In re Marrama

• Decision Date: 31 October 2005
• Docket Number: No. 04-9009.,04-9009.
• Citation: 430 F.3d 474
• Parties: In re Robert Louis MARRAMA, Debtor. Robert Louis Marrama, Appellant, v. Citizens Bank of Massachusetts and Mark G. DeGiacomo, Chapter 7 Trustee, Appellees.
• Court: U.S. Court of Appeals — First Circuit

Page 474

430 F.3d 474

In re Robert Louis MARRAMA, Debtor Robert Louis Marrama, Appellant, v. Citizens Bank of Massachusetts and Mark G. DeGiacomo, Chapter 7 Trustee, Appellees.

No. 04-9009.

United States Court of Appeals, First Circuit.

Heard March 8, 2005.

Decided October 31, 2005.

David G. Baker, for appellant.

Mark G. DeGiacomo, with whom Olga L. Bogdanov and Murtha Cullina LLP were on brief for appellee Mark G. DeGiacomo.

Jack J. Mikels, Michael A. Wirtz, Janell E. DeGennaro, and Jack Mikels & Associates on brief for appellee Citizens Bank of Massachusetts.

Lynne F. Riley, with whom Riley & Esher, were on brief for Amicus Curiae, National Association of Bankruptcy Trustees.

Gary Klein, with whom Roddy, Klein & Ryan, and John Rao, National Consumer Law Center, were on brief for Amicus Curiae, National Association of Consumer Bankruptcy Attorneys.

Before HOWARD, Circuit Judge, CYR and STAHL, Senior Circuit Judges.

CYR, Senior Circuit Judge.

Robert Louis Marrama appeals from the bankruptcy court order which rejected his petition to convert these proceedings from chapter 7 to chapter 13, based on its determination that Marrama had attempted to conceal assets from creditors. We affirm.

I BACKGROUND

In August 2002, Marrama transferred residential real estate in York, Maine, having an unencumbered value of $85,000, to a revocable spendthrift trust, for no consideration, and designated himself sole beneficiary and his girlfriend sole trustee. Marrama's acknowledged intent was to protect the property from the claims of creditors. Seven months later, he submitted a voluntary chapter 7 petition, together with a statement of financial affairs wherein he (i) disclosed that he was the Trust's beneficiary, (ii) listed the value of its res as zero, (iii) denied making any property transfers within one year preceding the filing of the chapter 7 petition, and (iv) asserted that the IRS owed him no tax refunds.¹ Whereas, Marrama was due a tax refund exceeding $11,000.

In June 2003, the chapter 7 trustee questioned Marrama regarding these apparent discrepancies. Rather than responding, Marrama filed notice in the bankruptcy court, pursuant to Bankruptcy Code § 706(a), seeking to convert the chapter 7 case to a chapter 13 debt-restructuring proceeding, based upon his contention that, more recently, he had acquired additional rental income and gainful employment. The chapter 7 trustee opposed the conversion on the ground that Marrama intentionally failed to disclose in his schedules the preferential transfer of the Maine property into the trust some seven months prior to his chapter 7 petition, as well as his anticipated federal tax refund. The debtor contended that these misstatements and omissions were inadvertent.

Following a non-evidentiary hearing, the bankruptcy court refused to permit the conversion to chapter 13, on the ground that the deceptive statement of financial affairs demonstrated Marrama's "bad faith." Marrama appealed to the BAP, which affirmed. In re Marrama, 313 B.R. 525 (1st Cir. BAP 2004).² The present appeal fails as well.

II DISCUSSION

On an appeal from a BAP decision, we review de novo the legal determinations of the bankruptcy court, and its findings of fact for clear error. See Brandt v. Repco Printers & Lithographics, Inc. (In re Healthco Int'l, Inc.), 132 F.3d 104, 107-08 (1st Cir.1997).

A. Section 706(a) and "Bad Faith" Conversion

The initial issue on appeal is whether Bankruptcy Code § 706(a) confers any discretion upon the bankruptcy court to forfend against "bad faith" conversions to chapter 13, or the debtor has an "absolute" right to convert. Interpretation of subsection 706(a) presents a pure issue of law, engendering de novo review. See HSBC Bank USA v. Branch (In re Bank of New England Corp.), 364 F.3d 355, 361 (1st Cir.), cert. denied, ___ U.S. ___, 125 S.Ct. 318, 160 L.Ed.2d 225 (2004). Subsection 706(a) provides:

The debtor may convert a case under this chapter [viz., chapter 7] 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) (emphasis added). Thus, section 706 imposes two plainly expressed limitations upon a debtor's right to convert: the debtor (i) must not previously have converted the case; and (ii) must meet the eligibility requirements for the chapter to which he intends to convert, see 11 U.S.C. § 706(d). With respect to a conversion to chapter 13, for example, the debtor must have a regular income, unsecured debts less than $307,675, and secured debts less than $922,975. See id. § 109(e).

