Marrama v. Citizens Bank of Mass.

• Decision Date: 21 February 2007
• Docket Number: No. 05-996.,05-996.
• Citation: Marrama v. Citizens Bank of Mass., 127 S.Ct. 1105, 166 L.Ed.2d 956, 549 U.S. 365, 75 USLW 4113 (2007)
• Parties: Robert Louis MARRAMA, Petitioner, v. CITIZENS BANK OF MASSACHUSETTS et al.
• Court: U.S. Supreme Court

549 U.S. 365

127 S.Ct. 1105

166 L.Ed.2d 956

75 USLW 4113

Robert Louis MARRAMA, Petitioner,

v.CITIZENS BANK OF MASSACHUSETTS et al.

No. 05-996.

Supreme Court of the United States

Argued Nov. 6, 2006.

Decided Feb. 21, 2007.

Syllabus^*

In filing his petition under Chapter 7 of the Bankruptcy Code, petitioner Marrama misrepresented the value of his Maine property and that he had not transferred it during the preceding year. Respondent DeGiacomo, the trustee of Marrama's estate, stated his intention to recover the Maine property as an estate asset. Thereafter, Marrama sought to convert the proceeding to Chapter 13, but the trustee and respondent bank, Marrama's principal creditor, objected, contending that the request to convert was made in bad faith and would constitute an abuse of the bankruptcy process. The Bankruptcy Judge denied Marrama's request, finding bad faith. Affirming, the First Circuit's Bankruptcy Appellate Panel rejected Marrama's argument that he had an absolute right to convert under § 706(a) of the Bankruptcy Code, which provides that a Chapter 7 debtor “may convert a case” so long as it has not been converted previously, and that a waiver of the right to convert is unenforceable. The First Circuit also rejected that argument, emphasizing, inter alia, that a bankruptcy court has the authority to dismiss a Chapter 13 petition based on a debtor's bad faith, and that a first-time motion to convert a Chapter 7 case to Chapter 13 should not be treated differently from the filing of a Chapter 13 petition in the first instance.

Held: Marrama forfeited his right to proceed under Chapter 13. The broad description of the right to convert as “absolute” in Senate and House Committee Reports fails to give full effect to the express limitation of § 706(d), which provides 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.” That text expressly conditioned Marrama's right to convert on his ability to qualify as a Chapter 13 “debtor.” Marrama does not qualify as such a debtor under § 1307(c), which provides that a Chapter 13 proceeding may be either dismissed or converted to a Chapter 7 proceeding “for cause.” Bankruptcy courts routinely treat dismissal for prepetition bad-faith conduct as implicitly authorized by the words “for cause,” and a ruling that an individual's Chapter 13 case should be dismissed or converted to Chapter 7 because of bad faith is tantamount to a ruling that the individual does not qualify as a Chapter 13 debtor. Congress gave “ ‘honest but unfortunate debtor[s],’ ” Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755, the chance to repay their debts should they acquire the means to do so, and § 706(a) protects a debtor from being forced to waive that right. However, a provision protecting a borrower from waiver is not a shield against forfeiture. Neither § 706 nor § 1307(c) limits a court's authority 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, bankruptcy judges' broad authority to take necessary or appropriate action “to prevent an abuse of process” described in Code § 105(a) is adequate to authorize an immediate denial of a § 706 motion to convert in lieu of a conversion order that merely postpones the allowance of equivalent relief and may give a debtor an opportunity to take action prejudicial to creditors. Pp. 1109-1112.

430 F.3d 474, affirmed.

STEVENS, J., delivered the opinion of the Court, in which KENNEDY, SOUTER, GINSBURG, and BREYER, JJ., joined. ALITO, J., filed a dissenting opinion, in which ROBERTS, C. J., and SCALIA and THOMAS, JJ., joined, post, p. 1112.

David G. Baker, for petitioner.

