In re Scrivner

• Decision Date: 08 August 2008
• Docket Number: No. 07-6167.,07-6167.
• Citation: 535 F.3d 1258
• Parties: In re Toby SCRIVNER and Angelique Pisano, Debtors. Toby Scrivner and Angelique Pisano, Appellants, v. John D. Mashburn, Trustee, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

535 F.3d 1258

In re Toby SCRIVNER and Angelique Pisano, Debtors Toby Scrivner and Angelique Pisano, Appellants, v. John D. Mashburn, Trustee, Appellee.

No. 07-6167.

United States Court of Appeals, Tenth Circuit.

August 8, 2008.

Submitted on the briefs:^*

Sam George Caporal and Mark W. Hayes, Oklahoma City, OK, for the Appellants.

John Mashburn, Trustee, Garvin, Agee, Carlton & Mashburn, P.C., Edmond, OK, for the Appellee.

Before TACHA, BRISCOE, and HARTZ, Circuit Judges.

TACHA, Circuit Judge.

Toby Scrivner and Angelique Pisano (the "debtors") appeal from the judgment of the Bankruptcy Appellate Panel ("BAP") affirming the bankruptcy court's authorization of a surcharge of their exempt property. Exercising jurisdiction pursuant to 28 U.S.C. § 158(d)(1), we REVERSE the BAP's judgment and the bankruptcy court's order authorizing the surcharge of the debtors' exempt assets.

I. BACKGROUND

On October 14, 2005, the debtors filed a Chapter 7 petition for bankruptcy. In their schedule of assets, the debtors disclosed a 0.5% ownership interest in a television show called "Cheaters." They also reported that this interest produces "a monthly income ranging from $700 to $1,700," and they did not claim this income as exempt in their schedule of assets. In addition, the debtors did not surrender the monthly income from their interest in Cheaters to the trustee.

In March 2006, the bankruptcy court granted the debtors a discharge. After the debtors received the discharge, the trustee filed a motion to compel the turnover of the Cheaters distributions. The bankruptcy court granted the motion in an order requiring the debtors to turn over the post-petition income generated by their interest in Cheaters. The debtors did not appeal the order, and they did not surrender any of the post-petition Cheaters income.

Beginning in June 2006, after delivering a copy of the court's turnover order to the Cheaters's producers, the trustee began receiving the debtors' distributions from their interest in Cheaters directly from the producers. In order to recover post-petition distributions prior to June 2006, the trustee filed a motion for an order of contempt and to surcharge the debtors' exemptions in the amount of $17,424.75 plus interest, costs, and attorneys' fees. In response, the debtors argued that, because the court had already granted them a discharge, the trustee could not ask the court to compel the turnover of estate property. In addition, they argued that their exemptions are protected from surcharge by state and federal law. They also argued — for the first time — that the Cheaters distributions are exempt property under Oklahoma law and therefore not estate property subject to turnover. They did not, however, file an amendment to their schedule of assets to claim the Cheaters distributions as exempt.

On October 24, 2006, the bankruptcy court issued an order granting the trustee's motion to surcharge the debtors' exemptions. The court ordered the debtors to turn over to the trustee $17,424.75 plus interest and $1300 in attorneys' fees by November 6, 2006. In the event the debtors failed to surrender the funds, the court order gave the trustee the authority to surcharge the debtors' exemptions, including the debtors' retirement funds, to the extent necessary to satisfy the entire amount owed to the trustee. The court further held that the debtors are responsible for any taxes, penalties, or fees incurred in withdrawing or borrowing money from their retirement accounts.

The debtors appealed the bankruptcy court's order to the BAP, which affirmed — by a vote of two to one — the bankruptcy court's decision to authorize the surcharge of the debtors' exemptions. In addition, all three judges rejected the debtors' argument that the bankruptcy court erred in ordering the turnover of the Cheaters income because it is exempt under state law. Although one judge simply noted that this property is not exempt, the BAP majority refused to consider the debtors' exemption argument, holding that the bankruptcy court's implicit determination that the Cheaters income is estate property became the law of the case when the debtors did not appeal the turnover order. The debtors appeal the BAP's judgment affirming the bankruptcy court's authorization of the surcharge,¹ as well as the BAP's refusal to decide whether the Cheaters distributions are exempt.

II. DISCUSSION

Although this is an appeal from a BAP decision, we independently review the decision of the bankruptcy court. See In re Warren, 512 F.3d 1241, 1248 (10th Cir. 2008) (explaining that by independently reviewing the bankruptcy court's decision, "we treat the BAP as a subordinate appellate tribunal whose rulings are not entitled to any deference (although they certainly may be persuasive)"). We review questions of law de novo and the bankruptcy court's factual findings for clear error. Id.

