MARRAMA v. CITIZENS BANK OF MASSACHUSETTS
Robert Marrama filed for Chapter 7 bankruptcy and agreed to turn over all of his non-exempt assets to a trustee for payment of his creditors. Trustees later accused Marrama of acting in bad faith by attempting to conceal two assets: a tax refund and some real estate. Marrama then moved to convert his bankruptcy petition from Chapter 7 to Chapter 13, which would allow him to keep more of his assets. Citizens Bank, one of Marrama's creditors, opposed the conversion. Citizens Bank argued that Marrama should not be able to convert to Chapter 13 due to his initial bad faith Chapter 7 petition. The bankruptcy court agreed and denied the conversion.
The bankruptcy appeals panel affirmed the court's ruling. On appeal to the U.S. Court of Appeals for the First Circuit, Marrama argued that the plain language of Section 706(a) of the Bankruptcy Code supported his right to convert to Chapter 13, regardless of the circumstances. Section 706(a) states, "The debtor may convert a case under [Chapter 7] to a case under Chapter 11, 12 or 13 of this title at any time [...]" Citizens Bank countered that the word "may" indicates a privilege rather than a right. It also argued that the bankruptcy system could be abused if debtors were able to convert to Chapter 13 after filing bad faith Chapter 7 petitions. The First Circuit upheld the panel's ruling, denying Marrama his conversion.
Can the right in Section 706(a) of the Bankruptcy Code to convert a Chapter 7 bankruptcy to another chapter be denied because of bad faith?
Legal provision: Bankruptcy Code, Bankruptcy Act or Rules, or Bankruptcy Reform Act of 1978
Yes. In a 5-4 decision, the Court ruled that there is a "bad faith" exception to the right of conversion in Section 706(a). The opinion by Justice John Paul Stevens held that although the vast majority of Chapter 7 debtors can convert to Chapter 13, a Chapter 7 debtor who engages in bad faith conduct does not qualify as a "debtor" under Chapter 13 and thus cannot convert his petition. The majority also wrote that courts have the inherent power to deny the motions of litigants who act in bad faith. The Court concluded that "Nothing in the text of [...] 706 [...] limits the authority of the court to take appropriate action in response to fraudulent conduct by the atypical litigant who has demonstrated that he is not entitled to the relief available to the typical debtor."
Argument of David G. Baker
Chief Justice Roberts: We'll hear argument first today in Marrama versus Citizens Bank of Massachusetts.
Mr. Baker: Mr. Chief Justice, and may it please the Court:
Section 706(a) of the Bankruptcy Code provides that a debtor may convert a case under chapter 7 to a case under any other chapter of the Bankruptcy Code at any time if the case has not been converted previously from another chapter, and that any waiver of the right to convert a case under the subsection is unenforceable.
Other subsections of section 706 give rules for the Court to decide about conversion in the case where some party other than the debtor requests conversion of the case and also provides that the conversion must lead to a chapter to which that debtor is qualified to be a debtor.
Chief Justice Roberts: Mr. Baker, as I understand it subsequent to the grant of certiorari in this case, your client filed for relief under Chapter 13 and that relief was denied.
You're now seeking under... your petition seeks a conversion to Chapter 13 and I guess I wonder what relief is still open to you.
Mr. Baker: In the present case or the new case?
Chief Justice Roberts: What relief is open to you in this case?
In other words, you're trying to get a conversion to Chapter 13.
Subsequently, you've tried to apply for relief under Chapter 13 and that's been denied.
Why isn't the case moot in the sense that that relief is not available to you now?
Mr. Baker: The circumstances of the new case are entirely different.
In fact, in that... in the present... the new case, the court decided that he was not eligible because his debt limit exceeded the statutory limitations that exist section 109(e).
There is a three-year time span between the two, and we believe that the existing case is not moot because he still has remedies that he can obtain in Chapter 13.
Justice Ginsburg: But if he isn't eligible... the new case determined that he was not eligible because his debts were too high.
He didn't incur additional debts between the time of the proceeding one and proceeding two?
Mr. Baker: Yes, Your Honor, he did.
Justice Ginsburg: Or he didn't reduce the debt.
If we have a finding from the bankruptcy court that he is ineligible, that is number one condition to convert into Chapter 13.
If you don't meet that condition, that's the end of the matter.
Mr. Baker: I wouldn't say it would be the end of the matter in the present case because the eligibility was never questioned below, was never a factor below.
Justice Ginsburg: But now there has been a finding, and it's an essential finding, that there be eligibility.
And wouldn't the bankruptcy court's findings in the later case have preclusive effect?
Mr. Baker: In the prior case?
I would say no, Your Honor.
First, because as I mentioned, the issue of eligibility within the monetary limits was never raised below.
And in fact, if you look at his schedules in the supplemental joint appendix, he is clearly within the statutory limits based... just looking at his schedules.
Justice Ginsburg: But that's a question you can argue on appeal in... from the recent decisions, but for the moment you have a bankruptcy court making that determination, which I think would be preclusive on another bankruptcy court.
Mr. Baker: The... well, the... the bankruptcy court made a decision in the current case, the new case, but they haven't dismissed it.
