Marrama v. Citizens Bank of Mass.
2007 U.S. LEXIS 2651, 127 S. Ct. 1105, 166 L. Ed. 2d 956 (2007)
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Rule of Law:
A debtor's right to convert a Chapter 7 bankruptcy case to a Chapter 13 case under 11 U.S.C. § 706(a) is not absolute and may be forfeited if the debtor has engaged in bad-faith conduct. Such conduct renders the debtor ineligible to be a "debtor" under Chapter 13, thus failing the condition for conversion set forth in § 706(d).
Facts:
- Robert Marrama was the sole beneficiary of a trust that owned a house in Maine.
- Seven months before filing for bankruptcy, Marrama transferred the Maine house into this newly created trust for no consideration.
- Marrama later admitted this transfer was for the purpose of protecting the property from his creditors.
- On March 11, 2003, Marrama filed a voluntary petition for Chapter 7 bankruptcy.
- In his verified bankruptcy schedules, Marrama listed the value of the Maine house as zero.
- Marrama also falsely declared in the schedules that he had not transferred any property, other than in the ordinary course of business, during the preceding year.
- Marrama also failed to disclose an anticipated tax refund on his schedules.
Procedural Posture:
- Robert Marrama filed a voluntary petition under Chapter 7 in the U.S. Bankruptcy Court.
- After the trustee, Mark DeGiacomo, stated his intent to recover concealed assets, Marrama filed a motion to convert his case to Chapter 13.
- The trustee and a creditor, Citizens Bank of Massachusetts, objected to the conversion, arguing it was made in bad faith.
- The Bankruptcy Judge denied Marrama's motion to convert, finding that his conduct constituted bad faith.
- Marrama, as appellant, appealed to the Bankruptcy Appellate Panel for the First Circuit, which affirmed the Bankruptcy Court's decision.
- Marrama then appealed to the U.S. Court of Appeals for the First Circuit, which also affirmed the denial of conversion.
- The U.S. Supreme Court granted certiorari to resolve a circuit split on the issue.
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Issue:
Does a debtor in a Chapter 7 bankruptcy proceeding forfeit the right to convert the case to Chapter 13 under 11 U.S.C. § 706(a) by engaging in bad-faith conduct?
Opinions:
Majority - Justice Stevens
Yes. A debtor forfeits the right to convert from Chapter 7 to Chapter 13 by engaging in bad-faith conduct. The right to convert under § 706(a) is expressly limited by § 706(d), which requires that the debtor 'may be a debtor under such chapter.' A Chapter 13 case can be dismissed 'for cause' under § 1307(c), and courts have consistently held that 'cause' includes prepetition bad-faith conduct. A debtor who has engaged in fraudulent conduct is not the 'honest but unfortunate debtor' the Code aims to protect and therefore does not qualify as a debtor under Chapter 13. Denying conversion at the outset is an appropriate use of the court's authority under § 105(a) to prevent an abuse of process and avoids the futile exercise of converting a case only to have it immediately dismissed or converted back to Chapter 7.
Dissenting - Justice Alito
No. A debtor does not forfeit the right to convert from Chapter 7 to Chapter 13 based on a judicial finding of bad faith, as the right to convert is subject only to the express conditions in the statute. The text of § 706(a) grants a broad right to convert, limited only by two explicit conditions: the case has not been previously converted, and the debtor meets the eligibility requirements to 'be a debtor' under the destination chapter as specified in 11 U.S.C. § 109, which pertains to income and debt limits, not good faith. The majority improperly conflates the grounds for dismissal 'for cause' under § 1307(c) with the statutory eligibility requirements of § 109. Congress provided other specific remedies for bad faith, such as denying discharge of debts under § 727, but did not make good faith a prerequisite for conversion.
Analysis:
This decision resolves a circuit split by establishing that the right to convert a Chapter 7 case to Chapter 13 is not absolute. It empowers bankruptcy courts to act as gatekeepers, preventing debtors who abuse the bankruptcy process from benefiting from the more favorable terms of Chapter 13. The ruling conditions the statutory right of conversion on the equitable principle of good faith, effectively reading the 'for cause' dismissal standard of § 1307(c) into the eligibility requirements of § 706(d). This strengthens the court's authority to police debtor conduct early in the process and prevents the 'futile procedural anomaly' of converting a case only to immediately dismiss it.
