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Marrama v. Citizens Bank of Massachusetts:

Yesterday the Supreme Court decided Marrama v. Citizens Bank of Massachusetts. The issue was whether an individual debtor has an absolute right to convert his case from Chapter 7 to Chapter 13, or whether the Bankruptcy Judge has the power to deny the conversion if it was in "bad faith" and therefore would be an abuse of the bankruptcy process. The Court held 5-4 with Stevens writing that the conversion could be denied, with Alito writing a dissent.

My view is that the Court reached the right result, but turned what should have been an easy case into a much more difficult and close case than it should have been, and in so doing, wrote an unnecessarily confused opinion. The problems with the opinions in the case arise from a failure to fully consider the policy and context of the key statutory provisions in the case and the legislative context in which they were enacted.

Even after reading the briefs awhile back and the opinion a couple of times, I confess that the precise timeline of the facts in the case are a bit murky to me. But the precise timing is not as important as the debtor's basic behavior in the case. As I understand it, sometime before filing his initial bankruptcy case Marrama transferred his sole asset of value, a home in Maine, into a self-settled trust, and then on his schedules he declared that the value of his interest in the trust was zero. This wasn't Marrama's only willful misrepresentation in the case, as Stevens notes, but the biggest one. At his 341 hearing, the trustee told Marrama that he intended to recover the Maine property as property of the estate (and presumably would seek to deny his discharge as well). Marrama chalked up the omission to a "scrivener's error" to which the Bankruptcy Judge later ruled that there is no "Oops" defense to the concealment of assets in bankruptcy.

Once Marrama was busted by the trustee, he decided to convert his case to Chapter 13. I am a bit unclear about how his scam was going to work (please help me out in the comments if I don't have this exactly right), but my understanding is that it was something like this--once Marraama was busted, he knew the concealed property would be recovered for the estate and he would probably lose his discharge. By converting to Chapter 13, he could retain the property and by refiling correct schedules, he figured he wouldn't be subject to any concerns about losing his discharge. So the idea is that he would use his initial filing in Chapter 7 as his "one free bite at the apple" of committing bankruptcy fraud, and then if he got busted, he would flip over to 13 with no consequences. I suspect that it is this "one free bite" aspect of the racket and the possibilities for fraud and abuse that led Justice Stevens to note in his opinion that this is "an issue that has arisen with disturbing frequency."

The opinions themselves are a thicket of textualism. I will not parse them here, as I don't have much to add to those densely-reasoned textual opinions. The basic textual issue turns on the interpretation of sections 706(a) and (d) of the Bankruptcy Code, which provide:

(a) The 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. Any waiver of the right to convert a case under this subsection is unenforceable.

(d) Notwithstanding any other provision of this section, 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 question in the case is whether the seemingly unqualified language of section (a) ("the debtor may convert") gives a bankruptcy debtor an absolute right to convert once from Chapter 7 to Chapter 13 unless one of the of the precise conditions enumerated there are triggered--e.g., that the debtor can convert only once and that the debtor may be a debtor under the chapter to which he is converting. Justice Alito's dissent rests on the argument that this language is unambiguous and exhaustive, "The Code restricts, a Chapter 7 debtor's conversion right in two--and only two--ways." Since bad faith conversions are not specifically enumerated, they are permitted.

Justice Stevens's majority opinion is premised on the observation that Bankruptcy Judges have long held equitable power to prevent fraudulent and inequitable use of the bankruptcy system, a power that is reflected in numerous provisions of the Bankruptcy Code, particularly section 1307(c) which permits the Bankruptcy Court to dismiss or convert a Chapter 13 case "for cause," which has been interpreted to include filings made in bad faith. Bankruptcy proceedings are equitable proceedings and I think that Justice Stevens is correct in his recognition of the power of Bankruptcy Judges to prevent bad faith abuse of bankruptcy and the longstanding nature of the power. So while I am not surprised by the outcome in the case, which I think is obviously correct, I am surprised only by how close the vote was.

Textualist opinions by the Supreme Court are often denounced as "wooden" and I think the opinions in Marrama evidence that. This does not seem like a difficult question from the perspective of bankruptcy law and policy. I think what made this a close case is that none of the Justices appear to have even tried to think through the bankruptcy questions that underlie the question.