Dismissal is in fact on appeal to the District Court for the District of Massachusetts.
The reason is, in our view is that the bankruptcy court in the new case incorrectly looked back to the claims that had been filed in the prior case.
Now, it is a difficult issue in some respects because there is case law at least in Massachusetts or the First Circuit that says a debtor does not have standing to object to claims in a Chapter 7 case.
So the fact that a number of claims were filed and argued doesn't relate to, in a prior case, does not have a preclusive effect in the new case.
Now we did, in fact, object to quite a number of claims and the eligibility, and I think that ultimately once the claim objections are resolved, we will be within the statutory limits.
Justice Ginsburg: If the decision is affirmed on appeal to the First Circuit, do you think you could still argue that there's qualification for Chapter 13, after the court of appeals has affirmed a determination that there isn't?
Mr. Baker: I'm... I don't quite follow the question.
Would you mind restating it?
Justice Ginsburg: We have now a judgment that this debtor is ineligible for Chapter 13.
If that judgment is affirmed on appeal to the court of appeals, can you nonetheless argue that somehow there is no preclusive effect?
Mr. Baker: Yes, Your Honor, because there's a three-year difference between the two and substantially different facts.
The... we have to go back, I think, to the case that's at bar, because it is those claims, the claims that were filed in the current case that are the issue.
As I say, we are in the process of doing objections to those claims and I think that ultimately we will come within them.
Justice Scalia: They're not at issue as far as this mootness question goes.
I mean, you're seeking to have the right to file under 13.
And if, in fact, there's no eligibility to file under 13, you're asking for the impossible.
The case is simply... you know... it's just air.
So I guess, perhaps you rely on the fact that the case is still on appeal.
Should we not take as a given that there is a judgment that you don't qualify for 13, and yet you're coming before us asking us to say that you can apply under Chapter 13.
It doesn't make any sense.
Mr. Baker: Well, I would respectfully say... suggest that it does, Your Honor, because once... we don't really get to the eligibility question until the court below considers it in the context of the case that's at bar.
We have to, as I say, we are in the process of objecting to claims and resolving them.
Justice Scalia: Well, didn't you make that argument to the bankruptcy court that found that you were not eligible?
Mr. Baker: --No, Your Honor, because as I mentioned before, the case law in the First Circuit up to this point has held that a Chapter 7 debtor does not have standing to object to claims.
Now in the new case, in fact, the bankruptcy court--
Justice Scalia: That's what I'm asking.
A Chapter 7 debtor doesn't, but a Chapter 13 debtor presumably does.
So didn't you make the same argument to the bankruptcy court.
Mr. Baker: --In the old case, yes, once we converted the chapter.
Justice Scalia: And they rejected it?
Mr. Baker: No.
I beg your pardon, Your Honor.
No, we did not address eligibility in the present case.
Justice Scalia: I don't care about the present case.
I care about the Chapter 13 case in which you have been found not to qualify for Chapter 13 treatment.
Didn't you make before that court the same argument you're making now that some of the debts shouldn't be counted.
Mr. Baker: I did.
Justice Scalia: They rejected it, right?
Mr. Baker: Pardon?
Justice Scalia: And they rejected it?
Mr. Baker: The bankruptcy court did reject it, yes.
But they rejected it because, as I say, up to that point the case law had held that we did not have standing to object to the claims, so we were bound by what was there.
Justice Scalia: But you said it was only a Chapter 7 debtor who couldn't object.
Mr. Baker: Right.
Justice Scalia: But you are applying under Chapter 13.
Mr. Baker: Right.
What I'm trying to say is in the previous Chapter 7 case we lacked standing to object to those claims and that in the new Chapter 13 case the court took the Chapter 7 case claims and said, you're bound by these in the new chapter 13 case.
Justice Scalia: Didn't you object to that and say you should look at these claims afresh?
Mr. Baker: Yes.
Justice Scalia: And what did the court say?
Did it say it had to or that it did so and still found them over the limit.
Mr. Baker: It... the bankruptcy court in the new case said... pardon?
The bankruptcy court in the new case said that there are circumstances under which a debtor would have standing.
This was in effect a new rule of law for that, for this district.
So subsequent to that decision we did, in fact, object to quite a number of claims and substantially reduced the total of those claims, and I think that once--
Justice Scalia: What did the bankruptcy court say?
Mr. Baker: --The bankruptcy court sustained our objections to those claims and in fact reduced the total substantially.
Justice Scalia: I don't understand that.
But did it reduce it to a level that you qualified for Chapter 13 treatment?
Mr. Baker: We are not finished with the claims objection process.
I believe that once we are--
Justice Scalia: Of course you are.
They've rendered a decision.
How could you not be finished with the claims objection process if the bankruptcy court has rendered a final decision.
Mr. Baker: --Because the bankruptcy court rendered a final decision which is on appeal in the new case.
We are objecting to the Chapter 7 claims in the old case.
I apologize if this is confusing.
Justice Scalia: It is terribly confusing.
It seems to me that the Chapter 13 bankruptcy court had the responsibility for determining whether you qualified under the, you know, under the amount of debt.
Mr. Baker: And it did so by reference to the claims that had been filed in the previous Chapter 7 case.
