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

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[1]. 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 gotten 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.[2]

But the Supreme Court in  Law v. Siegel[3] , 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 do.”

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.

That is,  unless you are a follower of the edict of the 3rd circuit Court of Appeals. The court there in In re Baker[4] said: “lower courts are obligated to follow Supreme Court dicta [the plural of dictum] 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.  But the Law v. Siegel decision was one of those rare birds, one you remember hearing about but which 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, then you file bankruptcy, and “forget” to disclose that you moved money into your mortgage from a non-exempt source[5]. 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.

[1] Your homestead is an exempt, or protected, asset in Florida…except in some circumstances.

[2] See Lucius v. McLemore741 F. 2d 125 ( 6th Cir. 1982)

[3] 134 S.Ct. 1188(2014)

[4] 791 F. 3d 677

[5] The transfer of dollars from your ring into your house within two years of filing has to be reported on your bankruptcy schedules

Markarian & Hayes
Markarian & Hayes is located in Palm Beach, Wellington & Vero Beach, Florida and serves clients across Florida from Vero Beach to the Florida Keys, including those in and around Palm Beach, West Palm Beach, Pahokee, Delray Beach, Loxahatchee, Coral Springs, Boca Raton, Boynton Beach, Lake Worth, Deerfield Beach, South Bay, Pompano Beach, Hobe Sound, Stuart, Port St. Lucie, Sebastian, Fort Pierce, Hollywood, Tampa, Tallahassee, Orlando, Martin County, Broward County, Hillsborough County, Leon County, Palm Beach County, Fort Lauderdale, Miami-Dade County and Sebastian. The firm’s lawyers also have a long history representing clients’ interests throughout the Caribbean.
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