In my view, the question in this case is pretty straightforward. Justice Alito writes a standard textualist opinion--here's a list of Code provisions, denial of conversion for bad faith isn't on it, and the Code provides other roundabout ways of punishing a bad faith conversion:

In sum, the Code expressly gives a debtor who initially files under Chapter 7 the right to convert the case to another chapter so long as the debtor satisfies the requirements of the destination chapter. By contrast, the Code pointedly does not give the bankruptcy courts the authority to deny conversion based on a finding of "bad faith." There is no justification for disregarding the Code's scheme.

But note what is lacking from Alito's rationale--although he states that there is "no justification for disregarding the Code's scheme" nowhere does he offer any explanation (plausible or otherwise) for why Congress would have possibly wanted to permit bad-faith conversions or to deny Bankruptcy Judges the power to prevent a bad faith conversion. Instead, he simply starts with the premise that Code gives the debtor an absolute right to convert once. If the conversion is in bad faith, Alito speculates that the Court could convert it back immediately "for cause" under section 1307(c), assuming that all of the requirements could be met. But all of the requirements enumerated there seem to apply only to defects in the Chapter 13 filing, and don't seem to address the fraud in the initial Chapter 7 filing (which is presumably why Marrama immediately filed in Chapter 13, because he thought he could cleanse his concealment by converting).

The problem with reading the statutory provisions in the narrow textualist manner as Alito does is that the reading is stripped of its context (of course, the majority opinion is no better on this point). Again, is there any reason to believe in this section that Congress desired to remove from Bankruptcy Judges the power to prevent bad faith abuse of the bankruptcy courts? Did Congress really intend the debtor to have an absolute power as of right to convert his case once?

The premise of this claim that there is an absolute power to convert resides in one piece of legislative history that Marrama relied on heavily in the case (as does Alito):

Petitioner contends that subsection (a) creates an unqualified right of conversion. He seeks support from language in both the House and Senate Committee Reports on the provision. The Senate Report stated:

"Subsection (a) of this section gives the debtor the one-time absolute right of conversion of a liquidation case to a reorganization or individual repayment plan case. If the case has already once been converted from chapter 11 or 13 to chapter 7, then the debtor does not have that right. The policy of the provision is that the debtor should always be given the opportunity to repay his debts, and a waiver of the right to convert a case is unenforceable." S. Rep. No. 95--989, p. 94 (1978); see also H. R. Rep. No. 95--595, p. 380 (1977) (using nearly identical language).

This passage has been read to express Congress's intent that the debtor be given an absolute one-time right to convert--"Subsection (a) of this section gives the debtor the one-time absolute right of conversion of a liquidation case to a reorganization or individual repayment plan case." But I believe that this is a misreading of the legislative history, and again, I think the misreading arises from a failure to consider the context of the statement. And specifically here, the legislative and historical context, and that the final sentence of this passage actually reflects an important qualification on the "absolute" language at the beginning, a qualification that only emerges from a consideration of the legislative context.

When Congress enacted the 1978 Code, Chapter 13 was a relatively novel process. So-called "wage-earner" plans (predecessors to Chapter 13) had developed spontaneously and piecemeal under the Bankruptcy Act, and in providing for Chapter 13 in the Bankruptcy Code, Congress intended to try ratify, formalize, and regularize the use of Chapter 13. Moreover, Congress wanted to make clear that debtors could elect to file Chapter 13 if they desired and Congress was expressing a goal of encouraging willing debtors to do so. But given the relative novelty of Chapter 13, Congress could not exactly foresee exactly how Chapter 13 would play out in practice.

But one thing is clear from reading the legislative history of the entire Code--Congress believed that the primary reason why debtors would use Chapter 13 (and precisely why Congress wanted to encourage its use in the 1978 Code) was to permit debtors to repay their debts if they wanted to. Why state the proposition as an "absolute right to convert?" Again, reading the legislative history of the Code as a whole, it is because Congress wanted to give debtors the right to try to repay their debts, even if a bankruptcy judge thought it was foolish and that the debtor would be better off in chapter 7 instead. This was an effort to permit debtors who wanted to try to "live up to their moral obligations" to do so, even if meant that they were foregoing the easier ride of Chapter 7.

Why does all of this matter? Consider now the rest of the legislative history applicable to Marrama--"The policy of the provision is that the debtor should always be given the opportunity to repay his debts, and a waiver of the right to convert a case is unenforceable." Thus the legislative history expressly states, "The policy of the provision is that the debtor should always be given the opportunity to repay his debts." A debtor who is seeking to convert to chapter 13 in bad faith, such as Marrama, is quite plainly not seeking to convert for the purpose of being given an opportunity to repay his debts, thus the expressly stated policy of the purported absolute right to convert would not be advanced by permitting conversion in such a case.