We can't object to claims in a Chapter 13 case that haven't been filed.
So procedurally, we had to go back to the Chapter 7 case and do the claims objections within the context of the old Chapter 7 case.
Now, in the Chapter 13 case we used the... the bankruptcy court used the total of those claims that had been filed in the Chapter 7 case to determine eligibility in the 13.
In doing so, the bankruptcy court basically announced a new rule of law that the claims that had been filed would be essentially I suppose, res judicata in the subsequent case, but that in some cases a Chapter 7 debtor--
Justice Scalia: And you objected to that, I gather?
Mr. Baker: --Sorry?
Justice Scalia: You objected to that, to that ruling?
Mr. Baker: Not necessarily, because it does give you a vehicle to go back to the old Chapter 7 case and do the procedural claims objections in that case, which is what we did, and we substantially reduced the total of the claims.
Justice Ginsburg: What is the status of the Chapter 7 case?
I was under the impression it had been dismissed and a determination of no discharge had been made.
Mr. Baker: A determination of no discharge had been entered.
However, it was an asset case, so it remains open, it remains open at this point, until the Chapter 7 trustee makes a distribution to creditors or files his final report with the court.
It has not been dismissed.
Justice Ginsburg: But there's a determination that you're not entitled to a discharge?
That has been made.
Mr. Baker: That's correct.
Justice Breyer: If we just could go to the merits for a second here.
You're saying this word, where it says, the word is you "may convert", and that means you can convert no matter what?
Mr. Baker: The plain language of the statute says that, yes, Your Honor.
Justice Breyer: No matter what?
Okay, suppose they repeal Chapter 13 before you convert.
Then can you convert?
Mr. Baker: I'm sorry.
Would you repeat that?
Justice Breyer: I'm just producing examples where it's clear you can't convert.
Now, suppose Congress... there is no Chapter 13.
Could you convert then?
Mr. Baker: Not if there's no Chapter 13.
Justice Breyer: No, okay.
Suppose he dies.
Could you convert then?
Mr. Baker: If the debtor dies?
Justice Breyer: Yes.
No inheritance, no nothing.
Mr. Baker: Well, there is a rule, I believe it's--
Justice Breyer: Even though there's no such person existing any more.
He's gone and his whole family is gone, and there's no inheritors, nothing.
Then can he convert?
Mr. Baker: --Right.
I think the rule 2009 says, the Federal Rules of Bankruptcy--
Justice Breyer: I'm trying to produce ridiculous examples.
Maybe... all right, so you say even if he's dead and there's no family he still could convert.
That's an extreme test of my hypothetical, but okay.
What about if, in fact, he goes insane?
Mr. Baker: --Well, again, Your Honor, the rule says--
Justice Breyer: What about if, in fact, the conversion is part of a scheme to defraud millions of people in a foreign country because it will be viewed as a signal that they should mail their life savings into a particular account in Switzerland?
Can he convert then?
Mr. Baker: --The statute is plain, Your Honor.
Justice Breyer: You say yes on that?
Mr. Baker: I would say yes.
Justice Breyer: Even though it's going to bilk people out of millions of dollars?
Mr. Baker: I think that the statute is plain and says that the debtor may convert.
Justice Breyer: No matter what?
Even if he's dead, even if he's insane?
Mr. Baker: Even if he's insane.
Justice Breyer: Well alright, then I can't get anywhere with my hypotheticals.
I would have thought the answer was no, but there we are.
Justice Ginsburg: Mr. Baker, couldn't the... let's say the conversion goes through.
The first thing that the bankruptcy court does in the Chapter 7 converted to Chapter 13 is say: I'm going to dismiss this suit, the... the bad faith taint stays with the case, it doesn't get... you can't erase it; and so back you go to the Chapter 7.
Why couldn't the bankruptcy court now sitting as a Chapter 13 court say: We're not going to let a debtor who has conducted himself in bad faith proceed in this court?
Mr. Baker: The bankruptcy court could certainly do that.
The procedural safeguards of due process require, obviously, notice and hearing of the court's reasons for wanting to say that.
Justice Souter: Yes, but your claim doesn't rest on a due process denial of hearing does it?
That's not, that's not the question you brought to us.
So it seems to me that Justice Ginsburg's question is not answered by saying, well, he'd get a hearing in that case.
The fact remains that in that case the, as I understand it, the judge in Chapter 13 could immediately deconvert to Chapter 7, couldn't he?
Mr. Baker: Well, I wouldn't say he could immediately reconvert.
Again, there is the due process requirement that the debtor have an opportunity to be heard on the issue.
Justice Souter: But due process is not the issue here.
The fact is the bankruptcy court could deconvert or reconvert to Chapter 7, in effect, following the election that the debtor makes.
That's so, isn't it?
Mr. Baker: Yes.
Justice Souter: Well then, why would we have a system as ridiculous as to preclude the court from looking at fraud or bad faith at the moment of election, go through the paperwork and the folderol of converting to 13, and immediately turn around, admittedly having the power, to deconvert?
That would be a rather foolish system.
Mr. Baker: Well, perhaps, but it is the system that Congress has given us.
