Opinion ID: 171084
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Heading: The Bankruptcy Court's Authorization of the Surcharge of Exempt Assets

Text: The bankruptcy court authorized the surcharge against the debtors' exempt assets pursuant to its equitable powers. A bankruptcy court's equitable powers are codified in 11 U.S.C. § 105(a). See In re Alderete, 412 F.3d 1200, 1206 (10th Cir. 2005) (Section 105(a) of the Bankruptcy Code establishes the equitable powers of the bankruptcy court.). This section provides: The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process. § 105(a). We have held, for example, that this provision grants bankruptcy courts the power to sanction conduct abusive of the judicial process, see In re Courtesy Inns, Ltd., 40 F.3d 1084, 1089 (10th Cir. 1994), and to correct their own mistakes, see In re Themy, 6 F.3d 688, 689-90 (10th Cir.1993). Moreover, § 105(a) grants bankruptcy courts the power to enjoin particular actions that will interfere with a debtor's bankruptcy case. See In re Western Real Estate Fund, Inc., 922 F.2d 592, 601 (10th Cir.1990) (per curiam) (noting that a temporary stay prohibiting a creditor's suit against a nondebtor ... may be permissible). We have repeatedly emphasized, however, that a bankruptcy court may not exercise its broad equitable powers under § 105(a) `in a manner that is inconsistent with the other, more specific provisions of the [Bankruptcy] Code.' In re Frieouf, 938 F.2d 1099, 1103 n. 4 (10th Cir.1991) (quoting In re Western Real Estate Fund, Inc., 922 F.2d at 601). In other words, a bankruptcy court's exercise of its authority under § 105(a) may not contravene or disregard the plain language of a statute. See, e.g., In re Alderete, 412 F.3d at 1207 (holding that the bankruptcy court lacked the power under § 105(a) to grant the partial discharge of student loan debt when the debtor did not show undue hardship as required by statute); In re Tuttle, 291 F.3d 1238, 1245 (10th Cir.2002) (noting that even though the debtor's equitable arguments [under § 105(a)] are compelling, they cannot overcome the plain language of the Code). As we have previously noted, [t]o allow the bankruptcy court, through principles of equity, to grant any more or less than what the clear language of [a statute] mandates would be tantamount to judicial legislation and is something that should be left to Congress, not the courts. In re Alderete, 412 F.3d at 1207 (quotation omitted). In the present case, we must therefore decide whether the bankruptcy court's authorization of the surcharge of exempt assets is consistent with other provisions of the Bankruptcy Code. This is a question of first impression for our court, and only one other circuit has decided whether a bankruptcy court may use its equitable powers to surcharge a debtor's exempt assets when the debtor fails to turn over estate property. In Latman v. Burdette, 366 F.3d 774 (9th Cir.2004), the Ninth Circuit held that the surcharge of a debtor's exempt assets may be an appropriate remedy 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. Id. at 786. As the Latman court noted, id. at 785-86, a number of bankruptcy courts have reached the same conclusion. See, e.g., In re Mazon, 368 B.R. 906, 910 (Bankr.M.D.Fla.2007) (noting that the remedy of surcharge prevent[s] 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); In re Karl, 313 B.R. 827, 831 (Bankr.W.D.Mo.2004) (explaining that the surcharge remedy preserves the spirit of the Bankruptcy Code and the creditors' reasonable expectations in the event of liquidation). As these cases illustrate, when the debtor conceals or fails to surrender assets belonging to the estate, the arguments supporting a surcharge of exempt assets are compelling. Here, the debtors failed to follow a court order requiring the surrender of their post-petition Cheaters distributions. Allowing the debtors to keep the full value of their exempt assets, when they have kept or converted assets belonging to the estate, arguably gives the debtors an undeserved benefit at the expense of the estate and the creditors. [2] But although we recognize this concern, we are not at liberty to grant any more or less than what the clear language of [the Bankruptcy Code] mandates. In re Alderete, 412 F.3d at 1207 (quotation omitted). The Code contains specific provisions governing exemptions. See 11 U.S.C. § 522. Generally, if the debtor claims property as exempt and a party in interest does not object, that property is exempt from property of the estate. See § 522( l ); see also Fed. R. Bankr.P. 4003. Furthermore, the Code contains a limited number of exceptions to the rule that exempted property cannot be used to satisfy pre-petition debts or administrative expenses. See § 522(c), (k). These enumerated exceptions do not include a surcharge of exempt property for failure to turn over estate property. Because the Code contains explicit exceptions to the general rule placing exempt property beyond the reach of the estate, we may not read additional exceptions into the statute. See TRW, Inc. v. Andrews, 534 U.S. 19, 28, 122 S.Ct. 441, 151 L.Ed.2d 339 (2001) (Where Congress explicitly enumerates certain exceptions to a general prohibition, additional exceptions are not to be implied, in the absence of evidence of a contrary legislative intent. (quotation omitted)); see also In re Sadkin, 36 F.3d 473, 478 (5th Cir.1994) (Section 105(a) does not allow the bankruptcy court to override explicit mandates of other sections of the Bankruptcy Code. (quotation omitted)). The Code also contains specific remedies for a debtor's failure to turn over estate property to the trustee as required by 11 U.S.C. § 521(a)(4). For example, if the debtor destroys or conceals estate property with the intent to hinder or defraud a creditor or officer of the estate, the debtor may be denied a discharge. Id. § 727(a)(2). The court may also deny a discharge if the debtor has refused to obey a lawful court order. Id. § 727(a)(6). Similarly, other provisions addressing debtor misconduct contemplate specific remedial action on the part of the trustee and court. For example, § 707 authorizes the dismissal of a Chapter 7 case for cause, including unreasonable delay by the debtor that is prejudicial to creditors. Id. § 707(a)(1). Most salient for purposes of this case, the trustee may request that the court revoke a discharge if the debtor has refused to obey a court order. Id. § 727(d)(3). In a Chapter 7 case, the debtor is often able to obtain a discharge early in the case. See Fed. R. Bankr.P. 4004(a), (c) (requiring court to grant a discharge sixty days after the first date set for the meeting of creditors if certain conditions are satisfied). The provisions governing revocation of a discharge allow the debtor to receive an early discharge while protecting the estate and creditors from debtor misconduct post-discharge. See 6 Collier on Bankruptcy ¶ 727.15[5] (15th ed. rev.). The trustee in this case is apparently pursuing this very remedy, having commenced an adversary proceeding in the bankruptcy court to revoke the debtors' discharge. [3] In short, because the surcharge of exempt property is inconsistent with the Code's provisions governing exemptions and debtor misconduct, it is beyond the scope of a bankruptcy court's equitable authority under § 105(a). Section 105(a) does not empower courts to create remedies and rights in derogation of the Bankruptcy Code and Rules. See In re Alderete, 412 F.3d at 1207; see also United States v. Sutton, 786 F.2d 1305, 1308 (5th Cir.1986) (explaining that § 105(a) does not authorize the bankruptcy courts to create substantive rights that are otherwise unavailable under applicable law, or constitute a roving commission to do equity (footnote omitted)). We therefore hold that the bankruptcy court exceeded its equitable authority under § 105(a) in authorizing the surcharge of the debtors' exempt assets.