In other words, in creating a supposed "absolute right to convert" Congress anticipated at the time that those debtors who would be using Chapter 13 under the "new" Code would be only those who were doing so only to repay their debts, and this was the express policy of permitting conversion. And this understanding is manifest throughout the language and structure of Chapter 13. Congress sought to regulate the more obvious abuses that could be anticipated under Chapter 13, such as plans where the debtor would actually pay less than under Chapter 7.

So it seems evident that Congress simply did not anticipate that a debtor might try to use conversion as a tool of bad faith abuse as Marrama did here. All Congress seems to have had in mind would be good faith debtors, not bad faith, so it didn't anticipate abuse of the conversion right (even now the scam itself is not obvious). So, instead, Congress simply expressed that the policy of the section was to enable good faith debtors to convert, thereby implying that this was the condition on the absolute right to convert.

And this explains why Alito can point to no policy purpose that would be advanced by permitting bad faith conversions, because Congress's policy was to permit only good faith conversions.

And so what about bad faith conversions? Well, here Stevens has it exactly right--given that Congress only meant to permit good faith conversions, and didn't (and couldn't) anticipate all bad faith conversions, bad faith conversions could be policed by the Bankruptcy Court's ancient and well-established repository equitable powers to prevent bad faith abuse of the bankruptcy process. On this point, then, Stevens is correct.

In the end, the Court fortunately ended up reaching the correct result in the case, although it was only a close case because both the majority and the dissent take a wooden approach to statutory interpretation that didn't consider the context, and that the outcome would have made more sense had they done so.

Update:

One of the Comments provides a useful explanation for why the debtor may have sought conversion to Chapter 13:
Second, and more likely in my view, is that he knew if he stayed in Chapter 7, the trustee would liquidate the assets he fraudulently transferred. A debtor does not have a unilateral right to dismiss a Chapter 7 case, and remaining in 7 would certainly lead to liquidation — especially in light of the provision of the BK code that says a debtor cannot exempt fraudulently transferred assets. However, if a debtor in Chapter 13 fails to file a confirmable plan, or fails to make the plan payments, the case is usually dismissed. I think this was his goal. So Marrama, knowing the trustee represented a speeding locomotive headed down the tracks squarely at him, simply wanted to jump off the tracks, even if it meant having to deal with his creditors one by one. Perhaps his state exemption law would additionally not bar him from exempting the fraudulently transferred assets.

Update:

Also, to be clear--I don't believe I'm making an argument that the Court should prefer policy analysis to plain language (and don't intend to do so). After all, both the majority and the dissent's opinions are grounded in plain language and both are plausbible. The question is what to do with the silence in sec. 706 about whether the silence as to a bad faith exception excludes reading the language against this background assumption of judicial equitable power. So I'm simply saying that given that both readings are plausible, only one of the two makes any sense when read in the context of the legislative history and policy purpose of the statutory language and explains the particular structure of the statute in a way that makes sense. Instead, the dissent's opinion misunderstands the legislative history to justify its interpretation of the statutory silence as implying an absolute right to convert, so my quibble is not with textualism per se, but the use of legislative context. I've never understood textualism to imply that one should ignore the context and purposes of the statute.

Whitey:
I think that what you call "context," most people would simply call "policy arguments." Not that this makes the arguments any less compelling; your policy case is a good one. However, I would defer to the clear statutory language unless it led to a frusteration of statutory purpose. In this case, the interpretation the dissent gives certainly does not advance statutory purpose, but it also doesn't frusterate it.
2.22.2007 9:42am
Zoe1 (mail):
Prof,

Isn't the question whether Judges should ignore the text of statutes in favor of policy arguments to try to make Congress's handiwork more sensible and smart? Judges are generalists by nature: They will never have the expertise that a law professor who teaches and writes in the area will have. Isn't it better that they follow the text rather than play policy expert in an area they are very unlikely to understand?
2.22.2007 9:58am
B.C. (mail):
It appears that the Chapter 7 filing was the only thing done in "bad faith." Presumably, the debtor had the right to file Chapter 13 from the beginning and doing so would have been in "good faith." Does the "bad faith" associated with the former really taint the latter?

