When is Exempt Not Exempt? The Case of the Rare Bird

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The answer to that question could fill volumes, but most recently, it has encountered a new twist. That twist is embodied in the following fact scenario.

You file bankruptcy and list a particular asset, your home for example, as exempt, which your homestead is an exempt, or protected, asset in Florida … except in some circumstances. Your trustee and creditors have a limited window to object to that exemption. The deadline comes and goes without a peep. You are home free. Right?

Maybe. Maybe not.

The Supreme Court chimed in on this issue, but their “chiming” was in the form of what is known as “dictum.” More about that later.

The case involved a bankruptcy debtor who imposed what his trustee argued was a fictitious lien on his home to eat up whatever equity above exemption the trustee would have received, but for the lien. The trustee had not objected to the exemption itself; he was only contesting the lien. It was, up to that moment, not unusual for a bankruptcy trustee to successfully argue to the court that he should be allowed to break through, or “surcharge” a debtor’s property, even when the asset has achieved exempt status. See Lucius v. McLemore 741 F. 2d 125 ( 6th Cir. 1982)

Davis Miles Referral

However, the Supreme Court in Law v. Siegel 134 S.Ct. 1188(2014), while discussing the rationale for denying surcharge rights to the trustee, inserted a statement that while not directly addressing the issue at hand, shared the court’s general philosophical thinking … or what lawyers refer to as “dictum.” Here is what it said:

“The court may not refuse to honor the exemption absent a valid statutory basis for doing so.”

The problem comes in evaluating the weight that other courts are supposed to give to “dictum.” Courts are bound by rulings of higher courts, but “dictum” is not considered to be legal precedent; it is merely, for lack of a better term, espousing.

Lex Reception

That is, unless you are a follower of the edict of the Third Circuit Court of Appeals. The court there in In re Baker 791 F. 3d 677 said, “lower courts are obligated to follow Supreme Court dicta particularly where there is not [a] substantial reason for disregarding it.”

When the Supreme Court renders a split decision – a majority ruling but with written dissents by justices – there may be a reason to not rely too heavily on dictum. However, the Law v. Siegel decision was one of those rare birds, one you remember hearing about but appears infrequently. It was unanimous.

So you sell that secret diamond ring you kept in the Maxwell House coffee can in your backyard, then use the proceeds to pay down your mortgage. The transfer of dollars from your ring into your house within two years of filing has to be reported on your bankruptcy schedules. When you file bankruptcy and “forget” to disclose that you moved money into your mortgage from a non-exempt source, the trustee only discovers your little ruse after your declared exemption on your house is locked in. She seeks a constructive trust over your exempt home. Does the “dictum” of Law v. Siegel act as your shield? There is a good argument that it does, but time will tell.

Meanwhile, our position remains that Maxwell House coffee cans and bankruptcy filings are not good bedfellows. Julianne Frank

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