Join Today and Benefit Daily from ABI's 35+ Years of Insolvency Expertise.
Join Today!
Help Center

Marrama to Test Absolute Right to Convert

Journal Issue: 
Column Name: 
Journal Article: 

The lone bankruptcy case on the Supreme Court's docket thus far for the 2006-07 term features a debtor who seems to give the "honest but unfortunate" debtor of bankruptcy lore, and for whom the fresh start is designed, a bad name. The legal issue at stake in this case, Marrama v. Citizens Bank of Massachusetts, is straightforward: Does a debtor have an absolute right to convert his or her case from chapter 7 to chapter 13 (or chapter 11 or 12)? The case raises larger, familiar statutory interpretation issues as well.

 

Seven months before filing for bankruptcy under chapter 7, Robert Marrama, the debtor and Supreme Court petitioner, transferred a Maine vacation house (valued at $85,000) to a spendthrift trust. Because the trust was revocable, and Marrama was its only beneficiary and his girlfriend the only trustee, Marrama retained complete control over the house. Its intended effect was to put the property beyond the reach of Marrama's creditors. In the statement of financial affairs he filed along with his bankruptcy petition, Marrama's disclosure about the trust was less than complete. He disclosed the existence of the trust and his status as its beneficiary, but listed its value as zero and claimed not to have made any transfers during the year before bankruptcy (thus omitting reference to having transferred the Maine house to the trust). Marrama also neglected to mention that the IRS owed him a tax refund of $11,194. When the chapter 7 trustee questioned him about the apparent inaccuracies in his disclosure, Marrama's lawyer responded with the bankruptcy equivalent of "Beam me up, Scottie" (to quote the old Star Trek show). Rather than defend the disclosure, he invoked §706(a) and asked the bankruptcy court to convert Marrama's case to chapter 13, which would enable him to leave chapter 7, and the chapter 7 trustee, behind.

Marrama's argument for conversion was based on the language of §706(a), which states that a "debtor may convert a case under [chapter 7] to a case under chapter 11, 12 or 13...at any time."1 This language, his lawyer argued, establishes an absolute right to convert the case to chapter 13 if the case has not previously been converted and the debtor meets the eligibility requirements for chapter 13. The bankruptcy court refused to allow the conversion, concluding that the debtor did not have an absolute right to convert and that his questionable behavior before and during bankruptcy warranted denial of the conversion. The Bankruptcy Appellate Panel (BAP) upheld the denial, as did the First Circuit. Presumably hoping that the fourth time would be the charm, Marrama appealed to the Supreme Court.

The casual observer—or indeed the close observer who has not read the lower court opinions—might wonder why the Supreme Court tapped Marrama for its first and thus far only bankruptcy case of the new term. Not only did all three lower courts swat down Marrama's attempted conversion, but the First Circuit opinion was authored by Judge Conrad Cyr. Now a senior judge on the First Circuit, Judge Cyr was himself a longtime bankruptcy judge. As a leading bankruptcy judge in the 1970s, Judge Cyr played a visible role in the legislative deliberations that led to the 1978 Code. On behalf of the National Association of Bankruptcy Judges, he and Judge Joe Lee developed a "Judges Bill" that served as a counterpoint to a bill derived from the 1973 report of the National Bankruptcy Review Commission.2 He continued to play a prominent role in bankruptcy circles until his appointment to the federal district court. Surely a bankruptcy decision bearing Judge Cyr's judicial signature, and giving his imprimatur to two lower court opinions, would carry uncommon weight.

As the reader may by this point suspect, the reason Marrama grabbed the Supreme Court's attention is that the conversion issue has roiled the lower courts. "Even the most cursory review of the decisions on this issue," Marrama's lawyers wrote in their petition for a writ of certiorari, "at all judicial levels, [discloses] that the law is in complete disarray."3 Even more surprising, given that he won a complete victory in the First Circuit, the chapter 7 trustee essentially agreed. "Respondent cannot disagree," he wrote in his response, "with the petitioner's position that there is a split of authority among courts which have considered this issue," with the Fifth Circuit holding that debtors have an absolute right to convert to chapter 13, whereas the First, Fourth and Sixth have concluded that conversion can be denied under at least some circumstances.4 The bankruptcy courts, BAPs and district courts are similarly divided. The division stems from a very familiar tension in the bankruptcy case law—whether to hew to the literal words of the statute or to interpret the Code flexibly to reach what seems like a sensible result.

