Mazon - Surcharge of Otherwise Exempt 401(k)

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Mazon - Surcharge of Otherwise Exempt 401(k)

Postby JDA » Sun May 19, 2013 9:24 am

This ruling was reversed in part by the immediately following opinion.

In re Mazon, 368 B.R. 906 (Bk.M.D.Fl. 2007).

United States Bankruptcy Court, M.D. Florida, Ft. Myers Division.

In re Bernard C. MAZON and Jane I. Mazon, Debtors.

No. 9:05–BK–04213–MGW.

May 11, 2007.

Attorneys and Law Firms

*907 Christian B. Felden, Felden and Felden, Naples, FL, for Debtors.



MICHAEL G. WILLIAMSON, Bankruptcy Judge.

A trustee may equitably surcharge a debtor's statutory exemptions when the debtor has failed to schedule and turn over estate assets. A homestead exempt under Florida's constitutional exemption, however, may not be so surcharged unless the estate assets can be traced into the acquisition of an interest in the homestead.

In this case, the debtors failed to disclose assets valued at approximately $615,000, which they dissipated post petition. However, none of the dissipated estate assets can be traced into the debtors' homestead. Accordingly, the motion of the Trustee to surcharge exempt assets will be granted as to the assets claimed as exempt under the Florida general statutory exemptions and denied as to the property that has been claimed as exempt under the Florida constitutional homestead exemption.

*908 Procedural Background

This case came on for a final evidentiary hearing on April 26, 2007, on the Trustee's Motion to Surcharge Debtors' Exemptions and/or Exempt Property (Doc. No. 147) ("Motion"). The Court considered the entire record, including the exhibit that is part of the record in this case and the record established in adversary proceedings filed by the Trustee (Adv. No. 9:06–ap–00313–MGW) ("Trustee's Adversary") and Callahan Blaine, the largest single creditor of the Debtors (Adv. No. 9:05–ap–00219–MGW) ("Creditor's Adversary"). This court has jurisdiction of this matter under 28 U.S.C. sections 157 and 1334(b). This is a core proceeding pursuant to 28 U.S.C. section 157(b)(2)(A), (B), (E), and (O).

The debtors, Bernard C. Mazon and Jane I. Mazon ("Debtors"), filed their chapter 7 petition on March 10, 2005. Robert E. Tardif, Jr. was appointed as the trustee ("Trustee"). On Schedules A and B, the Debtors scheduled a condominium unit in Naples, Florida, valued at $760,000, three 401k accounts collectively valued at $100,000, and a life insurance policy with cash value of $40,000. The Debtors claimed these assets as exempt on Schedule C.

As part of the administration of this case, the Trustee's Adversary was filed seeking the turnover of property from the Debtors. In addition, Callahan & Blaine filed the Creditor's Adversary, seeking the imposition of an equitable lien against the Debtors' homestead. The Court consolidated the two adversary proceedings for purposes of trial, and the trial was conducted on December 13, 2006, and on January 17, 2007.

During the course of discovery in the adversary proceedings, the Trustee learned that the Debtors failed to schedule and disclose various assets they owned on the date of filing. Specifically, the Debtors individually or jointly owned two annuities with a combined value of more than $2,100,000 ("Annuities"); an IRA valued at approximately $270,000 ("IRA"); and interests in two businesses, Emicole Properties, LLC and Emicole Investments, Ltd. ("Emicole Assets"). In the Trustee's Adversary, the Court entered an order and final judgment, finding that the Annuities, IRA, and Emicole Assets were property of the bankruptcy estate and not subject to exemption.

In the Creditor's Adversary, the Court entered a final judgment granting an equitable lien to the creditor in the amount of $1,102,811.86 against the Debtors' homestead unit. The Court ordered that the homestead be sold to satisfy the equitable lien. In the event that the sale amount exceeds the equitable lien, the Court ruled that the Debtors would retain the surplus as exempt property.

Although the Court awarded the Trustee the Annuities and the IRA and the Trustee was able to preserve those assets, the Trustee did not recover any Emicole Assets before they were dissipated by the Debtors. These assets consisted of (1) a financial account maintained by Emicole Investments, Ltd. at Frost Brokerage Services with a balance of $434,939.22 on the date of filing, and (2) real property in Pennsylvania owned by Emicole Properties, LLC on the date of filing and sold post petition for $181,196.23. The Debtors spent the money obtained from the Emicole Assets for their personal use.

As a result of the Debtors' failure to schedule, disclose, and turn over the Emicole Assets, the Trustee filed the Motion seeking an order surcharging the Debtors' exempt property. Specifically, the Trustee requests that the Court allow him to surcharge the three 401k accounts, the life insurance cash value, and any money that the Debtors receive from the sale of their *909 homestead that exceeds the equitable lien in favor of Callahan & Blaine.

