Kenneth T. Malley v. WARREN E. AGIN, Trustee

United States Court of Appeals
For the First Circuit
No. 11-2042
KENNETH T. MALLEY,
Appellant,
v.
WARREN E. AGIN, Trustee,
Appellee.
APPEAL FROM THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joan N. Feeney, U.S. Bankruptcy Judge]
Before
Boudin, Circuit Judge,
Souter, Associate Justice,*
and Thompson, Circuit Judge.
Michael Van Dam, with whom Gerald Van Dam, Jill Schafter,
and Van Daw Law LLP were on brief, for appellant.
Warren E. Agin, with whom Swiggart & Agin, LLC was on brief,
for appellee.
August 15, 2012
The Hon. David H. Souter, Associate Justice (Ret.) of the *
Supreme Court of the United States, sitting by designation.

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SOUTER, Associate Justice. In this direct appeal under
28 U.S.C. § 158(d)(2)(A) from the United States Bankruptcy Court
for the District of Massachusetts, Kenneth Malley, the debtor in a
Chapter 7 liquidation proceeding, see 11 U.S.C. §§ 701-784, appeals
from an order issued in reliance on 11 U.S.C. § 105(a) surcharging
his interest in property listed as exempt. The issue is whether
§ 105(a) authorizes a charge against the value of otherwise exempt
assets as a remedy for the debtor’s wrongful concealment of non-
exempt and now unavailable property subject to creditors’ claims,
and we hold that the bankruptcy court was acting within its
statutory authority.
The issue arises in the aftermath of Malley’s treatment
of the proceeds from the sale of his former marital house, which
occurred shortly before filing his Chapter 7 petition. The
transaction netted over a quarter of a million dollars, from which
he repeatedly declared and swore under oath that he had received
nothing, the entire balance having gone to his ex-wife, he said.
The trustee of the Chapter 7 bankruptcy estate nonetheless came to
believe that some $27,000 of those funds allegedly going to the ex-
wife were to be used to discharge Malley’s credit card debt, which
prompted the trustee to take action against the ex-wife to avoid
that disposition. As it turned out, however, Malley’s false
disclosure had actually hidden his secret receipt of $25,000, which
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he claimed he was unable to turn over to the trustee when ordered
to do so.
Malley’s willful concealment of the funds he received and
apparently spent was, of course, a violation of his disclosure
obligation under 11 U.S.C. § 521, compounded by continuing
misrepresentation, all of which amounted to fraud on the court, the
trustee, and the general creditors. When the trustee moved for
sanctions, the court denied discharge, as it was authorized to do
under 11 U.S.C. § 727, and issued a further order charging the
concealed amount, plus the cost of untangling the fraud, against
the value of an asset claimed as exempt, and so treated up to that
point. The surcharge dwarfs the value of the asset, Malley’s
interest in a truck used in business, which is the only significant
property mentioned in the briefs that Malley might use in making a
fresh start in life, one of the bankruptcy scheme’s objectives for
the benefit of an honest debtor. See, e.g., Perez v. Campbell, 402
U.S. 637, 648 (1971).
The court’s surcharge order is challenged here as
exceeding the equitable power granted by 11 U.S.C. § 105(a):
The court may issue any order, process,
or judgment that is necessary or appropriate
to carry out the provisions of this title. No
provision of this title providing for the
raising of an issue by a party in interest
shall be construed to preclude the court from,
sua sponte, taking any action or making any
determination necessary or appropriate to
enforce or implement court orders or rules, or
to prevent an abuse of process.
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The nub of the textual argument against the validity of
the surcharge is the limitation of the court’s authority to issuing
orders carrying out the “provisions” of the bankruptcy code.
Malley says the restriction should be read narrowly, in contrast,
say, to a grant of authority to make good on the general policies
or objectives of bankruptcy law, or authority simply to vindicate
the requirement of clean hands that equity jurisdiction
traditionally insists upon from those who seek its relief.
