Government Fraud v. Private Party Fraud

Regular readers should know where this one is going.

On Monday the SCOTUS will hear argument on the case of Law v. Siegel.  It’s a bankruptcy issue.  Bankruptcy is kind of an interesting area of law.

But that’s not the point here.

The point is that the courts get very creative about punishing bankrupt people who have supposedly committed fraud in their bankruptcy proceedings.  In the Law case, you have a guy who files for bankruptcy and has apparently manufactured/fabricated liens against his house so he can keep it, whereas otherwise it would be sold out from under him by the bankruptcy trustee to satisfy the claims of his creditors.

The case comes out of California.  California, where in many places a bungalo with a hammock, a sink and a toilet will cost you $5 million, apparently allows an unbelievably stingy $75,000 “homestead exemption” which is adopted by the bankruptcy court.  In simple terms this means if your home is worth $75,000 or less you get to keep it when you go bankrupt, but if it’s worth any more than that and you file for bankruptcy the trustee sells the house and puts you out on the street – with your $75,000 but no place to live.

Lots of luck.

Anyway, the trustee in bankruptcy defers to any mortgages on your home, because mortgages are almost always debts to banks and banks are favored litigants.  So if your house is worth $200K and it has a $200K mortgage to Bank of America and you file for bankruptcy the trustee doesn’t take your house – Bank of America does, with the trustee’s blessing.

And thus when a mortgage is ostensibly owed to someone other than a bank, some non-favored litigant like an individual, well the trustee will become suspicious and suspect fraud, and that’s what happened here apparently.  The debtor loaded up his house with phony mortgages to a fictitious person in the hope that the trustee wouldn’t take his house.

The fraud was discovered and the trustee took the house.  And the bankruptcy court punished the guy for this fraud by taking his $75,000 exemption, too.  So he was made homeless sans the $75K.  And the question before the SCOTUS is whether that’s all right.

So what’s the point of this little excursion into bankruptcy law, something we’ve never discussed on this blog before?

Read the article on the SCOTUS blog that I linked to above.  It is dripping with contempt for this poor schmuck who was trying to keep his home, albeit by easily discovered fraud (If he was going to fabricate a phony mortgage he should have made it to a bank.  Then the trustee never would have looked twice and he’d probably have gotten away with it.  Not that I’m recommending any such thing.).  The schmuck is raked over the coals, excoriated by the obscure but prestigious SCOTUS blog, deprived of his already unconscionably puny “homestead exemption” and left destitute.  And the article’s author fully expects the SCOTUS to sign off on this draconian oppression.  With gusto.

Yet in a slew of cases involving the exact same kind of conduct by public prosecutors – that is, fraudulent prosecutions with fabricated evidence – the SCOTUS has long since found that such conduct gets a pass:  the prosecutors are immune.  And they have heard uncontradicted evidence that prosecutors who engage in such conduct otherwise suffer no consequences whatsoever* and are often promoted or become judges.  And they have shrugged this off as if to say “meh”.

And then, when one poor sap finally gets some measure of justice against one of the lying, cheating prosecutors, who not only managed to convict him on made up evidence but put him on death row and almost succeeded in  killing him – well, the SCOTUS chafed at the justice some jury rendered and overturned it.  Took it all away.

And let’s not even start on the frauds committed by banksters, other than to note that they are explicitly given a pass as well because they are “too big to fail”.

So if anyone’s interested here’s my take:  the SCOTUS could use this Law v. Siegel case to move away from its heretofore srictly class based “jurisprudence”, note that those higher up the food chain are given a pass on far more egregious frauds than anything done by this desperate man trying to keep a roof over his head, reverse the punishment mindlessly meted out to him by the lower courts and hint that if prosecutors won’t prosecute big frauds then maybe their convictions for little frauds shouldn’t hold up either. 

It’s easier to convict little people than big people.  But that’s not the job.  Easy is not the point.



*  See discussion with Justice Sotomayor beginning at p. 21, line 20


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