Conclusions of Law

A. Trustee's Right to Surcharge Exempt Property in Exceptional Circumstances

1 The filing of bankruptcy creates an estate composed of all legal and equitable interests of the debtor in property. 11 U.S.C. sec. 541. In Florida, a debtor may exempt from property of the estate either property specified in Section 522(d) of the United States Bankruptcy Code or, alternatively, the exemptions permitted under Florida statutory and constitutional state law and non-bankruptcy federal law. By willfully and fraudulently concealing and dissipating estate assets, a debtor, effectively, keeps more assets than the Bankruptcy Code allows. Essentially, the debtor secretly exempts assets because the concealment and dissipation prevents administration of the assets by a trustee for the benefit of creditors.

2 The threshold legal issue presented by the Trustee's motion is whether a bankruptcy court may authorize a surcharge against a debtor's exempt assets in circumstances such as these where there has been a material failure to disclose assets of a bankruptcy estate that are subsequently dissipated. There is no Eleventh Circuit Court of Appeals case or any Florida case—either bankruptcy court or district court—on this point. Courts around the country, however, have had occasion to consider whether a trustee should be permitted to surcharge exempt property.

The Bankruptcy Code does not explicitly provide for the remedy of surcharge against a debtor's exemptions. Latman v. Burdette, 366 F.3d 774, 785 (9th Cir.2004). However, the "broad authority granted to bankruptcy judges to take any action that is necessary or appropriate 'to prevent an abuse of process' " described in section 105 has been recently reaffirmed by the United States Supreme Court in the case of Marrama v. Citizens Bank of Massachusetts, 549U.S. 365, ––––, 127 S.Ct. 1105, 1112, 166 L.Ed.2d 956 (2007). Indeed, as noted by the Supreme Court in Marrama, "even if sec. 105(a) had not been enacted, the inherent power of every federal court to sanction 'abusive litigation practices,' [citation omitted] might well provide an adequate justification for a prompt" remedy when faced with a debtor's active misconduct to take advantage of the bankruptcy system for improper purposes as occurred in Marrama and as has occurred in this case. Id.

34 The need to prevent abuse of the judicial system is all the more imperative in the bankruptcy context. As the Supreme Court has explained, bankruptcy courts "are courts of equity and 'appl[y] the principles and rules of equity jurisprudence.' " Young v. United States, 535 U.S. 43, 50, 122 S.Ct. 1036, 152 L.Ed.2d 79 (2002) (quoting Pepper v. Litton, 308 U.S. 295, 304, 60 S.Ct. 238, 84 L.Ed. 281 (1939)); see also Bank of Marin v. England, 385 U.S. 99, 103, 87 S.Ct. 274, 17 L.Ed.2d 197 (1966) ("There is an overriding consideration that equitable principles govern the exercise of bankruptcy jurisdiction."); SEC v. United States Realty & Improvement Co., 310 U.S. 434, 457, 60 S.Ct. 1044, 84 L.Ed. 1293 (1940) ("Good sense and legal tradition alike enjoin that an enactment of Congress dealing with bankruptcy should be read in harmony with the existing system of equity jurisprudence of which it is a part."). Chief among these equitable principles and rules is the concept that a debtor who seeks relief under the Bankruptcy Code must act in good faith and not for any improper purpose. As the Supreme Court has explained, "[o]nly exemplary motives and scrupulous good faith" can stir a court of equity to *910 grant relief in bankruptcy. Shapiro v. Wilgus, 287 U.S. 348, 356–57, 53 S.Ct. 142, 77 L.Ed. 355 (1932); see also Little Creek Dev. Co. v. Commonwealth Mortgage Corp. (In re Little Creek Dev. Co.), 779 F.2d 1068, 1072 (5th Cir.1986) (noting that the good faith standard "protects the jurisdictional integrity of the bankruptcy courts by rendering their powerful equitable weapons (i.e., avoidance of liens, discharge of debts, marshalling and turnover of assets) available only to those debtors and creditors with 'clean hands.' "); In re Wiggles, 7 B.R. 373, 375 (Bankr.N.D.Ga.1980) (tracing the origins of the concept of good faith in the bankruptcy context to Shapiro ).

The Supreme Court has also recognized that bankruptcy courts have long relied upon their inherent equitable powers in passing on and preventing "a wide range of problems arising out of the administration of bankrupt estates." Pepper, 308 U.S. at 304, 60 S.Ct. 238. Clearly, failure to disclose assets and the misappropriation of those assets falls squarely within the types of problems with which a bankruptcy court must be able to effectively deal.

5 The only explicit reference to a right to surcharge is found in section 506(c).1 See 2 W. Norton, Bankruptcy Law and Practice 2d sec. 43:4, p. 43–27 (2004) (referring to trustees' section 506(c) claims as "Surcharge Claims"). This section, however, is limited to a trustee's right to recover the reasonable and necessary costs and expenses of preserving or disposing of property securing a claim to the extent the secured claimant has benefited. Yet, even absent specific statutory authority, bankruptcy courts have, in the face of exceptional misconduct, developed remedies that prevent 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. Latman, 366 F.3d at 785–786. As a result, in exceptional circumstances, bankruptcy courts have allowed trustees to equitably surcharge a debtor's statutory exemptions. Id. at 786; In re Hamblen, 354 B.R. 322, 325 (Bankr.N.D.Ga.2006). The purpose of the surcharge is to reach an equitable result that preserves the spirit of the Bankruptcy Code. Latman, 366 F.3d at 785; In re Karl, 313 B.R. 827, 831 (Bankr.W.D.Mo.2004).

