Marrama v. Citizens Bank of Massachusetts

PETITIONER: Robert Louis Marrama
RESPONDENT: Citizens Bank of Massachusetts et al.
LOCATION: United States Court of Appeals for the Ninth Circuit

DOCKET NO.: 05-996
DECIDED BY: Roberts Court (2006-2009)
LOWER COURT: United States Court of Appeals for the First Circuit

CITATION: 549 US 365 (2007)
GRANTED: Jun 12, 2006
ARGUED: Nov 06, 2006
DECIDED: Feb 21, 2007

ADVOCATES:
David G. Baker - argued the cause for Petitioner
G. Eric Brunstad, Jr. - argued the cause for Respondents
Lisa Schiavo Blatt -

Facts of the case

Robert Marrama filed for Chapter 7 bankruptcy and agreed to turn over all of his non-exempt assets to a trustee for payment of his creditors. Trustees later accused Marrama of acting in bad faith by attempting to conceal two assets: a tax refund and some real estate. Marrama then moved to convert his bankruptcy petition from Chapter 7 to Chapter 13, which would allow him to keep more of his assets. Citizens Bank, one of Marrama's creditors, opposed the conversion. Citizens Bank argued that Marrama should not be able to convert to Chapter 13 due to his initial bad faith Chapter 7 petition. The bankruptcy court agreed and denied the conversion.

The bankruptcy appeals panel affirmed the court's ruling. On appeal to the U.S. Court of Appeals for the First Circuit, Marrama argued that the plain language of Section 706(a) of the Bankruptcy Code supported his right to convert to Chapter 13, regardless of the circumstances. Section 706(a) states, "The debtor may convert a case under [Chapter 7] to a case under Chapter 11, 12 or 13 of this title at any time [...]" Citizens Bank countered that the word "may" indicates a privilege rather than a right. It also argued that the bankruptcy system could be abused if debtors were able to convert to Chapter 13 after filing bad faith Chapter 7 petitions. The First Circuit upheld the panel's ruling, denying Marrama his conversion.

Question

Can the right in Section 706(a) of the Bankruptcy Code to convert a Chapter 7 bankruptcy to another chapter be denied because of bad faith?

Media for Marrama v. Citizens Bank of Massachusetts

Audio Transcription for Oral Argument - November 06, 2006 in Marrama v. Citizens Bank of Massachusetts

Audio Transcription for Opinion Announcement - February 21, 2007 in Marrama v. Citizens Bank of Massachusetts

John G. Roberts, Jr.:

Justice Stevens has the opinion in 05-996, Marrama v. Citizens Bank of Massachusetts.

John Paul Stevens:

This is a bankruptcy case.

The petitioner filed a voluntary petition to discharge his debts under Chapter 7 of the Bankruptcy Code.

In verified schedules attached to his petition, petitioner made several statements about his principal asset; a house in Maine that turned out to be misleading or inaccurate.

After petitioner’s examination of the meeting of creditors required by the code, the trustee of the state indicated his intention to recover the Maine property as an asset of the state.

Petitioner then moved to convert his case to a case under Chapter 13.

Proceeding under Chapter 13, enables a debtor with regular income to retain possession of his property and to discharge his debts as he completes payment of a plan approved by the bankruptcy court.

The bankruptcy court denied petitioner’s conversion request on the ground that the motion had been made in bad faith.

Both the Bankruptcy Panel for the First Circuit and the First Circuit Court of Appeals affirmed.

We granted certiorari to decide whether a Chapter 7 debtor has an absolute right to convert to Chapter 13, not withstanding or finding by the bankruptcy court that the conversion motion was brought in bad faith.

We affirm, Section 706(a) of the Bankruptcy Code provides that a debtor may convert a case under Chapter 7 to a case under Chapter 11, 12 or 13 at any time, if the case had not previously been converted, relying primarily on this language as well as the language in the house in Senate Committee reports on the provision.

Petitioner argues that he has an unqualified one time right to convert to Chapter 13, we disagree.

Under Section 706(d) of the code, a Chapter 7 debtor may not convert to Chapter 13 unless he is eligible to be a Chapter 13 debtor.

Under 1307(c), Section 1307(c) provides a non-exhaustive list of reasons that constitute cause for dismissal of a Chapter 13 debtor’s case because bankruptcy courts routinely pre-petition bad faith conduct as one such cause.

It follows that a Chapter 7 debtor, who has been determined to have acted in bad faith, maybe deemed ineligible to convert to Chapter 13.

In addition, Section 105(a) of the court which provides that a bankruptcy court may take any action necessary or appropriate to prevent an abusive process authorizes the court to deny a motion to convert to Chapter 13, when due to the debtor’s bad faith conduct, the Chapter 13 case is destined for immediate dismissal or re-conversion to Chapter 7.

Justice Alito has filed a dissenting opinion in which the Chief Justice, Justice Scalia and Justice Thomas have joined.