It seems like the real question is whether the judge has the power to deny the conversion as punishment for concealing the asset in Chapter 7. Section 105 makes this a no-brainer.


105(a). The court may issue any order, process, or judgment that is necessary or appropriate to caarry out the provisions of this title. No provision of this title providing for the raising of an issue by a party interest shall be construed to preclude the court form, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
2.22.2007 10:25am
Zywicki (mail):
Zoe1:
I'll have a short post up later today that comments on your observation. But my punchline is that I think that the Supreme Court today has trouble with cases like this because none of the Justices have any expertise in these areas, and that this should be considered in future vacancies. This is a point I made back at the time of the last vacancies, arguing that it would be useful for the Supreme Court to have a member with expertise in these areas to provide some depth in this area (like Justice Powell used to do with securities law). I'll have something up later today on this point.
2.22.2007 10:33am
elChato (mail):
You often hear business lawyers complain that the court doesn’t take enough business cases. Well, be careful what you wish for—if they took 25 business cases a year, they might very well issue a bunch of opinions these lawyers hated (or secretly liked, depending on their billing arrangements with clients).
2.22.2007 10:44am
Markusha:
I agree with Prof. Zywicki (which does not happen often). It is obvious to me that the court reached the correct result; there is no possible way that Congress wanted to allow debtors bad faith conversions as a matter of absolute right.

I was pleasantly surprised by Prof. Zywicki's critique of excessively textualist approach adopted by dissenters. To me, this case nicely illustrates the problem with this approach: it misses forest for the trees. One of the purposes of judicial system, I believe, is to determine what the law says and to apply the law fairly. This function necessarily involves more deeper reading of the statutes than adopted by dissent. Dissent would reduce the role of courts to computer-like mechanical application of letter of the law. Why need judges at all, then? Why not simply use a computer or a grammarian to state what the law says?

It also reminds me of a case construing the statute which said (I quote from memory): appeals must be filed not less than 10 days from a judgment. It was clear to everyone involved that Congress meant to say "more" instead of "less". A strictly textualist reading of the statute would have led to absurd results (i.e., appeals filed within 10 days would be dismissed, while appeals filed within, say, 10 years, would be fine). Fortunately, all of the appeals courts deciding the matter decided to construe the statute to fix the obvious mistake, by reading "more" instead of "less."

To summarize, dissenters' reading the law in such a narrow overtly textualist manner ignores the spirit of the law and misconstrues the function of the judicial system.
2.22.2007 11:07am
Bryan DB:
Prof. Zywicki,
If your complaint is that the Justices reached the "right" result (which I believe) in a crazy manner, then your complaint is with the text and not with the Justices. Your desire for the Justices' consideration of policy and the underlying purposes of the Bankruptcy Laws is exactly the sort of judicial activism about which conservatives constantly howl.
While I agree with the majority's result, I think Alito makes a good textualist point, even though it just does an excellent job of pointing out how the canon of "absurb results" has a place in textual analysis.
2.22.2007 11:29am
Mahlon:
Alito was correct. I'm sure, however, that he and Thomas, and Scalia, et al., agree with the policy argument that the debtor should be spanked severely at some point. The issue in the case is who gets to decide the when and where to spank. Congress left holes. Alito, et al., are simply refusing to fill them. Congress has done much damage to the nation by failing to do its job (writing laws that are comprehensive and clear). We should stop giving Congress an out.

I haven't looked at it bad faith issues in some time, But I think a bankruptcy judge possesses great lattitude in punishing such action. The question is whether stopping a conversion is one of them. There is nothing in the Code to sugest it.
2.22.2007 11:33am
arthur (mail):
There's a perfectly obvious reason that Congress chose not to create a "bad faith" exception to the absolute right to convert a proceeding to Chapter 13: judicial efficiency. Now, against the wish of Congress, any party that will do less well after a case is converted has the aility to challenge the conversion. Determination of whether a party acted in "bad faith" will generally require some sort of hearing or trial, a judicial decision and perhaps an appeal, all taking at least several months. (In the caser before the Court, baf faith is an easy call, but usually it isn't). The delay and risk this to debtors will cause gives creditors negotiating with debtors leverage against debtors that Congress decided creditors shouldn't have. A victory for creditors, but not for judicial restraint or common sense.
2.22.2007 11:36am
John (mail):
The debtor surely is subject to penalties for his wrongful conduct; but why should those penalties include preventing him from repaying his debts under Chapter 13?