For example, in Latman, the debtors sold a car and a boat for $8,500 just days before filing bankruptcy, but only scheduled cash on hand in the amount of $1,500. Latman, 366 F.3d at 779. The debtors failed to account for the $7,000 balance that they received but did not schedule. Id. The trustee moved to surcharge the debtors' wild-card exemption, which they used to cover the value of a van and an engagement ring. Id. The Ninth Circuit Court of Appeals upheld the trustee's ability to equitably surcharge exemptions because it was reasonably necessary to protect the integrity of the bankruptcy process and ensured that a debtor did not exempt an amount greater than permitted by the Bankruptcy Code. Id. at 786.

Similarly, in Hamblen, the debtors sold real property shortly before filing bankruptcy, deposited $200,000 of the proceeds into an account in the debtor's mother's name, and thereafter used the funds post petition and did not truthfully account for the proceeds. 354 B.R. at 326. The court authorized the surcharge of the debtors' $20,000 homestead exemption, concluding that the debtors, by their fraudulent concealment of the sale proceeds, realized *911 more than their allowable homestead exemption. Id. at 328. See also In re Karl, 313 B.R. at 832 (permitting surcharge of debtor's homestead exemption by value of truck that debtor failed to recover and surrender to trustee); In re Ross–Tucker, No. 03–1436, 2005 WL 3263932, at *1 (Bankr.D.C. Nov.28, 2005) (authorizing trustee to surcharge exempt homestead in amount of $25,000 judgment awarded to trustee that represented amount the debtor dissipated from the proceeds of a lawsuit the debtor settled without court authorization).

6 For these reasons, the Court concludes that it is within its discretion to exercise both the explicit grant of authority under section 105 and its inherent powers to surcharge the assets that the Debtors have claimed as exempt under Florida statutory exemptions. These exemptions would otherwise allow the Debtors to claim as exempt three 401k retirement accounts and the cash value of the Nationwide Life Insurance policy. Accordingly, the Trustee will be allowed to administer as property of this bankruptcy estate the following previously exempted assets:

a. 401k at T. Rowe Price Account—Plan ID 70089 (Tenfold Corporation)

b. 401k at Computer Sciences Corporation—SSN xxx–xx–xxxx

c. 401k at RBC Financial Group—ENV # MG001045—MG 14006

d. Nationwide Variable Life Policy—No. N990067730

B. Trustee's Right to Surcharge the Florida Constitutionally Exempt Homestead

7 The Court, however, must separately consider whether the Trustee is entitled to surcharge the Debtors' homestead property because the homestead exemption enjoys a special place in the hierarchy of rights given to Florida citizens. For the reasons more fully set forth below, the Court concludes that the Trustee is not permitted to surcharge the Debtors' homestead property.

In Havoco of America, Ltd. v. Hill, 790 So.2d 1018 (Fla.2001), the Florida Supreme Court, at the request of the Eleventh Circuit Court of Appeals, considered whether a debtor is entitled to Florida's homestead exemption when the debtor acquired the homestead using non-exempt funds with the specific intent of hindering, delaying or defrauding creditors. Answering the certified question in the affirmative, the court held that so long as the actual funds being used to pay down a mortgage or to buy the homestead were not acquired by fraud or under egregious circumstances, the homestead exemption could not be denied solely based upon the use of the money. Id. at 1028.

The Florida Supreme Court based its ruling upon considerations unique to Florida. For example, the court noted that "the homestead exemption is to be liberally construed in the interest of protecting the family home" and its "homestead exemption jurisprudence has long been guided by a policy favoring the liberal construction of the exemption." Id. at 1020–21. An associated rule of construction that complements the liberal rule of construction in favor of homestead is the rule that exceptions to the homestead exemption are to be strictly construed. Id.

8 In Havoco, the Florida Supreme Court emphasized that article X, section 4, of the Florida Constitution expressly provides only three exceptions to the homestead exemption. Id. at 1022. Specifically, the forced sale of homestead may only occur "for (1) payment of taxes and assessments thereon; (2) obligations contracted for the purchase, improvement or repair thereof; or (3) obligations contracted for house, field or other labor performed on the realty." Id. Over the years, the Florida *912 Supreme Court has clearly held that exceptions to the homestead exemption must be guided by the plain language of the homestead provision, notwithstanding proof of improper or criminal conduct. Id. at 1021.

