Court Opinion

ID: 806694
Source: CourtListenerOpinion
Date Created: 2012-08-15 16:42:20+00
Date Added: 2024-06-11T18:00:21.384163
License: Public Domain

United States Court of Appeals
                      For the First Circuit

No. 11-2042

                       KENNETH T. MALLEY,

                            Appellant,

                                v.

                     WARREN E. AGIN, Trustee,

                            Appellee.

         APPEAL FROM THE UNITED STATES BANKRUPTCY COURT
                FOR THE DISTRICT OF MASSACHUSETTS

          [Hon. Joan N. Feeney, U.S. Bankruptcy Judge]

                              Before

                       Boudin, Circuit Judge,
                   Souter, Associate Justice,*
                   and Thompson, Circuit Judge.

     Michael Van Dam, with whom Gerald Van Dam, Jill Schafter,
and Van Daw Law LLP were on brief, for appellant.
     Warren E. Agin, with whom Swiggart & Agin, LLC was on brief,
for appellee.

                         August 15, 2012

     *
          The Hon. David H. Souter, Associate Justice (Ret.) of the
Supreme Court of the United States, sitting by designation.
          SOUTER, Associate Justice.        In this direct appeal under

28 U.S.C. § 158(d)(2)(A) from the United States Bankruptcy Court

for the District of Massachusetts, Kenneth Malley, the debtor in a

Chapter 7 liquidation proceeding, see 11 U.S.C. §§ 701-784, appeals

from an order issued in reliance on 11 U.S.C. § 105(a) surcharging

his interest in property listed as exempt.        The issue is whether

§ 105(a) authorizes a charge against the value of otherwise exempt

assets as a remedy for the debtor’s wrongful concealment of non-

exempt and now unavailable property subject to creditors’ claims,

and we hold that the bankruptcy court was acting within its

statutory authority.

          The issue arises in the aftermath of Malley’s treatment

of the proceeds from the sale of his former marital house, which

occurred shortly    before   filing   his   Chapter   7   petition.   The

transaction netted over a quarter of a million dollars, from which

he repeatedly declared and swore under oath that he had received

nothing, the entire balance having gone to his ex-wife, he said.

The trustee of the Chapter 7 bankruptcy estate nonetheless came to

believe that some $27,000 of those funds allegedly going to the ex-

wife were to be used to discharge Malley’s credit card debt, which

prompted the trustee to take action against the ex-wife to avoid

that disposition.      As it turned out, however, Malley’s false

disclosure had actually hidden his secret receipt of $25,000, which

                                  -2-
he claimed he was unable to turn over to the trustee when ordered

to do so.

            Malley’s willful concealment of the funds he received and

apparently spent was, of course, a violation of his disclosure

obligation   under   11     U.S.C.   §   521,   compounded   by   continuing

misrepresentation, all of which amounted to fraud on the court, the

trustee, and the general creditors.             When the trustee moved for

sanctions, the court denied discharge, as it was authorized to do

under 11 U.S.C. § 727, and issued a further order charging the

concealed amount, plus the cost of untangling the fraud, against

the value of an asset claimed as exempt, and so treated up to that

point.   The surcharge dwarfs the value of the asset, Malley’s

interest in a truck used in business, which is the only significant

property mentioned in the briefs that Malley might use in making a

fresh start in life, one of the bankruptcy scheme’s objectives for

the benefit of an honest debtor.         See, e.g., Perez v. Campbell, 402
U.S. 637, 648 (1971).

            The   court’s    surcharge     order   is   challenged   here   as

exceeding the equitable power granted by 11 U.S.C. § 105(a):

                   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.

                                     -3-
          The nub of the textual argument against the validity of

the surcharge is the limitation of the court’s authority to issuing

orders carrying out the “provisions” of the bankruptcy code.

Malley says the restriction should be read narrowly, in contrast,

say, to a grant of authority to make good on the general policies

or objectives of bankruptcy law, or authority simply to vindicate

the   requirement   of    clean   hands   that   equity   jurisdiction

traditionally insists upon from those who seek its relief.

          Thus Malley emphasizes the ostensible inviolability of

exempt property under the terms of 11 U.S.C. § 522(c), in its

provision that “[u]nless the case is dismissed, property exempted

under this section is not liable during or after the case for any

debt of the debtor that arose . . . before [its] commencement.”

There being no dismissal here, the court’s authority to carry out

“provisions” can hardly be exercised by defying this explicit

guarantee, Malley says.

