Supreme Court Holds No Absolute Right to Convert
by Bankruptcy Attorney Richard J. Waple at Bankruptcy HQ
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Marrama originally filed a chapter 7 bankruptcy petition, but filed a motion to convert the case to a chapter 13 after the trustee discovered that Marrama had fraudulently concealed information about a property transfer seven months prior to the bankruptcy filing. Marrama had transferred a piece of real estate into a trust that he was the beneficiary of. On his bankruptcy petition, Marrama did not disclose the transfer and listed his interest in the trust as “0”. It appears that his motion to convert was intended to stop the trustee from taking control of the property, which was not exempt in his chapter 7 proceeding. Both the trustee and Citizens Bank filed objections to the conversion.
Marrama primarily relied on the argument that §706(a) of the Bankruptcy Code explicitly provides an absolute right to convert, with two exceptions; (1) A debtor may only convert once, and (2) a debtor must be eligible to be a debtor under the chapter he is attempting to convert to. Marrama had not previously converted and was financially eligible for a chapter 13 bankruptcy after recently gaining employment, and argued that he had a right to convert his case even if it would be later dismissed or reconverted in the chapter 13.
The Court disagreed. The majority opinion in the 5-4 ruling, delivered by Justice Stevens, held that Marrama was not eligible to be a chapter 13 since the chapter 13 would have been dismissed under §1307, because Marrama acted in “bad-faith”. The Court also referred to its broad authority to take action “to prevent an abuse of process” described in §105(a). The Court affirmed appellate court’s decision to deny Marrama’s motion to convert.
The dissent, delivered by Justice Alito, argued that a plain reading of the Bankruptcy Code clearly indicates that a debtor has an absolute right to convert a case to another chapter absent the two specific exceptions set forth in §706, “bad-faith” not being one of them. The dissent did not find anything “in §706(a) or any other provision of the Code [that] suggests that a bankruptcy judge has the discretion to override a debtor’s exercise of the §706(a) conversions right on a ground not set out in the Code”. The dissent seems to indicate a belief that the majority ignored the clear provisions set forth in the Bankruptcy Code to make an what it considers an equitable holding, and argues that “whatever steps a bankruptcy court may take pursuant to §105(a) or its general equitable powers, a bankruptcy court cannot contravene the provisions of the Code.” This holding does not prohibit a conversion to a chapter 13 bankruptcy where the debtor has acted in “good-faith”, not previously converted, and is otherwise eligible to file for a chapter 13 bankruptcy under §109.