A case that highlights the narrowness of these exceptions is Butterworth v. Caggiano, 605 So.2d 56 (Fla.1992). In that case, following Caggiano's conviction under Florida's Racketeer Influenced and Corrupt Organization Act, the state sought the civil forfeiture of his homestead. Id. at 57. The state argued that Caggiano's homestead was subject to forfeiture because he used the home in the course of racketeering activity. Id. The court noted that the exceptions are unqualified and create "no personal qualifications touching the moral character of the resident nor do they undertake to exclude the vicious, the criminal, or the immoral from the benefits" of homestead. Id. at 60. Similarly, five years later, the Court again refused to expand the exceptions to the homestead exemption when it held that a home being used as an instrumentality of a drug operation is not subject to forfeiture under the Florida Contraband Forfeiture Act. Tramel v. Stewart, 697 So.2d 821, 824 (Fla.1997).

Viewed in its most basic form, the Trustee requests that the Court impose an equitable lien against the Debtors' homestead as a means of collecting on an obligation of the Debtors to turn over property of this bankruptcy estate. In the Creditor's Adversary, the Court did grant the creditor such an equitable lien upon the Debtors' homestead. However, unlike Callahan & Blaine, the Trustee is not able to trace improperly diverted property of the estate into the homestead. This is an important distinction that prevents the imposition of an equitable lien in favor of the Trustee.

910 Most recently, the Eleventh Circuit Court of Appeals in In re Chauncey, 454 F.3d 1292, 1294 (11th Cir.2006), reaffirmed that an equitable lien may only be imposed under Florida law when money used to obtain an interest in the homestead property is obtained by fraud or egregious conduct. Accordingly, the focus must be upon how the money is obtained and not upon how the money is used. In re Cameron, 359 B.R. 818, 822 (Bankr.M.D.Fla.2006) (citing In re Johnson, 336 B.R. 568, 572 (Bankr.S.D.Fla.2006)). Money lawfully obtained that is thereafter improperly used does not support the imposition of an equitable lien against homestead property. Id.

In this case, the evidence reflects that the Debtors lawfully obtained money and property which they failed to disclose and turn over. There was no evidence presented that the money and property were diverted to acquire an interest in their homestead. Accordingly, the facts do not support a surcharge against the Debtors' homestead.


Based upon the foregoing rationale and the evidence before the Court, the Motion is granted as it relates to a surcharge against the Debtors' non-homestead exempt property. Florida law, however, does not permit or authorize the Trustee's request for surcharge against the Debtors' homestead property, and that portion of the relief requested by the Trustee is denied.

The Court will enter a separate order granting relief consistent with and for the reasons stated in this Memorandum Decision.



506(c) states that "[t]he trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim." 11 U.S.C. sec. 506(c).
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Re: Mazon - Surcharge of Otherwise Exempt 401(k)

Postby JDA » Mon May 20, 2013 7:59 am


In re Mazon, 395 B.R. 742 (Bk.M.D.Fla., 2008).

United States District Court, M.D. Florida, Fort Myers Division.

Bernard C. MAZON, Jane I. Mazon, Debtors.

Bernard C. Mazon, Jane I. Mazon, Appellants,


Robert E. Tardif, Jr., Trustee, Appellee.

No. 2:07–cv–478–FtM–29.Bankr.No. 9:05–bk–04213–MGW.

Sept. 9, 2008.

Attorneys and Law Firms

*744 Christian B. Felden, Felden & Felden, Naples, Fl, Heather L. Yonke, Genovese Joblove & Battista, Miami, FL, Thomas M. Messana, Heather L. Harmon, Genovese Joblove & Battista, P.A., Miami, Fl for Debtors/Appellants.

Alberto F. Gomez, Jr., Morse & Gomez, PA, Tampa, FL, John W. Hurney, Callahan & Blaine APLC, Santa Ana, CA, Keith T. Appleby, Fowler White Boggs Banker, PA, Tampa, FL, Robert E. Tardif, Attorney for Trustee, Naples, FL, for Trustees/Appellees.



JOHN E. STEELE, District Judge.

This matter comes before the Court on an appeal from the United States Bankruptcy Court's Order Granting In Part and Denying In Part Trustee's Motion to Surcharge Debtor's Exemptions and/or Exempt Property (Doc. # 1–3). Appellants filed an Initial Brief (Doc. # 15), appellee filed a Brief (Doc. # 19) in response, and appellants filed a Reply Brief (Doc. # 24).

The challenged Order allowed the Trustee to administer and liquidate otherwise exempt assets as property of the bankruptcy estate. It is clear from the record that debtors converted the "fresh start" intended by the Bankruptcy Code into a "head start" at the expense of creditors. However, for the reasons set forth below, the Court finds that the Bankruptcy Court was not authorized to impose a surcharge on exempt assets as a remedy for debtors' misconduct.