Congress has said the debtor may convert at any time so long as it has not been converted previously.
Chief Justice Roberts: When cases are reconverted to Chapter 7, is that typically done before or after the filing of the Chapter 13 plan?
Mr. Baker: Most of the time, a plan is... I don't do it this way, but most practitioners will file a plan at the same time as they file the notice, the motion to convert.
Justice Souter: But they don't have to.
Mr. Baker: They don't have to.
Justice Souter: And the deconversion could be done prior to the filing of the plan?
Mr. Baker: I suppose arguably it could.
In my view, the statutory provisions of section 1307 have to be applied to the question of conversion.
So I think--
Chief Justice Roberts: Creditors... under Chapter 13 one of the prerequisites to approval of the plan is that the creditors get at least as much as they would have gotten under Chapter 7, right?
Mr. Baker: --That's correct.
Chief Justice Roberts: So presumably the creditors might want to see what the Chapter 13 plan looks like themselves.
Mr. Baker: Exactly.
And I think it's the Tenth Circuit Bankruptcy Appellate Panel noted that sometimes a problem debtor files a plan and gets it confirmed, pays creditors, and everybody winds up better off.
Justice Kennedy: Could the district court... pardon me.
Could the bankruptcy court make that same determination in deciding whether or not to allow the Chapter 7 proceeding to be converted?
He could make this inquiry in a Chapter 7 proceeding?
He says: I don't think you should be able to convert because there's a fraud, but I'll look at how the creditors come out.
Could he do that?
And then you don't have the specter that Justice Souter referred to of this transfer back and then the transfer back, which is a waste of time.
Mr. Baker: Well, again, the statute says that the debtor may convert except in certain circumstances.
I think that the requirement of a motion to convert a case gives the court the procedural mechanism for looking at the case, seeing, making sure that the debtor--
Justice Breyer: But there is a difference, and this is... assume with me, which apparently you don't agree, that everywhere in law there are implied exceptions for unusual circumstances.
I have never found an instance where you couldn't think of some exception that they didn't see.
You could not bring a thing if you were insane or dead or if a death would ensue or a murder.
Assume that, all right.
Then the question would be, well, what about this instance?
And I think the strongest instance... the strongest argument for saying there's is no exception here is the argument that the trustee discovers that this individual is behaving dishonestly, that he's hidden assets.
Maybe he has a safe deposit box and he has a key and the key... the key will allow him to get diamonds out of the safe deposit box and hide them.
Under 7, the trustee has the key.
As soon as you convert it to 13 the key is given back to the debtor, who has been shown dishonest.
Now, assuming you're going to have some exceptions, why isn't that a very, very powerful one?
Mr. Baker: --Because ultimately the Chapter 13 trustee has the same powers of the Chapter 7 trustee with the exception, as Your Honor is pointing out, of possession of the property in the bankruptcy estate.
But that's how Congress wrote the statute.
We should not ignore Congress's command about the process of converting and look for exceptions before we proceed to go back to the appellate court--
Justice Alito: If I could come back to a prior question.
Unless there is some different procedure required when... between the two situations of denial of conversion from 7 to 13 and allowing conversion but with immediate reconversion back to 7, unless there's some difference between that's required by the code in those two situations, maybe it is because you have to... in the reconversion situation, you have to wait until the plan is filed.
Maybe it's because the bad faith doesn't carry over.
But unless there's some difference, I don't see what this case is about.
Mr. Baker: --Well, ultimately the case is about the language of the statute and whether the court should apply it as written.
And I think--
Justice Alito: You can't provide any reason why there's a difference between those two?
Mr. Baker: --I'm sorry?
Justice Alito: You deny... do you dispute the fact that the bankruptcy court could simultaneously convert on the motion of the debtor from 7 to 13 and during the 20-day period that's required by the rule, the rules, reconvert?
Do you dispute that, for bad faith?
Mr. Baker: I dispute that the court could do it sua sponte and without notice and an opportunity for a hearing.
Justice Alito: If it gives notice and an opportunity for a hearing during the 20 day period... you have to give 20 days notice before the conversion takes place; is that correct, from 7 to 13?
Mr. Baker: I believe that's correct.
When you file a motion, a 20 day notice is required, yes.
Justice Alito: If it has the hearing during that period, you don't dispute that the court could do that, or do you?
Mr. Baker: Well, again we come to the question of when the plan gets filed.
The plan isn't filed until after it's converted, according to the rules.
Justice Ginsburg: But here there was a hearing on the motion to convert, right?
There was a hearing?
Mr. Baker: Yes, Your Honor.
Justice Ginsburg: And as I understand it, there was no objection to the character of that hearing?
There was no request for an evidentiary hearing?
So there was a hearing.
Now, does that get wiped out too, just the way, the determination that you couldn't convert?
Mr. Baker: The procedure I would, I would expect to see is that if the court saw an issue of fact with respect to whether the case had been converted or whether the debtor was eligible for it to be a debtor in the chapter to which he seeks conversion, then an evidentiary hearing would be required.
If... the fact that there was no evidentiary hearing in the particular case here, I think, I think we have to go back to recognize the fact that most issues in bankruptcy court are decided summarily on motion practice.
