Source: https://supreme.justia.com/cases/federal/us/549/365/
Timestamp: 2019-01-18 11:32:43
Document Index: 189613965

Matched Legal Cases: ['§341', '§706', '§706', '§109', '§1307', '§1307', '§706', '§706', '§706', '§1307', '§105', '§706', '§105', '§522', '§1', '§158', '§104', '§109', '§109', '§521', '§521', '§1325', '§706', '§1307', '§706', '§706', '§1112', '§706', '§706', '§1307', '§1307', '§109', '§105', '§706', '§105', '§109', '§105', '§105']

Marrama v. Citizens Bank of Mass. :: 549 U.S. 365 (2007) :: Justia US Supreme Court Center
Justia › US Law › US Case Law › US Supreme Court › Volume 549 › Marrama v. Citizens Bank of Mass.
After Marrama’s examination at the meeting of creditors, see 11 U. S. C. §341, the trustee advised Marrama’s counsel that he intended to recover the Maine property as an asset of the estate. Thereafter, Marrama filed a “Verified Notice of Conversion to Chapter 13.” Pursuant to Federal Rule of Bankruptcy Procedure 1017(c)(2), the notice of conversion was treated as a motion to convert, to which both the trustee and the Bank filed objections. Relying primarily on Marrama’s attempt to conceal the Maine property from his creditors,[Footnote 3] the trustee contended that the request to convert was made in bad faith and would constitute an abuse of the bankruptcy process. The Bank opposed the conversion on similar grounds.
At the hearing on the conversion issue, Marrama explained through counsel that his misstatements about the Maine property were attributable to “scrivener’s error,” that he had originally filed under Chapter 7 rather than Chapter 13 because he was then unemployed, and that he had recently become employed and was therefore eligible to proceed under Chapter 13.[Footnote 4] The Bankruptcy Judge rejected these arguments, ruling that there is no “Oops” defense to the concealment of assets and that the facts established a “bad faith” case. App. 34a–35a. The judge denied the request for conversion.
Marrama’s principal argument on appeal to the Bankruptcy Appellate Panel for the First Circuit[Footnote 5] was that he had an absolute right to convert his case from Chapter 7 to Chapter 13 under the plain language of §706(a) of the Code. The panel affirmed the decision of the Bankruptcy Court. It construed §706(a), when read in connection with other provisions of the Code and the Bankruptcy Rules, as creating a right to convert a case from Chapter 7 to Chapter 13 that “is absolute only in the absence of extreme circumstances.” In re Marrama, 313 B. R. 525, 531 (2004). In concluding that the record disclosed such circumstances, the panel relied on Marrama’s failure to describe the transfer of the Maine residence into the revocable trust, his attempt to obtain a homestead exemption on rental property in Massachusetts, and his nondisclosure of an anticipated tax refund.
There are at least two possible reasons why Marrama may not qualify as such a debtor, one arising under §109(e) of the Code, and the other turning on the construction of the word “cause” in §1307(c). The former provision imposes a limit on the amount of indebtedness that an individual may have in order to qualify for Chapter 13 relief.[Footnote 6] More pertinently,[Footnote 7] the latter provision, §1307(c), provides that a Chapter 13 proceeding may be either dismissed or converted to a Chapter 7 proceeding “for cause” and includes a nonexclusive list of 10 causes justifying that relief.[Footnote 8] None of the specified causes mentions prepetition bad-faith conduct (although subparagraph 10 does identify one form of Chapter 7 error—which is necessarily prepetition conduct—that would justify dismissal of a Chapter 13 case).[Footnote 9] Bankruptcy courts nevertheless routinely treat dismissal for prepetition bad-faith conduct as implicitly authorized by the words “for cause.” See n. 1, supra. In practical effect, a ruling that an individual’s Chapter 13 case should be dismissed or converted to Chapter 7 because of prepetition bad-faith conduct, including fraudulent acts committed in an earlier Chapter 7 proceeding, is tantamount to a ruling that the individual does not qualify as a debtor under Chapter 13. That individual, in other words, is not a member of the class of “ ‘honest but unfortunate debtor[s]’ ” that the bankruptcy laws were enacted to protect. See Grogan v. Garner, 498 U. S., at 287. The text of §706(d) therefore provides adequate authority for the denial of his motion to convert.
The class of honest but unfortunate debtors who do possess an absolute right to convert their cases from Chapter 7 to Chapter 13 includes the vast majority of the hundreds of thousands of individuals who file Chapter 7 petitions each year.[Footnote 10] Congress sought to give these individuals the chance to repay their debts should they acquire the means to do so. Moreover, as the Court of Appeals observed, the reference in §706(a) to the unenforceability of a waiver of the right to convert functions “as a consumer protection provision against adhesion contracts, whereby a debtor’s creditors might be precluded from attempting to prescribe a waiver of the debtor’s right to convert to chapter 13 as a non-negotiable condition of its contractual agreements.” 430 F. 3d, at 479.