As always, first we must inquire whether the plain language of subsection 706(a) resolves the interpretive issue, and, if so, its manifest meaning must control. See In re BankVest Capital Corp., 360 F.3d 291, 297 (1st Cir.), cert. denied, ___ U.S. ___, 124 S.Ct. 2874, 159 L.Ed.2d 776 (2004). At the outset it must be noted that subsection 706(a) is to be viewed in light of a fundamental canon of the Bankruptcy Code: a bankruptcy court sitting in equity is duty bound to take all reasonable steps to prevent a debtor from abusing or manipulating the bankruptcy process to undermine the essential purposes of the Bankruptcy Code, including the principle that all the debtor's assets are to be gathered and deployed in a bona fide effort to satisfy valid claims. See United States v. Mourad, 289 F.3d 174, 178 (1st Cir.2002) (noting that Bankruptcy Code § 105(a) enables the bankruptcy court to "tak[e] any action or mak[e] any determination necessary or appropriate to ... prevent an abuse of [the bankruptcy] process"). Whether or not the Bankruptcy Code § 105(a) anti-abuse provision alone would warrant the bankruptcy court's decision to deny Marrama a subsection 706(a) conversion, that provision indeed looms large in determining whether Congress envisioned that subsection 706(a) be construed as withholding all discretion where the bankruptcy court is confronted with a patently abusive motion to convert:

Those who seek the shelter of the bankruptcy code [must] not play fast and loose with their assets or with the reality of their affairs. The statutes are designed to insure that complete, truthful, and reliable information is put forward at the outset of the proceedings, so that decisions can be made by the parties in interest based on fact rather than fiction. As we have stated, "[t]he successful functioning of the bankruptcy act hinges both upon the bankrupt's veracity and his willingness to make a full disclosure."

Boroff v. Tully (In re Tully), 818 F.2d 106, 110 (1st Cir.1987) (citation omitted). Absent plain language to the contrary in subsection 706(a), therefore, we would be loathe indeed to disregard such an overarching legislative policy.

Turning to the particular language utilized in subsection 706(a), we can discern no evidence that the Congress intended to override the presumptive power and responsibility of the bankruptcy court to weed out abuses of the bankruptcy process at any stage in the bankruptcy proceedings. Subsection 706(a) simply provides that the debtor "may" convert. The word "may" has at least two connotations. It can simply denote that a debtor has the option to convert, or not convert. On the other hand, "may" often suggests conditionality, signifying that the event or status described is in no sense to be considered a foregone conclusion. Thus, the phrase "may convert" reasonably may suggest that the right to convert is merely presumptive, and may be exercised only if the debtor meets the preconditions for eligibility established in Bankruptcy Code § 109(e), or even then only in the absence of other exceptional circumstances. See In re Finney, 992 F.2d 43, 45 (4th Cir.1993) (holding subsection 706(a) right not "absolute," but subject to bad-faith exception); Martin v. Martin (In re Martin), 880 F.2d 857, 859 (5th Cir.1989); In re Kuntz, 233 B.R. 580, 585 (1st Cir. BAP 1999). In other words, the debtor "may" succeed in an attempted conversion, but not necessarily in all conceivable instances.

Although Congress's mere use of the word "may" might not be conclusive in itself as to the existence or scope of the bankruptcy court's discretionary authority to deny a conversion, the statutory interpretation proffered by the trustee is bolstered as well by a comparison between Bankruptcy Code § 706(a) and § 1307(b), for example, which provides that "[o]n request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter." (Emphasis added.) Subsection 1307(b) demonstrates that Congress well understood how to draft statutory language which left no (or at least considerably less) discretion in the bankruptcy court to deny a chapter 13 debtor's request.² The fact that subsection 706(a) contains no such imperative language strongly suggests that it confers a more restricted right upon the debtor, and that the bankruptcy court presumptively retains its discretionary prerogative to deny conversion in some circumstances. See Citizens Awareness Network, Inc. v United States, 391 F.3d 338, 346 (1st Cir.2004) ("Congress's use of differential language in various sections of the same statute is presumed to be intentional and deserves interpretive weight.").³

Similarly, use of the phrase "at any time" in subsection 706(a) simply means that the debtor may seek to convert at any time during the pendency of the bankruptcy case, or in other words, that no artificial time constraints should impede an election to convert. Obviously, however, the temporal permissiveness of the phrase "at any time" hardly equates to the more broad circumstantial permission which Congress could have conferred, for example, by employing a phrase such as "regardless of the circumstances." See In re...