          But we think Malley’s point begs the question.        Should

Malley’s interest in the truck be recognized as “exempted under

this section” when its exemption would consummate a fraud on

creditors by giving the debtor a greater exemption in fact than the

code entitles him to claim in law?        We naturally suppose that

Congress intended bankruptcy courts to be able to enforce the

“provisions” requiring honest disclosure on the part of the debtor,

see § 521, and placing limits on exemption claims, see § 522.

                                  -4-
           Malley seeks to counter that supposition by directing us

to the reasoning of our sister court the Tenth Circuit, in In Re

Scrivner, 535 F.3d 1258 (10th Cir. 2008), which emphasized the

enumerated and discretionary remedies provided for a debtor’s

misconduct: denying or revoking discharge of liability for the pre-

filing debts, § 727(a)(2), or dismissal of the debtor’s petition

for relief, § 707(a)(1).       See Scrivner, 535 F.3d at 1264.        That

court   followed    the   interpretive   assumption   that   a   statutory

enumeration excludes what is left out, and it concluded that adding

surcharge to the menu of remedies would be in derogation of the

Code and rules, and seeking to add to the remedies enumerated would

run afoul of the restriction of § 105(a) power to carrying out

“provisions.”      Id. at 1265.

           But we are not persuaded.     To start with, the limitation

to carrying out “provisions” must be read within the entire section

in which it occurs, which in its second sentence authorizes the

court sua sponte to take “any action necessary or appropriate... to

prevent an abuse of process.”       We have been given no reason to

think that Congress would have intended the spaciousness of this

authority to be confined only to sua sponte action as distinct from

rulings at a trustee’s behest, and it makes sense to read the

second sentence’s authority to prevent abuse of process as an

example of what the first sentence speaks of as action “necessary

or appropriate to carry out the provisions by this title.”           There

                                   -5-
could not be a clearer example of foiling abuse of process than a

surcharge order mitigating the effect of fraud in retaining non-

exempt assets and thus enhancing the set-aside for a fresh start

beyond the amount Congress provided for the honest debtor. Nor can

one easily imagine an order more necessary, for although the

enumerated remedies of dismissal or denial of discharge penalize

the dishonest debtor, they add nothing to the pot for listed

creditors,    who    would   otherwise     bear    the      brunt   of    the     fraud.

Finally, it should be recalled, this line of reasoning does not

enlarge   the      court’s    authority        beyond       “carry[ing]     out     the

provisions”     of    the    code.      When    the     concealed        assets    have

disappeared, as the $25,000 seems to have done, surcharge is an

appropriate and necessary way to vindicate § 521, requiring honest

disclosure    of     non-exempt      assets,    and     §   522,    regulating      the

determination of legitimate exemptions for the debtor’s benefit.

If § 105(a) was not meant to empower a court to issue an order like

the one before us, it is hard to see what use Congress had in mind

for it.

          Accordingly, we endorse the Ninth Circuit’s conclusion in

Latman v. Burdette, 366 F.3d 774 (9th Cir. 2004), that a debtor’s

fraudulent concealment of non-exempt assets is an exceptional

circumstance in which an offsetting surcharge against otherwise

exempt property interests is reasonably necessary “both to protect

the integrity of the bankruptcy process and to ensure that a debtor

                                        -6-
exempts an amount no greater than . . . the Bankruptcy Code

[permits].”   Id. at 786; see id. at 785 (citing instances of common

bankruptcy court practice adopting this position); 2 Collier on

Bankruptcy ¶ 105.01[2] (Henry J. Sommer & Alan Resnick, eds., 16th

ed. 2009) (broad reading of § 105(a) power prevails).

          Although the Supreme Court has yet to consider today’s

issue, its most recent interpretation of § 105(a) accords with the

conclusion we reach.      In Marrama v. Citizens Bank of Mass., 549
U.S. 365 (2007), the Court recognized an unstated limitation on

unqualified   statutory   language,     and   supported   its   reading   by

invoking “the broad authority granted to bankruptcy judges to take

any action that is necessary or appropriate ‘to prevent an abuse of

process’ described in § 105(a) of the Code.”        Id. at 375.    And our

reasoning sits comfortably with this Circuit’s holding in In re

Hannigan, 409 F.3d 480, 481-82 (1st Cir. 2005), that a debtor’s

attempted amendment of a property value as declared in an asset

schedule was properly denied for prior bad faith, notwithstanding

a federal rule providing a right to amend “as a matter of course,”

so long as a case remains open.

          Affirmed and remanded.

                                  -7-