As noted above, Marrama's position boils down to one big argument. When the Code says that a debtor "may convert" to chapter 13, it makes that right absolute for first-time converters who meet the eligibility requirements for chapter 13 (principally, that they have regular income and owe less than $307,675 in unsecured and $922,975 of secured debts).5 In rejecting this reading of §706, the First Circuit emphasized that "subsection 706(a) is to be viewed in light of a fundamental cannon 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."6 The court then offered a series of reasons why the language of §706 did not override the bankruptcy court's authority to "weed out abuses." First, the court concluded that the word "may" can be read as presumptive, allowing conversion "only in the absence of other exceptional circumstances."7 Second, the court contrasted §706 with §1307(b), which states that "[o]n request of the debtor at any time, if the case has not been converted...the court shall dismiss a case under this chapter." According to the court, the use of much stronger language in §1307(b)—in particular, "shall" rather than "may"—"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." Finally, the court noted that an absolute right to convert would treat debtors who convert differently from those who begin in chapter 13, since a chapter 13 petition can be dismissed if it is filed in bad faith.

Although the legislative history describes the debtor's right to convert as "absolute" and a "matter of right," the court concluded that these terms are misleading and are implicitly limited to "honest" debtors. The court completed its discussion of conversion by rejecting Marrama's arguments that prohibiting conversion would undermine the 2005 amendments' objective of encouraging more chapter 13 petitions, and that courts could police misbehavior by converting petitions back to chapter 7 in appropriate cases. The 2005 amendments did not affect §706, the court reasoned, and forcing courts to reconvert bad-faith cases to chapter 7 after an automatic conversion to chapter 13 would be costly and inefficient. "For all these reasons," the court held that §706(a) "permits the bankruptcy court to deny a [debtor's] motion to convert where the court determines that the debtor engaged in bad-faith conduct."8 (The First Circuit also affirmed the lower courts' conclusion that Marrama had acted in bad faith; this issue is not before the Supreme Court).

In their Supreme Court brief, Marrama's lawyers focus squarely on the text of §706(a), arguing that "Congress is presumed to say what it means and mean what it says."9 The statute clearly gives the debtor, not the court, the right to decide whether to convert a case to chapter 13. "[W]here a statute is clear," they continue, "judges should not be free to interpret the statute in a way that suits their view of the parties before them."10 The reference in the legislative history to a debtor's "absolute" right to convert is, moreover, "a particularly crystal clear statement of congressional intent."11 Marrama's lawyers also warn about the "chaos that results when [this] bright-line rule is not obeyed," as courts reach divergent conclusions based on "their own subjective exceptions to the rule;"12 they criticize the suggestion that courts' qualms about a particular debtor are legitimate bases for denying conversion to chapter 13, and they contend that denying conversion violates Marrama's due-process rights because it amounts to a pre-emptive conclusion that Marrama would not propose a rehabilitation plan in good faith.

Also arguing for absolute conversion is the National Association of Consumer Bankruptcy Attorneys (NACBA).13 In an amicus curiae brief authored by John Rao of the National Consumer Law Center (NCLC) and veteran Supreme Court advocate Seth Waxman, NACBA, like Marrama's counsel, focuses heavily on the "plain meaning" of §706(a). "The ordinary definition of 'may' is 'to be allowed or permitted to,'" NCLC argues, quoting the American Heritage Dictionary.14 Countering the First Circuit's conclusion that §1307's more pointed language ("shall" rather than "may") suggests that §706(a) is implicitly conditional, NCLC argues that when Congress wished to add room for discretion, it did so explicitly, as in the provisions for converting from chapter 7 to chapter 11 and for converting from chapter 11 to 7. Moreover, the legislative history suggests that the language in §§706(a) and 1307 is actually meant to be synonymous, affording an absolute right to convert in both contexts. Further, under the "expressio unius" maxim, the fact that Congress included two explicit exceptions to the debtor's right to convert—§706(a) limits the right to first-time converters and §706(d) limits it to debtors who are eligible for chapter 13—suggests that it meant to exclude others. The NACBA brief concludes by arguing that §105(a) cannot serve as a basis for a good-faith requirement (since §105(a) cannot be used to override a clear statutory provision); that the legislative history (with its references to an "absolute" right to convert) confirms the plain meaning of §706(a), that chapter 13 provides several alternative mechanisms for policing bad faith (such as authority to convert the case back to chapter 7), and that there are legitimate policy reasons for an unconditional right to convert (creditors often support conversion, and the absolute right furthers the objective of encouraging the use of chapter 13).

As of this writing, one can only speculate about the arguments to be made on behalf of the chapter 7 trustee, as the respondent's brief is not yet due. Presumably, his lawyers, who include the prominent bankruptcy appellate lawyer Eric Brunstad, will emphasize the kinds of statutory arguments marshaled by the first circuit, suggesting that "may convert" is tentative rather than absolute, and that the prerequisite of good faith is invisibly hardwired into the statutory scheme. And Marrama himself is a very unattractive spokesman for the absolute right to convert, given the circumstances under which he invoked the right to convert.

