On November 6, 2006, we posted a blog article on a case that had been argued before the Supreme Court. That case was Marrama v. Citizens Bank of Mass., 549 U.S. ___ (2007). On February 21, 2007, the Supreme Court ruled that the petitioner, Marrama, forfeited his right to convert his Chapter 7 case to a Chapter 13 case. The Court held that Marrama could not convert to a Chapter 13 because he did not qualify as a Chapter 13 debtor because of bad faith.

On March 11, 2003, Mr. Marrama filed a Chapter 7 petition. In verified schedules attached to his petition, Mr. Marrama made a number of statements about his principal asset, a house in Maine, that were misleading or inaccurate. Specifically, he listed the value as zero and denied that he had transferred any property other than in the ordinary course of business during the year prior to filing. The truth however, was that the house had considerable value and he had transferred it into a newly created trust for no consideration prior to filing. Mr. Marrama later admitted that the purpose of the transfer was to protect the property from creditors.

During the meeting of creditors, the trustee advised Marrama that he intended to recover the house as an asset of the estate. Marrama then filed a Notice of Conversion to Chapter 13. The trustee and Citizens Bank of Massachusetts (the “Bank”), which was the principal creditor, both objected to the conversion, arguing that the request to convert was made in bad faith and would constitute an abuse of the bankruptcy process. The bankruptcy court denied the request to convert.

Marrama appealed and argued that he had an absolute right to convert from a Chapter 7 to a Chapter 13 under the plain language of Bankruptcy Code Section 706(a). The Bankruptcy Appeal Panel for the First Circuit affirmed the bankruptcy court and Marrama appealed to the Court of Appeals for the First Circuit, which also affirmed. Marrama then appealed to the Supreme Court, which concluded that the lower courts correctly held that Marrama forfeited his right to convert.

Section 706(a) of the Code states that a debtor may convert to a case from a Chapter 7 to a Chapter 11, 12 or 13 at any time, if it had not previously been converted from a Chapter 11, 12 or 13. However, the Court also looked to Section 706(d), which states that a debtor may not convert to another chapter unless he qualifies to be a debtor under such chapter.

Marrama argued that Section 706(a) creates an unqualified right of conversion. He argued that the language in both the House and Senate Committee Reports on the provision support his argument. The Senate Report states, in part, that the subsection “gives the debtor the one-time absolute right of conversion of a liquidation case to a reorganization or individual repayment plan case.” The Supreme Court said that this broad description as an “absolute right” fails to give full effect to the express limitations in subsection (d).

The Supreme Court found that Marrama’s bad faith efforts in concealing his main asset disqualified him from being a Chapter 13 debtor and, therefore, he could not convert from a Chapter 7 to a Chapter 13.

The full opinion may be found on the Supreme Court’s web site through the following link: http://www.supremecourtus.gov/opinions/06pdf/05-996.pdf

Ray