A statutory provision protecting a borrower from waiver is not a shield against forfeiture. Nothing in the text of either §706 or §1307(c) (or the legislative history of either provision) limits the authority of the court to take appropriate action in response to fraudulent conduct by the atypical litigant who has demonstrated that he is not entitled to the relief available to the typical debtor.[Footnote 11] On the contrary, the broad authority granted to bankruptcy judges to take any action that is necessary or appropriate “to prevent an abuse of process” described in §105(a) of the Code,[Footnote 12] is surely adequate to authorize an immediate denial of a motion to convert filed under §706 in lieu of a conversion order that merely postpones the allowance of equivalent relief and may provide a debtor with an opportunity to take action prejudicial to creditors.[Footnote 13]
Indeed, as the Solicitor General has argued in his brief amicus curiae, even if §105(a) had not been enacted, the inherent power of every federal court to sanction “abusive litigation practices,” see Roadway Express, Inc. v. Piper, 447 U. S. 752, 765 (1980), might well provide an adequate justification for a prompt, rather than a delayed, ruling on an unmeritorious attempt to qualify as a debtor under Chapter 13.
See, e.g., In re Alt, 305 F. 3d 413, 418–419 (CA6 2002); In re Leavitt, 171 F. 3d 1219, 1224 (CA9 1999); In re Kestell, 99 F. 3d 146, 148 (CA4 1996); In re Molitor, 76 F. 3d 218, 220 (CA8 1996); In re Gier, 986 F. 2d 1326, 1329–1330 (CA10 1993); In re Love, 957 F. 2d 1350, 1354 (CA7 1992); In re Sullivan, 326 B. R. 204, 211 (Bkrtcy. App. Panel CA1 2005).
The trustee also noted that in his original verified schedules Marrama had claimed a property in Gloucester, Mass., as a homestead exemption, see 11 U. S. C. §522(b)(2); Mass. Gen. Laws, ch. 188, §1 (West 2005), but testified at the meeting of creditors that he did not reside at the property and was receiving rental income from it, App. 71a–72a. Moreover, when asked at the meeting whether anyone owed him any money, Marrama responded “No,” id., at 50a, and in response to a similar question on Schedule B to his petition, which specifically requested a description of any “tax refunds,” Marrama indicated that he had “none.” Supp. App. 6. In fact, Marrama had filed an amended tax return in July 2002 in which he claimed the right to a refund, and shortly before the hearing on the motion to convert, the Internal Revenue Service informed the trustee that Marrama was entitled to a refund of $8,745.86, App. 30a–31a.
The parties dispute the accuracy of this representation. The trustee’s brief notes that Schedule I to Marrama’s original petition indicates that he had been employed by a flooring company at the time the case was filed. See Brief for Respondent Mark G. DeGiacomo 10, n. 7 (citing Supp. App. 18, 30). Marrama’s counsel stated during oral argument, however, that the income listed in Schedule I represented an estimate based on employment that had not yet begun. Tr. of Oral Arg. 24. Since the sufficiency of the evidence of bad faith is not at issue, we may assume that Marrama did have more income available when he sought to convert than when he commenced the Chapter 7 case.
The judicial council of any circuit is authorized by statute to establish a bankruptcy appellate panel service, comprising bankruptcy judges, to hear appeals from the bankruptcy courts with the consent of the parties. See 28 U. S. C. §158(b); Connecticut Nat. Bank v. Germain, 503 U. S. 249, 252 (1992). The First Circuit has established this service.
“Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $250,000 and noncontingent, liquidated, secured debts of less than $750,000, or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $250,000 and noncontingent, liquidated, secured debts of less than $750,000 may be a debtor under chapter 13 of this title.”
These dollar limits are subject to adjustment for inflation every three years. See §104(b).
Marrama initiated a new Chapter 13 case the day after we granted certiorari in the present case. The new case was dismissed on the grounds that, under §109(e), he was ineligible to be a Chapter 13 debtor. See In re Marrama, 345 B. R. 458, 463–464, and n. 10 (Bkrtcy. Ct. Mass. 2006). As the Bankruptcy Judge made no such determination on the record before us in this case, and as it is not necessary to our decision that such a determination be made, we do not consider whether Marrama fails to meet the §109(e) debt limit.