You ask what proof there is that Congress wanted to allow "bad faith" conversions. How about the fact that following conversion there would be repayments to creditors? The bad faith can be punished separately. I think Alito was right on this one.
2.22.2007 11:40am
Gene (mail):
Prof. Zywicki,

I agree with some of the comments above and disagree with your take on the decision. You may make a very good case for why Congress should have put some qualifications on the right to convert a Chapter 7 to a Chater 13 bankruptcy. However, that is a legislative argument to be addressed by Congress.

Here, you have, as you appear to agree, a seemingly clear statute that says that a debtor may convert a Chapter 7 to a Chapter 13. Given the lack of ambiguity,what is the justification for delving into legislative intent on this one?

To be sure, I am not opposed to looking at legislative intent and other relevant secondary sources when there is an ambiguity in the statutory langugage or when there is a pressing constitutional issue involved (8th Amendment). But here, you have no ambiguity and no similar constitutional concerns. Rather, you have a majority that is making a legislative judgement. It seems like judicial activism even if the Court reaches a right policy result.
2.22.2007 11:43am
weh (mail):
I sent your post to a friend of mine who practiced bankruptcy law and here is what he said about the tactical aspects of Marama's case:

Marrama knew he would be barred from receiving a Chapter 13 discharge because of bad faith; the lower court had been clear in its findings of fact, and there was no real attack on those findings. So why would he want to convert to an ostensibly futile Chapter 13? Two possible reasons.

First, there is a marginal possibility he wanted to pay off some debt, such as a mortgage arrearage, under the protection of the automatic stay, though he would wind up at the end of the case with any unpaid liability on the debt. The automatic stay can bring order even without the prospect of discharge.

Second, and more likely in my view, is that he knew if he stayed in Chapter 7, the trustee would liquidate the assets he fraudulently transferred. A debtor does not have a unilateral right to dismiss a Chapter 7 case, and remaining in 7 would certainly lead to liquidation -- especially in light of the provision of the BK code that says a debtor cannot exempt fraudulently transferred assets. However, if a debtor in Chapter 13 fails to file a confirmable plan, or fails to make the plan payments, the case is usually dismissed. I think this was his goal. So Marrama, knowing the trustee represented a speeding locomotive headed down the tracks squarely at him, simply wanted to jump off the tracks, even if it meant having to deal with his creditors one by one. Perhaps his state exemption law would additionally not bar him from exempting the fraudulently transferred assets.
2.22.2007 12:14pm
Prufrock765 (mail):
It is very important to bear in mind that, as two commenters have noted, that it was the INITIAL FILING that was in bad faith, NOT the conversion.
The statute here is neither ambiguous, nor, pace a previous poster (the deadline for filing appeals), an obvious error.
The notion that if we advocate for the methods embodied in the Alito dissent, which asks judges to read statutes carefully and apply them as the legislature intended, that we might as well replace judges with computers is such a crashing non sequitur that it beggars response.
Remember Roberts' confirmation hearing testimony: "if the law says that the little guy wins the the little guy will win...".
Whence this predisposition to allow judges to become social policy theorists whenever the mood strikes them?
2.22.2007 1:02pm
Steve:
The argument that there's no evidence of Congress' intent to allow bad faith conversions seems to prove too much. You could use that same logic to read a requirement of good faith and fair dealing into virtually every statute in the US Code.

On the other hand, it seems to me that if the textualists ever got their way altogether, Congress would be in session 24/7 trying to fix every misplaced comma that resulted in an unintented outcome for some litigant somewhere. I don't buy the argument that if courts stopped fixing the mistakes, Congress would be incentivized to stop making them; come on, this is Congress we're talking about.

Of course, it's not like Prof. Zywicki was particularly eager to see Congress fix these gaps in the first place.

SENATOR FEINGOLD: What about my question? Are there any changes to the bill that need to be made at all or is it exactly the way it should be? We are marking this thing up next week. This is it. The train is leaving the station, apparently, and there is not going to be another bankruptcy bill probably for a very long time. This is it. Should this bill be changed?

MR. ZYWICKI: I believe this bill is fine as it is.

SENATOR FEINGOLD: Not one word?

MR. ZYWICKI: There is no word that I would change in this particular piece of legislation.


Heh.
2.22.2007 1:33pm
Zywicki (mail):
Steve:
I addressed this question previously, as you note, and I would appreciate it if you would not take my comments out of context as well.

