Opinion ID: 150455
Heading Depth: 3
Heading Rank: 3

Heading: Marrama v. Citizens Bank of Massachusetts

Text: In 2007, the Supreme Court handed down its decision in Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007). Marrama, the Chapter 7 debtor in that case, had filed schedules that were “misleading” and “inaccurate”—listing the value of a trust as zero when the trust actually held a house of substantial value and denying that he had transferred the house to the trust in the year prior to the date of his petition. Id. at 368. When the trustee declared an intention to recover the house as an asset of the estate, Marrama sought to convert his case to Chapter 13 pursuant to 11 U.S.C. § 706(a). Id. at 368–69. That provision states that “[t]he 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. Any waiver of the right to convert a case under this subsection is unenforceable.” 11 U.S.C. § 706(a). That provision is subject to the limitation that “a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter.” Id. § 706(d). In determining whether § 706(a) was subject to an exception for bad faith, the Court first addressed the provision’s legislative history. The Senate Report stated that 11 Following these decisions, commentators weighed in, with some offering opinions on the proper interpretation and others simply summarizing the decisions courts had reached. See 8 COLLIER ON BANKRUPTCY ¶ 1307.03[1] (15th ed. rev. 2007) (“Although some courts have . . . granted motions to convert a case notwithstanding a debtor’s motion to dismiss in cases in which the court has found abuse, such decisions fly in the face of the plain language of the statute.” (footnote omitted)); 7 NORTON BANKRUPTCY LAW AND PRACTICE § 148:4 (3d ed. 2008) (“Courts have been especially loath to grant a debtor’s motion to voluntarily dismiss a Chapter 13 case when the motion is filed in response to a creditor’s or the trustee’s motion to convert.”); Christy McDonald, To Dismiss or not to Dismiss: The Absolute Question: Think Dismissing a Chapter 13 Is an Absolute Right? Think Again, N.J.L.J., vol. CLXVII, No. 5, Feb. 4, 2002 (noting the conflicting textual and policy arguments for and against a bad-faith exception to § 1307(b)). 12 No. 09-40023 [s]ubsection (a) of [§ 706] gives the debtor the one-time absolute right of conversion of a liquidation case to a reorganization or individual repayment plan case. If the case has already once been converted from Chapter 11 or 13 to Chapter 7, then the debtor does not have that right. The policy of the provision is that the debtor should always be given the opportunity to repay his debts, and a waiver of the right to convert a case is unenforceable. S. REP. NO. 95-989, at 94 (1978). The Marrama Court, however, found that the “reference to an ‘absolute right’ of conversion [wa]s more equivocal than” suggested. 549 U.S. at 372. The Court identified two specific limitations to the “absolute right” of conversion: (1) the proviso in § 706(a) that the right does not survive a previous conversion to Chapter 7 and (2) the requirement in § 706(d) that the debtor be eligible to proceed under the chapter to which conversion was sought. Id. The Court then suggested that there were two potential reasons why Marrama would not qualify as a debtor under Chapter 13. Id. The first arose from the debt limitations imposed on Chapter 13 debtors by 11 U.S.C. § 109(e), but the Court did not discuss that possibility in any detail. Id. at 372–73. Instead, the Court examined the second potential reason: the ability of a bankruptcy court to dismiss or convert a case for cause under § 1307(c). Id. at 373. In its discussion of § 1307(c), the Marrama Court noted that pre-petition bad-faith conduct by debtors such as Marrama constituted “cause” for bankruptcy courts to invoke § 1307(c). Id. Individuals engaged in such conduct, the Court reasoned, did not belong to “the class of ‘honest but unfortunate debtors’ that the bankruptcy laws were enacted to protect.” Id. at 364 (alterations omitted) (quoting Grogan v. Garner, 498 U.S. 279, 287 (1991)). The Court considered a finding of bad-faith conduct sufficient to invoke § 1307(c) “tantamount to a ruling that the individual does not qualify as a debtor under Chapter 13.” Id. at 373–74. Accordingly, the Court found that § 706(d)—and its requirement that a debtor be eligible under the chapter to which conversion was 13 No. 09-40023 sought—justified the bankruptcy court in denying conversion to Chapter 13 in the first instance. Id. at 374. The Court next addressed the language rendering waiver of the statutory rights unenforceable: 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. 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, 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. Id. at 374–75 (footnotes omitted). Finally, the Court noted that “the inherent power of every federal court to sanction abusive litigation practices 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.” Id. at 375–76 (citation and internal quotations marks omitted).