“Except as provided in subsection (e) of this section, on request of a party in interest or the United States trustee and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title, or may dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause, including—
“(1) unreasonable delay by the debtor that is prejudicial to creditors;
“(2) nonpayment of any fees and charges required under chapter 123 of title 28;
“(3) failure to file a plan timely under section 1321 of this title;
“(10) only on request of the United States trustee, failure to timely file the information required by paragraph (2) of section 521.”
Section 521(2), which has since been amended and redesignated as §521(a)(2), see 119 Stat. 38, imposes a duty on a debtor in a Chapter 7 proceeding to file within a certain time period a statement of intent with respect to the retention or surrender of property being used to secure debts. See 11 U. S. C. A. §521(a)(2), (2004 ed. and Supp. 2006).
We are advised by the Administrative Office of the United States Courts that 833,148 Chapter 7 cases were filed in fiscal year 2006. Memorandum from Steven R. Schlesinger, Administrative Office of the United States Courts, to Supreme Court Library (Dec. 13, 2006) (available in Clerk of Court’s case file).
We have no occasion here to articulate with precision what conduct qualifies as “bad faith” sufficient to permit a bankruptcy judge to dismiss a Chapter 13 case or to deny conversion from Chapter 7. It suffices to emphasize that the debtor’s conduct must, in fact, be atypical. Limiting dismissal or denial of conversion to extraordinary cases is particularly appropriate in light of the fact that lack of good faith in proposing a Chapter 13 plan is an express statutory ground for denying plan confirmation. 11 U. S. C. §1325(a)(3); see In re Love, 957 F. 2d, at 1356 (“Because dismissal is harsh . . . the bankruptcy court should be more reluctant to dismiss a petition … for lack of good faith than to reject a plan for lack of good faith under Section 1325(a)”).
“The 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, sU. S.onte, 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.”
Both the Chapter 7 trustee and the United States as amicus curiae argue in their briefs that in the interval between the allowance of a motion to convert under §706(a) and the subsequent granting of a motion to dismiss under §1307(c), the fact that the debtor would have possession of the property formerly under the control of the trustee would create an opportunity for the debtor to take actions that would impair the rights of creditors. Whether or not that risk is significant, under our understanding of the Code, the debtor’s prior misconduct may provide a sufficient justification for a denial of his motion to convert.
Under the clear terms of the Bankruptcy Code, a debtor who initially files a petition under Chapter 7 has the right to convert the case to another chapter under which the case is eligible to proceed. The Court, however, holds that a debtor’s conversion right is conditioned upon a bankruptcy judge’s finding of “good faith.” Because the imposition of this condition is inconsistent with the Bankruptcy Code, I respectfully dissent.
“[A] debtor may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at any time, if the case has not been converted under section 1112, 1208, or 1307 of this title.”
This reading of the Code is buttressed by the contrast between the terms of §706 and the language employed in other Code provisions that give bankruptcy judges the discretion to deny conversion requests. As noted, §706(a) says that a Chapter 7 debtor “may convert” the debtor’s case to another chapter. Chapters 11, 12, and 13 contain similar provisions stating that debtors under those chapters “may convert” their cases to other chapters. See §§1112(a), 1208(a), and 1307(a) (2000 ed. and Supp IV). Chapters 11, 12, and 13 also contain separate provisions governing conversion requests by other parties in interest. For example, the applicable provision in Chapter 11 provides:
“On request of a party in interest and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 11 of this title at any time.” §706(b) (emphasis added).
In sum, the Code expressly gives a debtor who initially files under Chapter 7 the right to convert the case to another chapter so long as the debtor satisfies the requirements of the destination chapter. By contrast, the Code pointedly does not give the bankruptcy courts the authority to deny conversion based on a finding of “bad faith.” There is no justification for disregarding the Code’s scheme.
In reaching the conclusion that a bankruptcy judge may override a Chapter 7 debtor’s conversion right based on a finding of “bad faith,” the Court reasons as follows. Under §706(d), a Chapter 7 debtor may not convert to another chapter “unless the debtor may be a debtor under such chapter.” Under §1307(c), a Chapter 13 proceeding may be dismissed or converted to Chapter 7 “for cause.” One such “cause” recognized by bankruptcy courts is “bad faith.” Therefore, a Chapter 7 debtor who has proceeded in “bad faith” and wishes to convert his or her case to Chapter 13 is not eligible to “be a debtor” under Chapter 13 because the debtor’s case would be subject to dismissal or reconversion to Chapter 7 pursuant to §1307(c). I cannot agree with this strained reading of the Code.