But this case does demonstrate a point I made in my testimony this past December--the notion that BAPCPA is particularly poorly drafted is hard to square with the fact that here we are still litigating over the meaning of certain provisions of the 1978 Code almost 30 years later, so while there are drafting errors and ambiguities in BAPCPA, they do not appear to be any greater or more numerous than in the 1978 Code (or any other complex piece of legislation like the tax code, the securities laws, or ERISSA). Nor do the constitutional questions raised by BAPCPA appear to be comparable at all to the major constitutional questions raised by the 1978 Code (such as in Marathon). I assume you are aware that this case involved the interpretation of the 1978 Code, not BAPCPA.
2.22.2007 2:39pm
DiverDan (mail):
I have to put my two cents in as one who has practiced Bankruptcy Law for nearly 20 years now - Alito's dissent has much the better side in this case, and the Majority Opinion simply endorses a far too common practice in Bankruptcy jurisprudence to look for the right result and then ignore the procedural hurdles needed to get there. Nothing in Alito's dissent, or a purely textualist reading of Section 706(a) would have required that the dishonest Debtor stay in a Chapter 13 case, or, as some have suggested, required a dismissal of the Bankruptcy case. If, as the text of the statute clearly requires, the Dishonest Debtor had a right to convert to Chapter 13, then every Creditor and the U.S. Trustee had a right under Section 1307(c) to seek a reconversion to Chapter 7 "for cause". Once again, the term "cause" is not defined, but a lengthy history of Bankruptcy cases confirms that the bad faith of the Debtor can justify a reconversion to Chapter 7. Moreover, while it is true that many Chapter 13 cases are dismissed, if you look at Section 1307(b), you'll see that the Debtor's automatic right to dismiss a case does NOT apply to any Chapter 13 case that was converted from a Chapter 7 case (or a Chapter 11 case, or a Chapter 12 case). So why follow the statute, allow the conversion to Chapter 13, only to have a creditor move to reconvert it, if the Judge knows ahead of time how he'll rule? Quite simply, to give the Debtor the procedural protections that Congress explicitly required - notice and a hearing. Maybe, after a creditor's motion to reconvert under Sec. 1307(c), the case would have ended up back in Ch. 7. But it is also possible that, given a few weeks to negotiate a Ch. 13 plan, the Debtor could have offered to the creditors a better return than they could hope for in a liquidation, and even a full or partial waiver of discharge in exchange for being allowed to keep the property he was so anxious to hide. The Debtor would have known that he was in deep trouble when the Motion to Reconvert was filed - at the very least the Debtor would have been given time (at least 20 days under Bankruptcy Rule 2002(a)(4)) to either marshall his evidence to try to rebut claims of bad faith, or, if that was impossible, try to cut an economic deal with the objecting creditors. Why is it that the Dissenters in this case, the so called conservative wing of the Supreme Court, are the only ones apparently willing to provide the Debtor the procedural protections called for by the Statute? It seems that the Stevens, Ginsberg, Kennedy &Souter crowd is so busy creating new rights under the rubric of substantive due process that they haven't got time to concern themselves with mere procedural due process.
2.22.2007 3:16pm
Stephen Sather (mail):
Any time that you have to go through mental gyrations to explain why the statute leads to the preferred result, you should question the result. Here, the majority re-defined the term "eligible" in order to get to the result it wanted. In the end, this opinion was about timing. Should the court consider whether the debtor's bad conduct was so serious to preclude a good faith attempt to reorganize prior to conversion or after conversion? Waiting to have a hearing until after the case has been converted is a minor impediment and gives effect to the statutory test. For a more detailed discussion, go to: Supreme Court Limits Absolute Right
2.22.2007 4:47pm
Thorley Winston (mail) (www):
It seems like the real question is whether the judge has the power to deny the conversion as punishment for concealing the asset in Chapter 7. Section 105 makes this a no-brainer.


105(a). The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party interest shall be construed to preclude the court form, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.


Interesting, it seems from this passage then that the statute gives the court the power to “take[] any action . . necessary or appropriate . . .to prevent an abuse of process.” Denying a conversion request to someone who the court has determined fraudulently file under Chapter 7 would seem then to be within the power of the court.
2.22.2007 8:08pm
andy (mail) (www):
This all seems pretty conclusory to me. The majority was right because it *had* to be right. The policy was to prevent the debtor from converting because the policy Congess' policy goal *had* to be to prevent the debtor from converting.