And it is my feeling that, the jurisprudence of rule 56 has to apply.
If a court sees that there are disputed issues of fact, the court must schedule an evidentiary hearing.
It cannot, it cannot simply grant summary judgment without furtherance issue of fact.
So this is why I say that, that on these two... the two particular points... and obviously, the question of whether it has been previously converted is very easy to determine.
But as previously discussed, the issue of eligibility, whether the claims and the debt is within the statutory limitation, is an issue of fact that ultimately might require an evidentiary hearing.
Justice Souter: But your case as I understand it, your case does not turn on the question whether there was or was not, should or should not have been a hearing in this case, an evidentiary hearing in this case; is that correct?
Mr. Baker: That's correct.
That's correct, because in our view the schedules... excuse me... in our view the schedules in this case clearly indicate that it... that he was within the statutory limitations, at least as far as the schedules go.
Justice Scalia: Mr.... Mr. Baker, I have... I have a question on a matter that really upsets me and causes me to wonder how, you know, how much we can rely upon your description here.
You claimed in the petition that the reason your client filed under Chapter 7 rather than 13 was that he was unemployed at the time.
And that he decided to go to 13 after he became employed.
Yet, on... as shown in the supplemental appendix, when he filed under Chapter 7, under penalty of perjury, he said that he was employed, and at the meeting of the creditors, he confirmed under oath that he was employed.
What was it?
Was he employed or not employed?
Mr. Baker: On the petition date itself, he was not.
And if you look at schedule I, which is at page 30 of the supplemental joint appendix, at the bottom line, bottom of the... and it indicates that he was in the process of having a second tenant in his rental property and that he was beginning a job at about the time the petition--
Justice Scalia: It says employment, occupation, name of employer: Capital Carpet and Flooring.
How long employed, five months.
Address of employment: Woburn, Massachusetts.
It also says the same thing on page 18 of the supplemental appendix.
And also with the meeting of creditors.
If you look at the joint appendix at 64a, he says the same thing that he was employed.
Was he employed or not employed?
Mr. Baker: --Right.
Justice Scalia: Does he go around swearing he was when he wasn't?
Mr. Baker: No, he was... he was not employed at the time.
If you look at his page 18, as you point out, it says at the bottom the income given is estimated based on a new job which is about to start.
He had... he had been the principal of a company called RLM Flooring, which had been closed by Citizens Bank.
So he was, in fact, unemployed because Citizens Bank had taken all of the assets of the corporation and shut it down.
And this put him of course behind on his mortgage so he was very concerned about finding employment so he could in fact, keep... get his mortgage current and then retain his home.
Justice Scalia: Look on page 64a of the appendix, the meeting of creditors.
Trustee says okay, and you now work for another entity, Capital Carpet and Flooring, sir?
And Mark Marrama says yes.
Mr. Baker: Right.
And between the... between the time of petition at the meeting of creditors which was approximately six... six weeks later, he became employed.
As I say, he had a mortgage.
He had children to whom he has to pay child support.
At the time he had a wife he owed a lot of money to.
He was concerned about having employment so he could in fact meet those obligations.
Justice Stevens: May I ask, I may have missed some of the colloquy here... is it correct that he would not be eligible to file a... to have a, institute a Chapter 13 proceeding if he had unsecured debts of over a certain amount?
Mr. Baker: Yes, Your Honor.
Justice Stevens: And what if at the time he makes the motion to convert, which you say he has an absolute right to make, what if the record then disclosed that he had debts exceeding that amount?
What should the bankruptcy judge do in that case?
Mr. Baker: The bankruptcy judge should examine the claims that have been filed, if any, do the arithmetic, offer the debtor an opportunity--
Justice Stevens: He concludes they're over the amount?
So it is clear under the record.
What should he do then?
Mr. Baker: --He should deny conversion.
Justice Stevens: He should what?
Mr. Baker: He should deny conversion.
Justice Stevens: So he does not have an absolute right in all cases to convert, then.
Mr. Baker: --It's absolute except in the two circumstances stated in the statute.
One of which, is as Your Honor is pointing out, the eligibility, the other is that if it has been previously converted he does not have that right.
If the Court has no further questions, I'll reserve my remaining time.
Chief Justice Roberts: Thank you,--
Mr. Baker: Thank you.
Argument of G. Eric Brunstad, Jr.
Chief Justice Roberts: Mr. Brunstad.
Mr. Brunstad: Mr. Chief Justice, and may it please the Court:
The bankruptcy court need not sit idly by and grant a motion which is part of an abusive scheme.
The power of the court is there to deny such a motion.
It is there by statute under section 105; it is there because the courts have always had power.
Chief Justice Roberts: Under... you think 105 is an affirmative grant of power?
Mr. Brunstad: I think the second sentence of 105(a) supports the traditional powers that courts have had to grant relief, to prevent or to deny relief to prevent abuse or to remedy bad faith conduct.
The fact that the debtor has the authorization under section 706 to convert a case cannot be construed to prevent the court from sua sponte taking action to prevent abuse--
Chief Justice Roberts: 105(a) is much more limited than that.
