Does bankruptcy court have power to void debtor's homestead exemption?

The situation we are going to discuss involves the debtor’s homestead claim of exemption for his residence in a bankruptcy proceeding. In California, the homestead claim of exemption is $75,000, $125,000, and $175,000 depending on certain factors. For example, debtor is 65years old. His residence has a fair market value of $700,000 at the time of bankruptcy filing, with a first mortgage balance of $550,000. He claims his residence as an exempt asset in schedule A of his bankruptcy petition. There is no problem here at this point because the equity of the house is less than $175,000. If the trustee files a motion to sell the house, debtor can successfully oppose the motion and the court will certainly deny trustee’s motion to sell.
But what happens when the debtor is guilty of fraud in his bankruptcy and the trustee asks the court to surcharge the trustee’s administrative and legal fees against the $175,000 homestead exemption to penalize debtor for his misconduct resulting in debtor losing his residence to the trustee despite his claim of homestead exemption? For instance, debtor makes a fake 2^nd trust deed to ensure that he qualifies for the exemption and trustee is forced to litigate the matter with debtor incurring a massive amount of legal fees that exceed $175,000 that he seeks to surcharge against the homestead claim of exemption of $175,000, who will prevail?
In Law v. Siegel, Trustee decided by the U.S. Supreme two weeks ago, CA debtor, Stephen Law filed for Chapter 7 relief in 2004 where his petition stated that his residence was worth $363,348 subject to a first mortgage of $147,156 held by WAMU, and a 2^nd mortgage for $156,929 held by “Lin’s Mortgage & Associates” aka LIN LIEN. With his $75,000 homestead exemption, debtor said he had no equity in his home. Mr. Siegel, the Chapter 7 trustee challenged the LIN LIEN as being fraudulent. “Whoever heard of a LIN LIEN? Smells fishy, doesn’t pass the smell test”, said Mr. Siegel. The trust deed supporting the lien was recorded by the debtor in 1999 held by LILI LIEN, so now it is referred to as the “LILI LIN LIEN.”“ I get tongue tied when I try to describe the lien!” argued Mr. Siegel. To make matters more complicated, two individuals claiming to be Lili Lin eventually responded to Siegel’s complaint. One Lili Lin of Artesia, California, was an acquaintance of Law who denied ever having loaned him money and described his numerous efforts to involve her in various bogus transactions relating to the disputed trust deed, and another Lili Lin, the one and only, holder of the 2^nd trust deed.
“Over the next five years, the one and only Lili Lin managed-despite supposedly living in China and speaking no English- to engage in extensive and costly litigation, including several appeals, contesting the avoidance of the deed of trust and Siegel’s subsequent sale of the house,” said Justice Scalia. In 2009, the bankruptcy court found that there was no person named Lili Lin who loaned money to the debtor, and concluded that the debtor created the loan in order to preserve the equity in his home. The court said the “most plausible conclusion” was that Law “authored, signed, and filed some or all of these papers. The bankruptcy court determined that Siegel spent more than $500,000 in attorney fees overcoming Law’s fraudulent misrepresentations, and granted Siegel’s motion to “surcharge” the entirety of Law’s $75,000 homestead exemption to pay a portion of those fees. The 9^th Circuit Court of Appeals AFFIRMED. But the Supreme Court REVERSED and REMANDED, ruling that the bankruptcy court violated the express terms of Section 522(k)’s when it ordered that the $75,000 protected by the debtor’s homestead exemption be “surcharged” to pay the trustee’s attorney’s fees. “In doing so, the court exceeded the limits of its authority under Section 105(a) and its inherent powers,” said Justice Scalia.
“The Lord Himself goes before you and will be with you; He will never leave you nor forsake you. Do not be afraid; do not be discouraged.” – Deuteronomy 31:8.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California.  Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave, Mailstop 58, Bldg A-1 Suite 1125, Alhambra, CA 91803.