The majority opinion makes me either laugh or cry, depending on my mood.. I see "reasoning" like this in tax cases all the time. It hurts rather than helps the integrity of the system for courts to style policy in response to a single litigant's facts.
2.22.2007 10:28pm
andy (mail) (www):
"the silence as to a bad faith exception excludes reading the language against this background assumption of judicial equitable power"

Since the statute is "silen[t] to a bad faith exception," I believe that the proper interpretation is that that exception does not exist, since, as the dissent corrrectly points out, the equitable power does not mean that the court can go *beyond* the statute.

99.9% of statutes out there do not have "bad faith exceptions." Does that mean it's ambiguous whether there is a bad faith exception, and that courts must do a case-by-case analysis to determine if an exception is really hiding somewhere? Courts exercise so-called "equitable powers" in numerous statutory context.

I just cannot accpet that, if a statute absolutely does not address an exception, that it is somehow unclear whether that exception applies. Must Congress now make a list of exceptions that do not apply whenever it enacts a statute?

"misunderstands the legislative history to justify its interpretation of the statutory silence"

Did the dissent even cite to anything at all in the legislative history? Hard to see how they use that history to justify their position if they do not even cite it. Or is this like the phantom bad faith exception -- since the dissent did not cite the legislative history, is its "silence" regarding the legislative history ambiguous? Does its silence indicate that it may have relied on it? With all due respect, this type of reasoning does not strike me as terribly persuasive, either regarding the hidden bad faith exception in the statute, nor the hidden legislative history reliance by the dissent.
2.22.2007 10:43pm
andy (mail) (www):
also, sorry if it seems like i took the gloves off. this is all the in spirit of academic debate. feel free to bash me back.
2.22.2007 10:48pm
Dave Hardy (mail) (www):
I must be getting cynical after 32 years of practice, but...

Knowing nothing of bankruptcy law or the policies behind it (I did do a consumer bankruptcy for a relative back in 1979); and

not having read the case or its reasoning and;

in short, not knowing squat about the issue, the law, the leg history, the policy considerations, or the details--

upon reading your first sentence, setting out the issue, I was able to predict just what the Court would do. Someone has done something crooked, in a matter where Congress didn't have to give him this relief and he thus shows his ingratitude, are we gonna deny another court the power to do something unpleasant in return?
2.22.2007 11:28pm
anonVCfan:
Dave Hardy writes:
Someone has done something crooked, in a matter where Congress didn't have to give him this relief and he thus shows his ingratitude, are we gonna deny another court the power to do something unpleasant in return?

The question is whether Congress denied the court this power.
2.23.2007 10:15am
PSP (mail):
The right wing of the Court has been producing a line of opinions that are best justified by Karl Llwellyan's statement "Because it's a Code". It galls to say this, but, I find myself agreeing with them.

I would disagree with the comment Prof. Zywicki pulled from comments regarding the Debtor's intentions, but I have made a career representing Debtors, not denigrating them. By conversion Marrama probably wanted to retain or control the liquidation of assets, as well as, get a nice pre-BAPCA Chapter 13 super-discharge.

It is a commplace in converted 13s to require reconversion, not dismissal, if confirmation is denied or trustee payments missed. If that was his strategy, it was a pretty damn poor one.

Nor can one assume he couldn't have confirmed a Plan, if amended schedules with full disclosure and a good faith Plan were filed. There is a distinction between good faith filings and the §1325 good faith Plan requirement. See In re Goddard, 212 B.R. 233 (D.N.J. 1997). While pre-petition conduct goes into the good faith plan analysis, it is only one consideration, which best interests of creditors will generally trump.

Marrama is another example of the ancient adage "Bad facts make bad law."
2.23.2007 1:12pm
andy (mail) (www):

Marrama is another example of the ancient adage "Bad facts make bad law."


I think this is more a matter of "Bad Judging makes Bad Law." It's one thing for some trial court to screw over a party on a motion or something because the judge is predisposed towards a particular litigant, but another thing entirely for the Supreme Court to twist statutes to conform to some underlying "policy."
2.23.2007 4:21pm
Greg D (mail):
But note what is lacking from Alito's rationale--although he states that there is "no justification for disregarding the Code's scheme" nowhere does he offer any explanation (plausible or otherwise) for why Congress would have possibly wanted to permit bad-faith conversions or to deny Bankruptcy Judges the power to prevent a bad faith conversion.

Well, how about "because Congress screwed up"?

