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ESTOPPEL TO THE RESCUE: OBJECTIONS TO EXEMPTIONS ON THE BASIS OF BAD FAITH SURVIVE LAW V. SIEGEL IN CALIFORNIA

In 2014, the U.S. Supreme Court struck down the Ninth Circuit's imposition of an equitable surcharge on the basis of bad faith against a debtor's exempt property in Law v. Siegel, 134 S.Ct. 1188 (2014). The Supreme Court held that the general equitable powers of Bankruptcy Code Section 105(a) did not provide authority for judge-made exemptions to explicit mandates of the Bankruptcy Code. The Supreme Court emphasized that "federal law provides no authority for bankruptcy courts to deny an exemption on a ground not specified in the Code," and that any basis for denial of a state law exemption must arise under state law. Id. at 1197-98. As a result of Law v. Siegel, a growing number of cases have held that bankruptcy courts lack the authority to disallow a debtor's claimed homestead exemption based on Section 105(a), whether indirectly by denying leave to amend, or directly by disallowing the exemption; therefore, effectively rendering an objection to claimed exemptions on the basis of bad faith a nullity.

All hope is not lost, however, given the recent decision of the Bankruptcy Court for the Central District of California in In re Lua, 529 B.R. 766 (Bankr. C.D. Cal. 2015), aff'd, 2015 U.S. Dist. LEXIS 155510 (C.D. Cal. Nov. 10, 2015). The court in Lua applied California state law to determine whether the debtor's claimed homestead exemption may be disallowed on equitable grounds and ultimately found that an amended homestead exemption could be disallowed under the doctrine of equitable estoppel. In Lua, the court reasoned that California courts have long recognized that equitable estoppel applies to homestead exemptions. Moreover, the concept of equitable estoppel is codified in California Evidence Code Section 623 and California Code of Civil Procedure 583.140.

If someone or some company owes you money and has filed bankruptcy, you may still have rights that allow you to collect those monies through proper legal proceedings in the bankruptcy court. Shulman Hodges & Bastian LLP, one of California's leading full service business law firms, has a team of lawyers experienced in collecting monies in and out of the bankruptcy court. We can be contacted at www.shbllp.com or via phone at 949-340-3400

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