First Circuit Affirms Power of Trustee to Surcharge Exempt Property

In Malley v. Agin, — F.3d —(1st Cir. Aug. 2012), the debtor hid property from the trustee, here cash proceeds from the sale of the home.  By the time the trustee figured it out, the funds were gone.  The bankruptcy court permitted a surcharge under section 105 against the debtor’s exempt truck.   The debtor argued “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.’”  “But we think [the debtor’s] point begs the question.  Should [the debtor]’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?”

“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 exempts an amount no greater than the Bankruptcy Code [permits].’”

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