So it seems evident that Congress simply did not anticipate that a debtor might try to use conversion as a tool of bad faith abuse as Marrama did here.

Ah, so we're in agreement. Congress screwed up, and wrote the law poorly.

That's too bad. ButI don't see why it justifies 5 members of the Supreme Court re-writing the law to suit their desires.

"Rule of law" doesn't guarantee justice, but then nothing guarantees justices."Rule of law" means that we get an ordered system where you can read the rules before-hand, and have a reasonable hope of figuring out the consequences of your actions.

Letting the Courts rewrite the rules after the fact doesn't guarantee justice either (and that is what you're advocating here). What it does is make everything a bit more arbitrary.

Why you consider that an improvement, I don't know.
2.23.2007 5:32pm
jgshapiro (mail):
I think Steve has it right. Zywicki's analysis essentially reads a bad faith exception into any provision of a code where it is expressly not disclaimed, on the theory that "why would Congress want someone acting in bad faith to profit?"

But surely Congress is aware that some people act in bad faith. This is not a recent phenomenon. Their lack of provision for this contingency should be read in favor of the petitioner, not against him. They knew it could happen, because bad faith has existed since the dawn of time, in every field of endeavor, and since Congress did not say anything about it, there is no bad faith exception.

This case reminds me of when the Court read a misappropriation exception into the insider trading prohibition. It just goes to show you that activism is not limited to liberal justices -- or liberal law professors.
2.25.2007 4:59am
David Baker (mail):
May Marrama's attorney weigh in? Reading through all the posts and trying to decide who has read the briefs and who hasn't was quite interesting. In any event, I am pleased with the result, although I would have preferred 5-4 the other way. I'm pleased because the majority opinion made it clear that the right to convert is absolute except where the conduct is "atypical" or "extraordinary", fn. 11. Unfortunately, the majority did not go on to give examples of what it would consider "atypical" or "extraordinary". Footnote 4 also notes that there are disputes of fact, and that the sufficiency of the evidence was not at issue. Well, yes it was. There was NO evidentiary hearing! The bankruptcy judge made his decision solely on offers of proof. Since when can summary judgment be rendered when there are disputes of material fact, and when "intent" is at issue? "Bad faith", in my opinion, requires some degree of "scienter". On the issue of denial of Marrama's discharge, the First Circuit was uncomfortable with denial at the summary judgment stage, and appropriately so; they should have been uncomfortable in this context, too. Any time "intent" is at issue, scheduling an evidentiary hearing should be virtually a knee-jerk response. If conversion is going to be deniable because of bad faith, then an evidentiary hearing is mandatory, IMHO.

All in all, I do think the minority got it right. The one practical point that everyone seems to be missing is that this was an asset case. The only person that is making any money on the case is the trustee; he (being his own attorney) very likely will be paid all of the estate assets as an administrative claim. Marrama needed to convert because having been rendered unemployed, he got behind on his home mortgage and needed time to cure, which he would have gotten in Chapter 13. He managed to cure without chapter 13, but it was a close call. Anyway, refusing to convert and at least afford him (and people like him) a chance harms creditors because, as the minority recognized, sometimes debtors straighten up and fly right, resulting in creditors getting paid at least something. He should have been given the opportunity to propose a plan (none was ever filed) before the issue of bad faith was broached.

One thing I have learned from this case is that, to my surprise, I must ask for an evidentiary hearing. Motion practice in the bankruptcy court is summary in nature, and I always understood Rule 7056 to require evidentiary hearings where there is a genuine dispute of material fact. I have always believed judges capable of discerning genuine disputes of material fact (and I believe that "intent" is a material fact). On the other hand, just because I ask for an evidentiary hearing doesn't mean I'll get it.

Prior to going into private practice, I was counsel to a chapter 13 trustee. Marrama's case was neither "atypical" nor "extraordinary". On the fringe, maybe, but none of the errors in the case (some of which were, in fact, mine) were all that egregious, in my experience. Conversion should have been allowed.
2.25.2007 3:55pm
andy (mail) (www):

Their lack of provision for this contingency should be read in favor of the petitioner, not against him. They knew it could happen, because bad faith has existed since the dawn of time, in every field of endeavor, and since Congress did not say anything about it, there is no bad faith exception.


I agree 100%. The "silence" of a statute on an exception does not the applicability of that exception ambiguous; rather, it makes the inapplicability of that exception quite clear.
2.25.2007 4:32pm