US Supreme Court Decision in Marrama v. Citizens Bank of Mass., et al.

On February 21, 2007, the US Supreme Court issued its decision in Marrama v. Citizens Bank of Massachusetts, et al., 549 US ___ (2007). The Court held that Chapter 7 debtors do not have the absolute right to convert their case to Chapter 13. Therefore, the involved Chapter 7 debtor who acted in bad faith by making a number of misleading or inaccurate statements in his bankruptcy schedules lost his right to proceed under Chapter 13. Section 706(a) provides that a Chapter 7 debtor “may convert a case under this chapter 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.” The debtor argued that this section provided him the one-time absolute right of conversion. The Court reviewed section 706(d) which provides a limitation on the right to convert. Section 706(d) 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.” The Court concluded that a debtor who acted in bad faith does not qualify as a “debtor” under Chapter 13. Section 1307 (c) provides that a Chapter 13 case may be dismissed or converted to Chapter 7 “for cause” and that bad faith conduct is routinely treated as “for cause”. The Court held that the equitable power of the bankruptcy court to take any action necessary or appropriate to prevent an abuse of process as set forth in Section 105(a) as well as the Court’s inherent authority to sanction abusive litigation practices provided justification for denial of a motion to convert under section 706.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983