G. Eric Brunstad, Jr., for respondents.

Lisa S. Blatt, for the United States as amicus curiae, by special leave of the Court, supporting the respondents.

Jeffrey A. Kitaeff, Jeffrey A. Kitaeff, P.C. Of Counsel, Andover, MA, David G. Baker, Esq., Counsel of Record, Yu Jin Weng, Boston, MA, for Petitioner.

Mark G. DeGiacomo, Esq., Counsel of Record, Olga L. Bogdanov, Esq., Taruna Garg, Esq., Boston, MA, for Respondent.

G. Eric Brunstad, Jr., Counsel of Record, Rheba Rutkowski, William C. Heuer, Kate Kotsaftis Simon, Eric Heining, Bingham McCutchen LLP, Hartford, Connecticut, for Respondent Citizens Bank of Massachusetts.

Justice STEVENS delivered the opinion of the Court.

The principal purpose of the Bankruptcy Code is to grant a “ ‘fresh start’ ” to the “ ‘honest but unfortunate debtor.’ ” Grogan v. Garner, 498 U.S. 279, 286, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Both Chapter 7 and Chapter 13 of the Code permit an insolvent individual to discharge certain unpaid debts toward that end. Chapter 7 authorizes a discharge of prepetition debts following the liquidation of the debtor's assets by a bankruptcy trustee, who then distributes the proceeds to creditors. Chapter 13 authorizes an individual with regular income to obtain a discharge after the successful completion of a payment plan approved by the bankruptcy court. Under Chapter 7 the debtor's nonexempt assets are controlled by the bankruptcy trustee; under Chapter 13 the debtor retains possession of his property. A proceeding that is commenced under Chapter 7 may be converted to a Chapter 13 proceeding and vice versa. 11 U.S.C. §§ 706(a), 1307(a) and (c).

An issue that has arisen with disturbing frequency is whether a debtor who acts in bad faith prior to, or in the course of, filing a Chapter 13 petition by, for example, fraudulently concealing significant assets, thereby forfeits his right to obtain Chapter 13 relief. The issue may arise at the outset of a Chapter 13 case in response to a motion by creditors or by the United States trustee either to dismiss the case or to convert it to Chapter 7, see § 1307(c). It also may arise in a Chapter 7 case when a debtor files a motion under § 706(a) to convert to Chapter 13. In the former context, despite the absence of any statutory provision specifically addressing the issue, the federal courts are virtually unanimous that prepetition bad-faith conduct may cause a forfeiture of any right to proceed with a Chapter 13 case.¹ In the latter context, however, some courts have suggested that even a bad-faith debtor has an absolute right to convert at least one Chapter 7 proceeding into a Chapter 13 case even though the case will thereafter be dismissed or immediately returned to Chapter 7.² We granted certiorari to decide whether the Code mandates that procedural anomaly. 547 U.S. 1191, 126 S.Ct. 2859, 165 L.Ed.2d 894 (2006).

I

On March 11, 2003, petitioner, Robert Marrama, filed a voluntary petition under Chapter 7, thereby creating an estate consisting of all his property “wherever located and by whomever held.” 11 U.S.C. § 541(a). Respondent Mark DeGiacomo is the trustee of that estate. Respondent Citizens Bank of Massachusetts (hereinafter Bank) is the principal creditor.

In verified schedules attached to his petition, Marrama made a number of statements about his principal asset, a house in Maine, that were misleading or inaccurate. For instance, while he disclosed that he was the sole beneficiary of the trust that owned the property, he listed its value as zero. He also denied that he had transferred any property other than in the ordinary course of business during the year preceding the filing of his petition. Neither statement was true. In fact, the Maine property had substantial value, and Marrama had transferred it into the newly created trust for no consideration seven months prior to filing his Chapter 7 petition. Marrama later admitted that the purpose of the transfer was to protect the property from his creditors.

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(f)(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,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 eligibleto proceed under Chapter 13.⁴ 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 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 (1st Cir. BAP 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...