1234 The United States District Court functions as an appellate court in reviewing decisions of the United States Bankruptcy Court. In re Colortex Indus., 19 F.3d 1371, 1374 (11th Cir.1994). The legal conclusions of the bankruptcy court are reviewed de novo, In re JLJ, Inc., 988 F.2d 1112, 1116 (11th Cir.1993), while findings of fact are reviewed for clear error. Fed. R. Bankr. P. 8013; In re Thomas, 883 F.2d 991, 994 (11th Cir.1989), cert. denied, 497 U.S. 1007, 110 S.Ct. 3245, 111 L.Ed.2d 756 (1990). A finding of fact is not clearly erroneous unless the reviewing court on the entire record is left with the definite and firm conviction that the court erred. In re Walker, 515 F.3d 1204, 1212 (11th Cir.2008) (citing Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985)). Equitable determinations by the Bankruptcy Court are reviewed under an abuse of discretion standard. In re Kingsley, 518 F.3d 874, 877 (11th Cir.2008) (citing In re General Dev. Corp., 84 F.3d 1364, 1367 (11th Cir.1996)). After examination of the briefs and record, the Court finds that oral argument is not needed because the facts and legal arguments are adequately presented and the decisional process would not be significantly aided by oral argument.


On March 10, 2005, Bernard and Jane Mazon (hereinafter the Mazons or debtors) filed a joint Chapter 7 voluntary petition. Robert E. Tardif, Jr. was appointed as Trustee. The Mazons listed on Schedules A and B their $760,000.00 condominium, three 401(k) accounts valued at approximately $100,000.00, and a whole life insurance policy valued at $40,000.00. All of these were also claimed as exempt assets on Schedule C. The Mazons submitted to examination at their Section 341 Meeting *745 in April 2005. No objections were filed as to these exempt assets.

During the course of discovery in two adversary proceedings (one by the Trustee for the turnover of property and the other by a creditor for an equitable lien on the debtors' homestead), the Trustee discovered that the debtors had failed to schedule and disclose various assets. Specifically, the debtors owned two annuities with a combined value of more than $2,100,000.00, an IRA valued at approximately $270,000.00, and sole interest in two businesses, Emicole Properties, LLC and Emicole Investments, Ltd. (collectively Emicole companies). In the Trustee's adversary proceeding, the annuities, IRA, and Emicole companies were found to be property of the estate and non-exempt. In the creditor's adversary proceeding, an equitable lien was granted in the amount of $1,102,811.86 against the homestead.1

On January 19, 2007, the Trustee filed a Motion to Surcharge Debtors' Exemptions and/or Exempt Property (Doc. # 2–12) with Memorandum of Law in Support (Doc. # 2–18). The Trustee asserted that the Emicole companies had substantial value to the bankruptcy estate at the time of filing2, but after filing the Chapter 7 petition the Mazons used and dissipated all or substantially all of the Emicole companies' assets for their personal use without turning over any monies to the Trustee. Therefore, the Trustee argued, exempt assets3 should be surcharged in the amount of the value of the unscheduled and undisclosed assets, including the Emicole companies.

On February 21, 2007, the Bankruptcy Court conducted a preliminary hearing on the Trustee's motion. At the request of the Trustee, the Bankruptcy Court took judicial notice of the proceedings in the two adversary proceedings, the transcripts of which were filed with the court. (Doc. # 3, pp. 3–4, 23–24.) Debtors' counsel voiced no objection to the judicial notice (Doc. # 3, pp. 12–19, 22) and stated that the prior testimony was "certainly something that can be used and he [debtor] would have to be held to in subsequent proceedings ...." (Doc. # 3, p. 13.) The Bankruptcy Court summarized his prior rulings as related to the surcharge issue:

... I also held that certain annuities and IRAs were not exempt either because they had not been disclosed or because they did not otherwise qualify for the exemption under applicable Florida law.

During the course of trial, there was also evidence that Debtors own certain entities called the Emicole entities which had not been disclosed in the Debtors' schedules. The Emicole entities independently had substantial asserts within them. There was never any disclosure of those assets, not was there any claim of exemption....

*746 It appears, based on the record established during the course of the trial on the exemption issues, that the assets that were in the Emicole entities were dissipated postpetition and, thus, are not available to the Trustee for payment to creditors.


However, with respect to the other enumerated assets, I believe that the concept of a surcharge does have validity and viability in Florida and would apply, given the appropriate circumstances.

Turning to this case, I believe and I find that to the extent that the Debtors did use undisclosed assets, specifically the Emicole assets, to fund their lifestyle in lieu of using their exempt assets, that an equitable surcharge or lien in favor of the estate should be impressed upon the balance of their non-homestead exempt assets.

(Doc. # 3, pp. 23–28.) The Bankruptcy Court then found that the evidentiary record might need to be further supplemented as to what assets the Emicole entities had on the date of the filing and whether any assets still existed, and scheduled a final evidentiary hearing at which time either party would be allowed to reference the current record of the adversary proceedings to the extent relevant to the surcharge issue or present live testimony. (Doc. # 3, pp. 30, 34–36.)

On April 26, 2007, the Bankruptcy Court conducted the final hearing. The Trustee filed his Request for Admissions and, without objection from debtors' counsel, the Bankruptcy Court took judicial notice that no responses had been filed and deemed admitted the factual matters in the Request for Admissions.4 The Bankruptcy Judge stated:

Based the Trustee's request for admissions and the record established during the trial of the equitable lien case, the record of which will be considered as part of the record for this contested matter, it has been established that the amounts that the Debtor has utilized postpetition which were not allowed as exempt and were dissipated exceed the remaining exemptions, other than the homestead, which I would not allow a surcharge to be asserted against.