A. The Bankruptcy Court's Authorization of the Surcharge of Exempt Assets

The bankruptcy court authorized the surcharge against the debtors' exempt assets pursuant to its equitable powers. A bankruptcy court's equitable powers are codified in 11 U.S.C. § 105(a). See In re Alderete, 412 F.3d 1200, 1206 (10th Cir. 2005) ("Section 105(a) of the Bankruptcy Code establishes the equitable powers of the bankruptcy court."). This section provides:

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.

§ 105(a). We have held, for example, that this provision grants bankruptcy courts the power to "sanction conduct abusive of the judicial process," see In re Courtesy Inns, Ltd., 40 F.3d 1084, 1089 (10th Cir. 1994), and to correct their own mistakes, see In re Themy, 6 F.3d 688, 689-90 (10th Cir.1993). Moreover, § 105(a) grants bankruptcy courts the power to enjoin particular actions that will interfere with a debtor's bankruptcy case. See In re Western Real Estate Fund, Inc., 922 F.2d 592, 601 (10th Cir.1990) (per curiam) (noting that "a temporary stay prohibiting a creditor's suit against a nondebtor ... may be permissible").

We have repeatedly emphasized, however, that a bankruptcy court may not exercise its "broad equitable powers" under § 105(a) "`in a manner that is inconsistent with the other, more specific provisions of the [Bankruptcy] Code.'" In re Frieouf, 938 F.2d 1099, 1103 n. 4 (10th Cir.1991) (quoting In re Western Real Estate Fund, Inc., 922 F.2d at 601). In other words, a bankruptcy court's exercise of its authority under § 105(a) may not contravene or disregard the plain language of a statute. See, e.g., In re Alderete, 412 F.3d at 1207 (holding that the bankruptcy court lacked the power under § 105(a) to grant the partial discharge of student loan debt when the debtor did not show undue hardship as required by statute); In re Tuttle, 291 F.3d 1238, 1245 (10th Cir.2002) (noting that even though the debtor's "equitable arguments [under § 105(a)] are compelling, they cannot overcome the plain language of the Code"). As we have previously noted, "[t]o allow the bankruptcy court, through principles of equity, to grant any more or less than what the clear language of [a statute] mandates would be tantamount to judicial legislation and is something that should be left to Congress, not the courts." In re Alderete, 412 F.3d at 1207 (quotation omitted).

In the present case, we must therefore decide whether the bankruptcy court's authorization of the surcharge of exempt assets is consistent with other provisions of the Bankruptcy Code. This is a question of first impression for our court, and only one other circuit has decided whether a bankruptcy court may use its equitable powers to surcharge a debtor's exempt assets when the debtor fails to turn over estate property. In Latman v. Burdette, 366 F.3d 774 (9th Cir.2004), the Ninth Circuit held that the surcharge of a debtor's exempt assets may be an appropriate remedy "when reasonably necessary both to protect the integrity of the bankruptcy process and to ensure that a debtor exempts an amount no greater than what is permitted by the exemption scheme of the Bankruptcy Code." Id. at 786. As the Latman court noted, id. at 785-86, a number of bankruptcy courts have reached the same conclusion. See, e.g., In re Mazon, 368 B.R. 906, 910 (Bankr.M.D.Fla.2007) (noting that the remedy of surcharge "prevent[s] what would otherwise be a fraud on the court and on creditors caused by the debtor's failure to schedule and turn over estate assets"); In re Karl, 313 B.R. 827, 831 (Bankr.W.D.Mo.2004) (explaining that the surcharge remedy preserves "the spirit of the Bankruptcy Code and the creditors' reasonable expectations in the event of liquidation").

As these cases illustrate, when the debtor conceals or fails to surrender assets belonging to the estate, the arguments supporting a surcharge of exempt assets are compelling. Here, the debtors failed to follow a court order requiring the surrender of their post-petition Cheaters distributions. Allowing the debtors to keep the full value of their exempt assets, when they have kept or converted assets belonging to the estate, arguably gives the debtors an undeserved benefit at the expense of the estate and the creditors.²

But although we recognize this concern, we are not at liberty "to grant any more or less than what the clear language of [the Bankruptcy Code] mandates." In re Alderete, 412 F.3d at 1207 (quotation omitted). The Code contains specific provisions governing exemptions. See 11 U.S.C. § 522. Generally, if the debtor claims property as exempt and "a party in interest" does not object, that property is exempt from property...