Exemption Reinstated After Bankruptcy Fraud

(CN) - Reversed by the Supreme Court, the 9th Circuit admitted Wednesday that a man's bankruptcy fraud did not free his exempt assets to pay attorneys' fees for a trustee.

Court-appointed trustee Alfred Siegel spent more that $500,000 proving that Stephen Law submitted false evidence for his Chapter 7 bankruptcy. Siegel ultimately discovered that Law used the name of a Chinese woman to show a fraudulent second mortgage on his home, thus shielding the property from creditors under California's homestead exemption.

The bankruptcy court in Los Angeles allowed Siegel to "surcharge" Law's $75,000 homestead exemption to help pay the attorneys' fees, and the 9th Circuit affirmed the move in 2011.

In a reversal that admitted the potential for "inequitable results," however, the high found that the surcharge illegally created an "additional exception" in the federal bankruptcy code.

The 9th Circuit vacated its previous ruling in a brief order Wednesday, and reversed the bankruptcy appellate panel and the bankruptcy court, remanding the case back to Los Angeles.

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