The factual and procedural history of this case is summarized in the memorandum that Mr. Tardif filed and I will adopt that fairly straightforward recitation.


And with respect to the legal argument, I also will adopt the legal argument generally that Mr. Tardif has set forth in that portion except with respect to the homestead.


I will surcharge under the authority cited by Mr. Tardif the exemptions other than the homestead but, under the authority of Havoco, Chauncey and other cases I've cited, will deny the request with respect to the homestead property.

(Doc. # 3–2, pp. 11, 12, 17–18.) On May 11, 2007, the Bankruptcy Court issued a Memorandum Decision on Trustee's Motion *747 to Surcharge Debtors' Exempt Property (Doc. # 2–25). See In re Mazon, 368 B.R. 906 (Bankr.M.D.Fla.2007). The Bankruptcy Court found it had the legal authority to impose a surcharge on exempt property in exceptional circumstances, and concluded "that it is within its discretion to exercise both the explicit grant of authority under section 105 and its inherent powers to surcharge the assets that the Debtors have claimed as exempt under Florida statutory exemptions." In re Mazon, 368 B.R. at 911.


56 The commencement of a bankruptcy case creates a bankruptcy estate "which is liquidated by the Trustee for the benefit of the debtor's creditors. 11 U.S.C. sec. 541(a)." In re James, 406 F.3d 1340, 1342 (11th Cir.2005). The bankruptcy estate is comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. sec. 541(a); In re Bracewell, 454 F.3d 1234, 1237 (11th Cir.2006), cert. denied, 549 U.S. 1301, 127 S.Ct. 1815, 167 L.Ed.2d 356 (2007). As the Bankruptcy Court correctly stated in this case, a debtor who conceals and dissipates bankruptcy estate assets effectively keeps more assets than the Bankruptcy Code allows. In re Mazon, 368 B.R. at 909.

789101112 After property comes into the bankruptcy estate, a debtor may exempt certain property from the bankruptcy estate. 11 U.S.C. sec. 522(b); In re Gamble, 168 F.3d 442, 444 (11th Cir.1999). Exempt property may include any unmatured life insurance contract or retirement funds to the extent exempt under sec. 401 of the Internal Revenue Code. See 11 U.S.C. sec. 522(b), (d)(7) and (12); Fla. Stat. secs. 222.14, 222.21. "Once the debtor has listed his or her exemptions, the trustee meets with the creditors. [ ] After this meeting, the trustee and creditors have 30 days to object to the exemptions. [ ] Unless a party in interest objects, the property claimed as exempt on such list is exempt.... Once the property is removed from the estate [through exemption], the debtor may use it as his own." Gamble, 168 F.3d at 444 (citations and internal quotations omitted.) Thus, exempt property is "returned to the debtor free of administration by the trustee." In re Sinnreich, 391 F.3d 1295, 1297 (11th Cir.2004).


13 Debtors initially argue that the Trustee waived his right to claim the exempt property as property of the bankruptcy estate because the Trustee failed to file a timely objection to their claimed exemptions. (Doc. # 15, pp. 16–18.) The Trustee responds that this waiver argument is itself waived because it was not raised in the Bankruptcy Court and cannot be raised for the first time on appeal. (Doc. # 19, pp. 7–8, 9–10.) In their Reply, debtors concede that the issue was not raised before the Bankruptcy Court, but argue that the issue can be considered at the discretion of the appellate court. (Doc. # 24, pp. 4–6.)

14 An appellate court may consider issues for the first time on appeal in five exceptional circumstances. Dean Witter Reynolds, Inc. v. Fernandez, 741 F.2d 355, 360–361 (11th Cir.1984). The Court finds that none of these exceptional circumstances apply to this appeal. Therefore, debtors' waiver issue will not be considered for the first time in this appeal.5

*748 B.

Debtors assert that the Bankruptcy Court was without legal authority to surcharge their exempt assets. Debtors argue that at least five alternative remedies existed for the Trustee under the Bankruptcy Code, and that the equitable remedy of a surcharge is simply a fictitious and improper device which is not authorized by the Bankruptcy Code. Debtors further argue that even if a surcharge is legally available, the Bankruptcy Court made no findings of exceptional circumstances which would have justified surcharging the exempt assets. (Doc. # 15, pp. 18–26.)

As an initial matter, the Trustee asserts that the argument that the Bankruptcy Court lacked authority to surcharge exempt assets is being raised for the first time on appeal, and therefore should not be addressed. (Doc. # 19, pp. 7, 9–10.) At the preliminary hearing debtors' counsel stated that "there is, of course, no specific statutory basis for a surcharge in the Code and this is purely a provision of the equity jurisdiction that the Court has, based on case law." (Doc. # 3, p. 12.) While somewhat ambiguous as to the issue of the existence of legal authority, the Bankruptcy Judge clearly recognized this as "[t]he threshold legal issue." (Doc. # 3, pp. 23–24.) The Court finds that in the context of the arguments the existence of the legal authority to surcharge exempt assets was sufficiently raised before the Bankruptcy Court. Indeed, the issue of legal authority was the primary reason the Bankruptcy Judge filed a written Memorandum Decision supplementing his oral findings. In re Mazon, 368 B.R. 906.