The requirements that must be met in order to “be a debtor” under Chapter 13 are set forth in 11 U. S. C. A. §109 (main ed. and Supp. 2006), which is appropriately titled “Who may be a debtor.” The two requirements that are specific to Chapter 13 appear in subsection (e). First, Chapter 13 is restricted to individuals, with or without their spouses, with regular income. Second, a debtor may not proceed under Chapter 13 if specified debt limits are exceeded.[Footnote 2]
The Court notes that the Bankruptcy Code is intended to give a “ ‘ “fresh start” ’ ” to the “ ‘ “honest but unfortunate debtor.” ’ ” Ante, at 1, 9 (quoting Grogan v. Garner, 498 U. S. 279, 286, 287 (1991)). But compliance with the statutory scheme—conversion to Chapter 13 followed by notice and a hearing on the question of reconversion—would at least provide some structure to the process of identifying those debtors whose “ ‘bad faith’ ” meets the Court’s standard for consignment to liquidation, i.e., “ ‘bad faith’ ” conduct that is “atypical” and “extraordinary.” Ante, at 10, n. 11.
Finally, the Court notes two alternative bases for its holding. First, the Court points to 11 U. S. C. §105(a), which governs a bankruptcy court’s general powers.[Footnote 4] Second, the Court suggests that even without a textual basis, a bankruptcy court’s inherent power may empower it to deny a §706(a) conversion request for bad faith. Obviously, however, neither of these sources of authority authorizes a bankruptcy court to contravene the Code. On the contrary, a bankruptcy court’s general and equitable powers “must and can only be exercised within the confines of the Bankruptcy Code.” Norwest Bank Worthington v. Ahlers, 485 U. S. 197, 206 (1988); accord, Sec v. United States Realty & Improvement Co., 310 U. S. 434, 455 (1940) (“A bankruptcy court . . . is guided by equitable doctrines and principles except in so far as they are inconsistent with the Act”).
Ultimately, §105(a) and a bankruptcy court’s inherent powers may have a role to play in a case such as this. The problem the Court identifies is a real one. A debtor who is convinced that he or she can successfully conceal assets has a significant incentive to pursue Chapter 7 liquidation in lieu of a Chapter 13 restructuring. If successful, the debtor preserves wealth; if unsuccessful, the debtor can convert to Chapter 13 and land largely where the debtor would have been if he or she had fully disclosed all assets and proceeded in Chapter 13 in the first instance.
Because the provisions of the Code rule out the procedure that was followed in this case by the bankruptcy court, I would reverse the judgment of the Court of Appeals.
“Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $307,675 and noncontingent, liquidated, secured debts of less than $922,975, or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $307,675 and noncontingent, liquidated, secured debts of less than $922,975 may be a debtor under chapter 13 of this title.” §109(e) (Supp. 2006) (footnote omitted).
Indeed, the only procedural guidance for such a situation is Federal Rule of Bankruptcy Procedure 1017(f)(2), which requires the filing of a motion to convert by the debtor and service thereof.
“The 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, sU. S.onte, 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.” §105(a).
See, e.g., In re All Denominational New Church, 268 B. R. 536 (Bkrtcy. App. Panel CA8 2001) (affirming dismissal for failure to comply with required monthly reporting); In re Martin’s Aquarium, Inc., 225 B. R. 868, 880 (Bkrtcy. Ct. E. D. Pa. 1998) (“[A] debtor may, in an appropriate case, be required to produce an accounting, and . . . a bankruptcy court does indeed have the power to so order [this equitable remedy]”).
See, e.g., In re Bartmann, 320 B. R. 725, 732–733 (Bkrtcy. Ct. N. D. Okla. 2004); In re Newport Creamery, Inc., 293 B. R. 293 (Bkrtcy. Ct. R. I. 2003); In re Peklo, 201 B. R. 331 (Bkrtcy Ct. Conn. 1996).
See, e.g., In re Everly, 346 B. R. 791, 797 (Bkrtcy. App. Panel CA8 2006) (bankruptcy court’s §105 powers include authority to sanction counsel); In re Brooks-Hamilton, 329 B. R. 270 (Bkrtcy. App. Panel CA9 2005) (upholding sanction and suspension of debtor’s counsel); In re Washington, 297 B. R. 662 (Bkrtcy. Ct. S. D. Fla. 2003).
See, e.g., In re Deville, 280 B. R. 483 (Bkrtcy. App. Panel CA9 2002); In re Johnson, 336 B. R. 568, 573 (Bkrtcy. Ct. S. D. Fla. 2006); In re Couch-Russell, No. 00–02226, 2003 W L 25273863 (Bkrtcy. Ct. Idaho 2003); In re Gorshtein, 285 B. R. 118 (Bkrtcy. Ct. S. D. N. Y. 2002).
Robert Louis Marrama
Citizens Bank of Massachusetts et al.
549 U.S. 365