In the past two decades, bankruptcy has served as one of the principal contexts where the Supreme Court has worked out theories of statutory interpretation. Marrama provides yet another opportunity for the Court to wrestle with the familiar tension between a strict, textualist interpretation of the Code on the one hand, and achieving a fair or sensible result on the other. The text of §706(a) surely seems to suggest that qualifying debtors have an absolute right to convert, as Marrama's lawyers argue. But it seems more sensible, fair and efficient, as the respondent will contend, that debtors be precluded from dodging questions about their disclosure, and delaying consideration of their good faith, by hopping into chapter 13.

So what is the Supreme Court likely to do? There was a time when the Supreme Court seemed to apply a strict textualist approach to its bankruptcy cases. But there are now enough counter-examples, cases like Dewsnup v. Timm15 and BFP v. Resolution Trust Corp.16 that are difficult to explain in textual terms, that one cannot simply assume that the position that most closely accords with the language of the statute will prevail. While no simple theory of statutory interpretation seems to account for the Supreme Court's bankruptcy jurisprudence, a very rough assessment might go something like this. If the statutory language appears to be relatively clear, the Supreme Court nearly always sticks to the Code's plain meaning. But when the plain-meaning approach produces patently unfair or problematic results, the Court has been more creative in its interpretation.17 This is particularly true where the legislative history does not clearly reinforce the most natural interpretation of the Code. Although Farrey v. Sanderfoot,18 which held that a husband could not use §522(f) to avoid his ex-wife's lien on marital property, can be defended in grammatical terms, for instance, the Court seemed to reinterpret the provision to prevent a clear miscarriage of justice.

In Marrama, by contrast, interpreting §706(a) literally to allow an absolute right of conversion is less likely to let scoundrels slip through the net of the Code. If the debtor has acted in bad faith, the bad faith can be addressed by converting back to chapter 7 or in applying the good-faith requirement for confirming a chapter 13 plan. It would certainly be simpler to authorize a bankruptcy judge to deny the initial conversion, but allowing the conversion need not mean letting the debtor off the hook. The prediction of this observer—an observer with an admittedly poor track record trying to anticipate Supreme Court decisions—is that the Court will reverse the First Circuit, concluding that the statute is clear and that even a dubious debtor has an absolute right to convert, so long as the case has not previously been converted and the debtor meets the eligibility requirements.


Footnotes

1 11 U.S.C. §706(a).

2 The Judges Bill and Judge Cyr's role are discussed in Skeel, David A. Jr., Debt's Dominion: A History of Bankruptcy Law in America, 139-43 (2001).

3 Petition for a Writ of Certiorari, Marrama v. Citizens Bank of Massachusetts and DeGiacomo, Chapter 7 Trustee, No. 05-996 (Jan. 30, 2006) at 5.

4 Response to Petition for Writ of Certiorari, Marrama v. Citizens Bank of Massachusetts and DeGiacomo, Chapter 7 Trustee, No. 05-996 (May 9, 2006) at 5.

5 See 11 U.S.C. §109(e). Another subsection of §706, §706(d), states that a debtor can only convert from chapter 7 if "the debtor may be a debtor under such chapter," thus explicitly limiting conversion to debtors who meet the eligibility requirements.

6 Marrama v. Citizens Bank of Massachusetts and DeGiacomo, Chapter 7 Trustee (In re Marrama), 430 F.3d 474, 477 (1st Cir. 2005).

7 Id. at 478.

8 Id. at 481.

9 Brief for Petitioner, Citizens Bank of Massachusetts, and DeGiacomo, Chapter 7 Trustee, No. 05-996 (Aug. 7, 2006) at 6.

10 Id. at 10.

11 Id. at 12.

12 Id. at 16.

13 Brief of National Association of Consumer Bankruptcy Attorneys as Amicus Curiae in Support of Petitioner, Marrama v. Citizens Bank of Massachusetts and DeGiacomo, Chapter 7 Trustee, No. 05-996 (Aug. 7, 2006).

14 Id. at 8.

15 502 U.S. 410 (1992) (holding that §506(d) does not truncate secured creditor's lien, despite the apparently clear statutory language to the contrary).

16 511 U.S. 531 (1994) (procedurally sound foreclosure sale is not a fraudulent conveyance, despite language of §548).

17 Bob Rasmussen reached a somewhat similar conclusion over a decade ago, back when the Supreme Court's bankruptcy decisions were seen as relentlessly textualist. In a survey of the cases, he concluded that most also accorded with the result one would reach by "practical reasoning," and defended the Court's textualism as keeping it out of policy debates. Rasmussen, Robert K., "A Study of the Costs and Benefits of Textualism: The Supreme Court's Bankruptcy Cases," 71 Washington U.L.Q. 535 (1993).

18 500 U.S. 291 (1991).

Bankruptcy Code: 
Topic Tags: 
Journal Date: 
Sunday, October 1, 2006

Reprint Request