 251 (10th Cir. 1993). The United States Supreme Court in

Taylor v. Freeland & Kronz, 503 U.S. 638, 645 (1992), states that “[w]e have no

authority to limit the application of § 522(l) to exemptions claimed in good

faith.” Likewise, bankruptcy courts have no authority to limit the application of

BAP Appeal No. 06-122 Docket No. 20-1 Filed: 06/20/2007 Page: 24 of 25
14 If the Surcharge Order does nothing more than give permission to the

Trustee to sue the Debtors’ pension plan, the order is meaningless. A trustee

always has the duty to collect and liquidate property of the estate, and does not

need a court order to do so. The automatic stay does not prevent a trustee from

prosecuting any of the estate’s legal rights. In re Lyngholm, 24 F.3d 89, 92 (10th

Cir. 1994). 

15 Due process requirements apply equally to bankruptcy proceedings. Bank

of Marin v. England, 385 U.S. 99, 102 (1966).

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§ 522(l) to exemptions on equitable grounds.

Lack of Jurisdiction

To the extent that the bankruptcy court’s Surcharge Order purports to be a

judgment14 against the Debtors’ pensions, the bankruptcy court lacks jurisdiction

because there is no evidence that the plan administrator has ever been served

with process or even provided with notice of the surcharge action. A retirement

fund, being a trust instrument, is a separate legal entity and is entitled to due

process of law.15 Before a federal court can assert personal jurisdiction over a

defendant, the court must determine whether the exercise of jurisdiction comports

with due process. Service of process and personal jurisdiction both must be

satisfied before a suit can proceed, they are distinct concepts that require separate

inquiries. Peay v. Bellsouth Med. Assistance Plan, 205 F.3d 1206, 1209 (10th

Cir. 2000). There is nothing in the record that shows service of process upon the

pension plan has ever been obtained. There is nothing in the record that shows

the bankruptcy court ever obtained jurisdiction over the corpus of the pension

plan. These inquiries must be satisfied before the Surcharge Order with respect

to the pension plan can be allowed to stand.

Conclusion

This Dissent argues several independent reasons why the Surcharge Order

must not stand. I would REVERSE.

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