It is only if you take the second clause of that out of context and quote it, as has been done, that it looks like an affirmative grant.
"No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from taking sua sponte other action. "
That's a much more limited, narrow provision telling you not to imply a negative pregnant from a requirement that a particular party raise an issue.
I... as a source of sweeping powers to, to basically act as a roving commission in equity, I think that's a mis-citation.
Mr. Brunstad: --Well, Chief Justice Roberts, I think that in order to understand 106(a), the second sentence, completely, I think it is important to understand it was added to 105 in 1986 in response to a number of decisions that were holding that the courts did not have the... the bankruptcy courts did not have the authority to sua sponte take action to prevent abuse, to monitor their own calendars, to make sure that inappropriate things weren't happening, and that Senator Hatch when he introduced this legislation which was ultimately enacted, the goal was to overturn cases like the Second Circuit's decision in Grissom to provide expressly and perhaps not as clearly as perhaps they intended, to give the courts this power.
Justice Scalia: Was that Second Circuit's decision a decision that said the court didn't have the power because it had not been moved to take that action by the party who had the responsibility for raising the issue?
Was that the basis for the Second Circuit's decision?
Mr. Brunstad: --In part, yes.
The court also--
Justice Scalia: Then... then you haven't contradicted what the Chief Justice suggested.
Mr. Brunstad: --Well, I think... I think 105(a), the second sentence is worded the way that it is.
It doesn't say exactly that the courts may take any action of sua sponte.
It says shall not be construed; the fact that a party has the right to make an action shall not be construed to deny the court the right sua sponte to take an action.
But I think that the implication of the statute is clear.
There is this background principle which applies not only in bankruptcy cases but in trial court cases in the district courts everywhere, that this Court recognized in Chambers, that it has specific application in this Court's jurisprudence in bankruptcy in Pepper versus Litton and other cases, that the bankruptcy courts may take action to prevent abuse.
And in fact, they must do so.
Because by granting a motion, by sitting back and allowing the court to grant relief that furthers an abusive scheme in essence makes the court complicit in the fraud or misdealing.
We can't have that.
Chief Justice Roberts: What do you do about the different structures, wording between 706(a) and 706(b)?
I mean, this provision says debtor may.
The other provisions say that a debtor may ask a court to order, and it suggests a difference in who has the primary responsibility, whether it is a motion of the Court or whether it is an independent action.
Mr. Brunstad: Mr. Chief Justice, I think that the drafting conventions between the two subsections is key.
706(a) says the debtor may convert.
Whereas other sections of the code, like 1307(b), other provisions, provide that upon request of the debtor, the court shall take some particular action.
Here the use of the "May"... I think the word "may" properly signals discretion in the court.
Chief Justice Roberts: So you think under those other provisions the court doesn't have this inherent power or the implicit power from 105(a) that you're arguing for here?
Mr. Brunstad: Well, if you look at section 1307(b), upon request of the debtor the court shall dismiss the case, that is an absolute right.
And for a clear reason.
Nobody can force a debtor to continue in Chapter 13 against the debtor's will because Chapter 13 requires the debtor to work to pay off creditors.
That would violate the 13th Amendment.
So there would be no circumstance where someone could block a debtor from getting out from Chapter 13, for constitutional reasons.
That's a special case.
That is why Congress drafted 1307(b) the way that it did.
Contrast that with section 706 where the court said the debtor may convert.
Now, there are, there are requirements that the debtor has to comply in order to convert, statutory, but there is also, a debtor cannot have an absolute right to convert if it would be part of an abusive scheme.
I think the direct analogy is this Court's decision in Pepper versus Litton.
There a fraudulent party wanted the Court to allow a claim as part of a fraudulent scheme, and this Court unanimously said no we're not going to allow that, even though there was a subsequent remedy further on in the process.
Chief Justice Roberts: If you, if given that the court has express statutory authority to reconvert from 13 back to 7, why should we take the leap of conferring inherent equitable authority to do something, when the statute addresses it in a much more specific way?
Mr. Brunstad: Two primary reasons, Your Honor.
The first reason is that it would be just pointless wheel spinning.
Chief Justice Roberts: Well, maybe, maybe not.
I mean, they convert.
He comes up with a plan under 13 that looks better to creditors.
I mean, just because there's fraud that offends the court and prompts it to take action prior to conversion doesn't mean that that's going to be the same situation after conversion.
Mr. Brunstad: But the debtor could argue in the context of the motion to convert, well, I would like to propose a Chapter 13 plan, perhaps the misconduct wasn't that severe, and the court can take that into consideration allowing the debtor to proceed.
But where as here you have a clear case of abuse, the court should be entitled to nip it in the bud at that particular point in time.
Allowing the court to senselessly say,
"Oh, go ahead and convert-- "
Chief Justice Roberts: Even if it might injure the creditors.
Mr. Brunstad: Well, the court can take that into account.
The court is not... is not shackled under section 706 to deny conversion, it can consider various factors.
If all the creditors were to come up and say:
"We know the debtor has been abusing the bankruptcy system, but we think you should allow the conversion to a Chapter 13 case because perhaps that will work for the particular circumstances. "
But whereas here there was no such thing, the creditors were saying don't allow conversion, this is part of an abusive scheme.