1516171819 It is undisputed that no statutory provision in the Bankruptcy Code specifically authorizes a surcharge on otherwise exempt property under the circumstances of this case, that is, where the debtors have failed to schedule, disclose, and turn over non-exempt assets which are then almost completely dissipated and not available for distribution to the creditors. It is also undisputed that "[b]ankruptcy courts are indeed courts of equity, and they have the power to adjust claims to avoid injustice or unfairness." In re Morgan, 182 F.3d 775, 779 (11th Cir.1999) (citations omitted). The equitable powers of the Bankruptcy Court are codified in 11 U.S.C. sec. 105(a), which provides:

The [bankruptcy] 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.

11 U.S.C. sec. 105(a). The equitable power of a bankruptcy court, however, "is not unlimited." In re Saybrook Mfg. Co., 963 F.2d 1490, 1494 (11th Cir.1992). Thus, "whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code." Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988). Additionally, a bankruptcy court has inherent powers, distinct from those in sec. 105(a). In re Hardy, 97 F.3d 1384, 1389–90 (11th Cir.1996); In re Walker, 532 F.3d 1304, 1309 (11th Cir.2008) ( "Federal courts, including bankruptcy *749 courts, have the inherent power to impose sanctions on parties and lawyers.")

The two federal appellate decisions concerning whether Section 105(a) allows a bankruptcy court to impose a surcharge on exempt assets have reached opposite results. In Latman v. Burdette, 366 F.3d 774, 785 (9th Cir.2004), the debtors failed to list all their assets and then gave inaccurate accountings of the assets' proceeds. The Trustee obtained an order of surcharge on exempt assets in the amount of the unaccounted for proceeds of these undisclosed assets. While recognizing that the Bankruptcy Code did not explicitly provide for a remedy of surcharge against exempt property in a case of under-reported assets, the Ninth Circuit upheld the surcharge under the bankruptcy court's equitable powers, stating: "The surcharge remedy fashioned by the bankruptcy judge prevented what would otherwise have been a fraud on the bankruptcy court and the Latmans' creditors caused by the Latmans' non-disclosure of monies that should have been listed on the bankruptcy schedules and available for the Latmans' creditors." Latman, 366 F.3d at 785. The Court held "that the bankruptcy court may equitably surcharge a debtor's statutory exemptions 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.

More recently, In re Scrivner, 535 F.3d 1258 (10th Cir.2008), found that a bankruptcy court could not impose a surcharge on exempt property. The Court stated that the bankruptcy court's equitable powers were codified in sec. 105(a); that these equitable powers may not be exercised in a manner inconsistent with the other, more specific provisions of the Bankruptcy Code; that a bankruptcy court's exercise of authority under sec. 105(a) may not grant any more or any less than what the plain language of the Bankruptcy Code mandates; and that because the Bankruptcy Code contains explicit exceptions to the general rule placing exempt property beyond the reach of the bankruptcy estate, and contains specific remedies other than a surcharge for a debtor's failure to turn over estate property to the trustee, a bankruptcy court may not read additional exceptions or remedies into the statute. The Court held that "because the surcharge of exempt property is inconsistent with the Code's provisions governing exemptions and debtor misconduct, it is beyond the scope of a bankruptcy court's equitable authority under sec. 105(a). Section 105(a) does not empower courts to create remedies and rights in derogation of the Bankruptcy Code and Rules." Id. at 1258 (citations omitted).

The Court concludes that Scrivner sets forth the correct approach. Like Scrivner, the Eleventh Circuit has held that a bankruptcy court's equitable powers under sec. 105(a) do not allow it to override a specific provision of the Bankruptcy Code, and do not allow it to grant any more or any less than what the clear language of the Bankruptcy Code would mandate. In re Cox, 338 F.3d 1238, 1243 (11th Cir.2003), cert. denied, 541 U.S. 991, 124 S.Ct. 2016, 158 L.Ed.2d 496 (2004). Rather, sec. 105(a) authorizes orders only as long as it is "necessary or appropriate to carry out the provisions of the Bankruptcy Code." Hardy, 97 F.3d at 1389. The Eleventh Circuit has held that once the property is removed from the bankruptcy estate through exemption, the debtor may use it as his own, free of the administration of the bankruptcy trustee. Gamble, 168 F.3d at 444; Sinnreich, 391 F.3d at 1296–97. An order returning such exempt property to the administration of the trustee is not one which carries out the express provisions *750 of the Bankruptcy Code. Additionally, as Scrivner noted, the Bankruptcy Code contains express exceptions to the rule that exempted property cannot be used to satisfy pre-petition debts or administrative expenses, and therefore a court may not read additional exceptions such as a surcharge into the statute. E.g., TRW, Inc. v. Andrews, 534 U.S. 19, 28, 122 S.Ct. 441, 151 L.Ed.2d 339 (2001) ("Where Congress explicitly enumerates certain exceptions to a general prohibition, additional exceptions are not to be implied, in the absence of evidence of a contrary legislative intent." (citation omitted)). Scrivner is also correct that the Bankruptcy Code contains specific remedies for a debtors bankruptcy misconduct. Indeed, in this case the Bankruptcy Court, after entry of the Memorandum Decision in this case, entered an Order Revoking Discharge of Debtors (Doc. # 217). While the remedies may be viewed as inadequate, that is a matter for Congress and not the court.

