Ninth Circuit Puts Limits on the Supreme Court’s Preclusion of Equitable Remedies

Law v. Siegel didn’t bar the bankruptcy court from employing equitable remedies in all circumstances, according to the Ninth Circuit.

The debtor was a lawyer who represented herself in the circuit. She cobbled together a creative argument. Although her effort was unsuccessful, the result was an opinion putting outer limits on the implications of Law v. Siegel, 571 U.S. 415 (2014).

The debtor had a long-running battle with an auto maker. She filed a chapter 13 petition and scheduled her claims against the auto maker for “$500,000 TDB.” She listed the claim as exempt under California law. The recovery would be exempt only if the proceeds were necessary for the support and maintenance of the debtor and her dependents.

In the chapter 13 case, the bankruptcy court denied the exemption claim. The debtor did not appeal.

The case converted, and the debtor again sought to exempt the claim against the auto maker. In chapter 7, she listed the claim in amended schedules as worth almost $2 million.

Compressing the procedural history, the bankruptcy court in the chapter 7 case denied the exemption, invoking claim preclusion in view of the disallowance of the exemption in the prior chapter 13 case. The Bankruptcy Appellate Panel affirmed, and the debtor appealed.

The Ninth Circuit upheld the BAP in a June 10 opinion by Circuit Judge Consuelo M. Callahan.

Judge Callahan began by noting how the Supreme Court has “long applied preclusion doctrines in the bankruptcy setting,” citing Katchen v. Landy, 382 U.S. 323, 334 (1966). However, the debtor argued that Law “abrogated those decisions by barring courts from denying exemptions on equitable grounds.” In the debtor’s opinion, Law meant that the bankruptcy court could no longer employ judicially created doctrines of issue and claim preclusion.

Law “involved a markedly different situation,” Judge Callahan said. The bankruptcy court in Law had surcharged the debtor’s homestead exemption on account of the debtor’s serious misconduct. Judge Callahan paraphrased the high court as reversing because “the bankruptcy courts’ equitable powers must yield to the Code’s more specific mandates.”

Law involved provisions in the Bankruptcy Code giving the debtor a homestead exemption. By contrast, Judge Callahan said that “no Code provision bars bankruptcy courts from deeming prior orders preclusive.” Therefore, she said, “the conflict animating Law is not present here.”

The debtor didn’t give up. Creative once again, she next argued there was no specific statutory basis for refusing to allow the exemption claim.

Judge Callahan was not impressed. There was a final judgment issued in the prior chapter 13 case disallowing the exemption. The orders were binding, “even if [the debtor] believes them wrongly decided,” the judge said.

Judge Callahan summed up:

Hence, unlike Law, where the debtor was statutorily entitled to the exemption, here [the debtor], by operation of the earlier orders, is not. Nothing in Law prevented the bankruptcy court from giving preclusive effect to that determination.

Icing the cake, Judge Callahan ruled that the bankruptcy court had properly applied the doctrine of issue preclusion, sometimes formerly known as collateral estoppel.

Not reading “Law as undermining the bankruptcy courts’ ability to invoke issue and claim preclusion as bases for rejecting previously denied exemptions,” Judge Callahan affirmed the BAP’s denial of the debtor’s exemption claim.