The trustee was saying don't allow conversion, this is part of an abusive scheme, the bankruptcy court... if the court had signed the order, then that affects the integrity of the court.
Is the court itself now not participating by allowing it to happen, this sort of fraudulent scheme?
The court should be able to nip it in the bud.
Debtors who are--
Chief Justice Roberts: What limitations would you recognize on this inherent authority to take action?
Where do they come from?
Mr. Brunstad: --Well I think that... Mr. Chief Justice, I think that they're the same sorts of limitations that require the district court, when it is considering invocation of its inherent powers, whether to exercise them or not, we have always sort of recognized a special situation for bad faith conduct and clearly abusive schemes.
Where those occur as in this case, the bankruptcy court looks at the circumstances, holds a hearing as was held this case, considers the views of the parties who are involved, and then decides.
Now it is a relatively high bar.
You know, bad faith... it is a continuum.
Where you have the honest but unfortunate debtor, abides by all the rules, clearly no bad faith implication would apply.
At the other end of the spectrum where you have a debtor who conceals assets, doesn't disclose, it's found out in bankruptcy and then as soon as the trustee finds out and is hot on the debtor's trail, then seeks to convert to get out from bankruptcy, well, there you have a clear-cut case of abuse that can't be tolerated.
Now I think that--
Justice Scalia: Mr. Brunstad, are you going to address the mootness point?
Do you think the case is moot?
Mr. Brunstad: --Yes, Justice Scalia.
I think candidly, the case is not moot.
There is a good reason why we do not allow in our system two separate bankruptcy cases to be pending at the same time.
Once a first bankruptcy case has started, the court jurisdiction attaches its exclusive jurisdiction, and I think the second bankruptcy case that was filed while the first bankruptcy case was still pending was filed without jurisdiction and there was actually no jurisdiction, because of the prior existing case.
Additionally, I think we have to recognize that there were different debt levels at different times.
I don't know exactly what they were, but for the first case there was debt level A.
About three years later, there was debt level B, which may well have been higher.
On remand if the debtor were to succeed, which I hope the Court does not allow the debtor to proceed, or succeed here, but on remand if it were determined that with the first case the debt levels were properly below the limits under 109(e), then the debtor would be eligible to convert as far as that criteria is concerned.
We do not know absolutely that that would not be able to be satisfied in the existing case.
Justice Scalia: Did you make the jurisdictional objection before the second bankruptcy court?
Mr. Brunstad: We did not participate in the second case and make that objection, Your Honor.
Justice Scalia: How so?
Mr. Brunstad: I think that it was primarily, it was, the debtor was litigating and we did not make the jurisdictional argument.
Justice Scalia: I find that extraordinary.
Justice Ginsburg: So it wouldn't be before the First Circuit.
Mr. Brunstad: That particular issue, I think the appeal of the second case is pending before the district court.
I think that the bankruptcy judge disposed of the case pretty summarily and decided that while this particular debtor, just looking at the schedules, does not have the eligibility requirements for the second case, and therefore dismissed it.
That does not necessarily preclude a finding upon the facts in the first case which is still pending, that it could be converted.
I think candidly, I need to say that.
Justice Ginsburg: It's hardly a summary disposition.
The opinion goes on for pages and pages.
Mr. Brunstad: Well, this particular bankruptcy judge obviously had a lot of experience with this particular debtor, having presided over the first case as well, Justice Ginsburg.
So I think the bankruptcy court was very fully apprised of the facts and circumstances surrounding the case, with the record and having written several opinions already in the first bankruptcy case which was still pending.
Justice Scalia: This case, your case?
Mr. Brunstad: The current case today, yes, Justice Scalia.
Justice Stevens: May I ask this question.
If the remedy of not allowing them to convert to Chapter 13 is denied, are there other remedies that the bankruptcy court can impose against the debtor who engages in misconduct of this kind?
Mr. Brunstad: Yes, Justice Stevens, but they're not tailored to this particular problem or abuse.
They are remedies, for example, the denial of the discharge for concealing assets under section 727.
But that won't--
Justice Stevens: Are there any criminal sanctions?
Mr. Brunstad: --There might be criminal sanctions for willful... basically, in essence, it's sort of an idea of theft, you know, by not disclosing assets, but it's a relatively high bar for criminality.
But that won't protect the creditors in the Chapter 7 case.
Justice Stevens: Then how are the creditors hurt by this series of events?
Mr. Brunstad: Well, the creditors are hurt because in the chapter 7 case, once the bankruptcy case is filed, the trustee takes possession of all the debtor's property, which becomes property of the estate.
The trustee's role is to liquidate the property and distribute the proceeds to creditors.
When the case is converted to Chapter 13, under 1306, the property revests in the debtor, including any concealed property.
At that point, under section 348, upon conversion, the Chapter 7 trustee is disenfranchised.
His services terminate.
What debtors in bankruptcy who are perpetuating this kind of concealment scheme want you to do is say oh no, you can go ahead and convert, and then maybe we'll deal with it later, because maybe later on in the proceedings something will happen.
The Chapter 13 trustee might not be apprised of it.
The case might go to a different bankruptcy judge.