202122 The Bankruptcy Court also relied upon its inherent power. In re Mazon, 368 B.R. at 911. The Supreme Court has directed that courts "exercise caution in invoking its inherent power." Chambers v. NASCO, Inc., 501 U.S. 32, 32, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991). As Degen v. United States, 517 U.S. 820, 116 S.Ct. 1777, 135 L.Ed.2d 102 (1996) summarized:

Courts invested with the judicial power of the United States have certain inherent authority to protect their proceedings and judgments in the course of discharging their traditional responsibilities. [ ] The extent of these powers must be delimited with care, for there is a danger of overreaching when one branch of the Government, without benefit of cooperation or correction from the others, undertakes to define its own authority. [ ] In many instances the inherent powers of the courts may be controlled or overridden by statute or rule. Principles of deference counsel restraint in resorting to inherent power, and require its use to be a reasonable response to problems and needs that provoke it.

Degen, 517 U.S. at 823–24, 116 S.Ct. 1777 (internal citations omitted). To impose sanctions under the court's inherent powers requires a finding of bad faith. Walker, 532 F.3d at 1309. This inherent power "is derived from the court's 'need to manage [its] own affairs so as to achieve the orderly and expeditious disposition of cases.' " In re Sunshine Jr. Stores, Inc., 456 F.3d 1291, 1304 (11th Cir.2006) (citation omitted) (alteration in original). The parties have not cited, and the Court has not found, any federal appellate decision allowing a surcharge of exempt assets under the bankruptcy court's inherent powers. The Court concludes that the inherent powers of a bankruptcy court provide no greater authority in the context of this case than does sec. 105(a) and do not allow the imposition of a surcharge on exempt assets.6

Accordingly, it is now


1. The Motion to Withdraw as Counsel for Appellants, Bernard C. Mazon and Jane I. Mazon (Doc. # 27), filed on March 21, 2008, is DENIED as moot for the proceedings in District Court.

2. The Order Granting In Part and Denying In Part Trustee's Motion to Surcharge Debtor's Exemptions and/or Exempt Property (Doc. # 1–3) is REVERSED as to that portion granting the *751 Trustee's motion to impose a surcharge on the debtors' exempt property, and the case is REMANDED to the Bankruptcy Court to enter an order vacating that portion of the Order.

3. The Clerk shall enter judgment accordingly, transmit a certified copy of this Opinion and Order and the Judgment to the Clerk of the Bankruptcy Court, terminate the appeal, and close the file.



The Amended Order on Adversary Complaint to Determine Nondischargeability of Debt and Declaratory Relief Regarding Equitable Lien and Amended Final Judgment for Plaintiff and Against Defendants Bernard C. Mazon and Jane I. Mazon were affirmed by the undersigned in 2:07–cv–147–FtM–29 on April 28, 2008.


On or about the date of filing for bankruptcy, the Emicole companies had a financial account at Frost Brokerage Services, Inc. with a balance of $434,939.22 and real property in Pennsylvania valued at over $180,000.00, among other assets.


The exempt properties subject to surcharge are: (1) a 401(k) at T. Rowe Price Account—Plan ID 70089 (Tenfold Corporation); (2) a 401(k) at Computer Sciences Corporation—SSN XXX-XX-XXXX; (3) a 401(k) at RBC Financial Group—ENV # MG001045—MG14006; and (4) the Nationwide Variable Life Policy—No. N990067730.


The Request for Admissions (Doc. # 2–23) provide that Emicole Properties, LLC owned real property on the date of filing; that Emicole Properties, LLC conveyed the real property to Michael and Bethany Mazon for the sum of $181,196.23 after filing; Emicole Investments Ltd. maintained a financial account at Frost Brokerage Services, Inc. with a balance of $434,939.22 on the date of filing; the debtors owned all interest in the Emicole companies on the date of filing; after filing for bankruptcy, the debtors spent all or most of the money in the account for personal use leaving a total value of approximately $1,000.00.


In any event, the Trustee has never argued the validity of the exemptions or that the exempt property was actually non-exempt, and thus there was no basis for an objection within the thirty day period. Rather, the Trustee consistently recognized the property as being exempt, but sought to impose a surcharge on it because of debtors' misconduct with regard to the undisclosed and dissipated non-exempt assets.


In light of the Court's holdings, it is unnecessary to resolve debtors' claim that there were insufficient findings to support the imposition of a surcharge on their exempt assets.
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