Thus Malley emphasizes 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.”
There being no dismissal here, the court’s authority to carry out
“provisions” can hardly be exercised by defying this explicit
guarantee, Malley says.
But we think Malley’s point begs the question. Should
Malley’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? We naturally suppose that
Congress intended bankruptcy courts to be able to enforce the
“provisions” requiring honest disclosure on the part of the debtor,
see § 521, and placing limits on exemption claims, see § 522.
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Malley seeks to counter that supposition by directing us
to the reasoning of our sister court the Tenth Circuit, in In Re
Scrivner, 535 F.3d 1258 (10th Cir. 2008), which emphasized the
enumerated and discretionary remedies provided for a debtor’s
misconduct: denying or revoking discharge of liability for the pre-
filing debts, § 727(a)(2), or dismissal of the debtor’s petition
for relief, § 707(a)(1). See Scrivner, 535 F.3d at 1264. That
court followed the interpretive assumption that a statutory
enumeration excludes what is left out, and it concluded that adding
surcharge to the menu of remedies would be in derogation of the
Code and rules, and seeking to add to the remedies enumerated would
run afoul of the restriction of § 105(a) power to carrying out
“provisions.” Id. at 1265.
But we are not persuaded. To start with, the limitation
to carrying out “provisions” must be read within the entire section
in which it occurs, which in its second sentence authorizes the
court sua sponte to take “any action necessary or appropriate... to
prevent an abuse of process.” We have been given no reason to
think that Congress would have intended the spaciousness of this
authority to be confined only to sua sponte action as distinct from
rulings at a trustee’s behest, and it makes sense to read the
second sentence’s authority to prevent abuse of process as an
example of what the first sentence speaks of as action “necessary
or appropriate to carry out the provisions by this title.” There
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could not be a clearer example of foiling abuse of process than a
surcharge order mitigating the effect of fraud in retaining non-
exempt assets and thus enhancing the set-aside for a fresh start
beyond the amount Congress provided for the honest debtor. Nor can
one easily imagine an order more necessary, for although the
enumerated remedies of dismissal or denial of discharge penalize
the dishonest debtor, they add nothing to the pot for listed
creditors, who would otherwise bear the brunt of the fraud.
Finally, it should be recalled, this line of reasoning does not
enlarge the court’s authority beyond “carry[ing] out the
provisions” of the code. When the concealed assets have
disappeared, as the $25,000 seems to have done, surcharge is an
appropriate and necessary way to vindicate § 521, requiring honest
disclosure of non-exempt assets, and § 522, regulating the
determination of legitimate exemptions for the debtor’s benefit.
If § 105(a) was not meant to empower a court to issue an order like
the one before us, it is hard to see what use Congress had in mind
for it.
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
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exempts an amount no greater than . . . the Bankruptcy Code
[permits].” Id. at 786; see id. at 785 (citing instances of common
bankruptcy court practice adopting this position); 2 Collier on
Bankruptcy ¶ 105.01[2] (Henry J. Sommer & Alan Resnick, eds., 16th
ed. 2009) (broad reading of § 105(a) power prevails).
Although the Supreme Court has yet to consider today’s
issue, its most recent interpretation of § 105(a) accords with the
conclusion we reach. In Marrama v. Citizens Bank of Mass., 549
U.S. 365 (2007), the Court recognized an unstated limitation on
unqualified statutory language, and supported its reading by
invoking “the broad authority granted to bankruptcy judges to take
any action that is necessary or appropriate ‘to prevent an abuse of
process’ described in § 105(a) of the Code.” Id. at 375. And our
reasoning sits comfortably with this Circuit’s holding in In re
Hannigan, 409 F.3d 480, 481-82 (1st Cir. 2005), that a debtor’s
attempted amendment of a property value as declared in an asset
schedule was properly denied for prior bad faith, notwithstanding
a federal rule providing a right to amend “as a matter of course,”
so long as a case remains open.
Affirmed and remanded.
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