In some jurisdictions, the Chapter 13 docket is heard by an entirely separate bankruptcy judge.
They would like to get the benefit of delay in conversion, because perhaps they can get away with it in the subsequent Chapter 13 case.
Or alternatively in the Chapter 13 case, if the debtor doesn't file a plan, then the Chapter 13 trustee, who may have hundreds and hundreds of Chapter 13 cases he or she is responsible for, on a check list might simply check off no plan filed, case dismissed, in which case the creditors don't get the benefit of the liquidation, they don't get the benefit of the assets being recovered, they don't get equality of distribution under the Chapter 7 scheme, and the debtor's fraud is in essence gotten away with.
So that is why, when a motion to convert comes up and the bankruptcy court sees--
Justice Stevens: Wouldn't a Chapter 7 case be refiled immediately?
Mr. Brunstad: --Not necessarily, Your Honor.
The debtor could move to another jurisdiction.
Justice Stevens: But the creditors aren't going to let him just run away with the assets, are they?
Mr. Brunstad: Well, Justice Stevens, in many many Chapter 7 cases, in many many bankruptcy cases, you have creditors, most of the creditors may hold claims of $500, $1,000, $3,000.
This case is unique because there happened to be a creditor, Citizens Bank, who was owed hundreds of thousands of dollars who had an interest in pursuing the case.
In many other cases... that's why... one of the reasons why we have a Chapter 7 trustee, to represent the interest of myriad small claimants who collectively have no individual incentive to really incur all the costs to monitor the system.
By converting the case from 7 to 13, disenfranchising that representative of all the creditors, the debtor who wants to play the game of concealing the assets, and catch me if you can, can in essence get away with it.
This bankruptcy judge understood this.
This bankruptcy judge denied the conversion so we would keep the case in Chapter 7, the Chapter 7 trustee could do his job, collect the assets--
Justice Ginsburg: Could the Chapter 7 trustee be appointed the trustee in the Chapter 13, the same trustee who has now been... he's terminated because the Chapter 7 has been converted.
Could the court in the Chapter 13 format appoint the same trustee?
Mr. Brunstad: --No, Justice Ginsburg.
There is a standing Chapter 13 trustee in Chapter 13 cases that handles all the Chapter 13 cases, unless for some reason that Chapter 13 trustee must recuse him or herself.
Under section 348, once the case is converted from 7 to 13, the Chapter 7 trustee services are terminated.
Justice Scalia: What does the trustee do?
He's not really a trustee under 13, is he?
Mr. Brunstad: The Chapter 13 trustee--
Justice Scalia: I mean, the property doesn't vest in him, you've told it.
It remains in the ownership of the debtor?
Mr. Brunstad: --Yes, Justice Scalia.
The Chapter 13 trustee is probably characterized mostly an administrative person, who supervises to see that the Chapter 13 procedures are complied with, has the debtor filed the Chapter 13 plan.
Justice Scalia: He's called a trustee, though?
Mr. Brunstad: --Correct, Justice Scalia.
Justice Scalia: Well that's really not his capacity.
Mr. Brunstad: In practical reality, that's correct, Justice Scalia.
What the Chapter 13 trustee does is, if a plan is not filed, moves to dismiss the case.
If a plan is filed, may look at the plan.
If the plan is confirmed, acts as the disbursing agent.
The debtor typically makes payments under the plan to the Chapter 13 trustee.
The Chapter 13 trustee then makes distributions to creditors.
And on Chapter 13 day in many jurisdictions, one day a week or every other week, the Chapter 13 trustee will come to court with hundreds and hundreds and hundreds of files.
Justice Scalia: It's called Chapter 13 day?
Mr. Brunstad: In many places it is, Your Honor, and they have a Chapter 13 bankruptcy judge.
Often it's assigned to the most junior bankruptcy judge sitting in the particular jurisdiction.
With hundreds and hundreds of cases, the Chapter 13 trustee has neither the incentive nor the resources to do the things that a Chapter 7 trustee does every single day.
And not only that, the Chapter 13 trustee does not have the power to go after collecting all of the property and liquidating it.
It's denied that power under the statutory scheme.
So it makes no sense.
It's pointless to say we must... the bankruptcy judge must idly sit by, grant a motion that's part of this abusive scheme, allow the case to be converted to Chapter 13, hold another hearing, have a second set of papers perhaps, only to send the case back to Chapter 7.
Chief Justice Roberts: The sense it makes is that that's what the statute provides, and rather than relying on this alleged inherent power that apparently is not boundless, and that the bounds of which will have to be articulated in case after case after case, the statute provides a very clear mechanism to address the issue of fraud which allows him to reconvert it back to Chapter 7 promptly.
Mr. Brunstad: Well, I think, Mr. Chief Justice, in the Link case, the Court rejected that argument in construing section 41(b), where the Court said, quote,
"neither the permissive language of the rule, which merely authorizes a motion by the defendant, nor its policy requires us to conclude that it was the purpose of the rule to be abrogate the power of courts acting on their own initiative to clear their calendars of cases that have remained dormant because of the inaction or dilatoriness of the parties seeking relief. "
Likewise in Chambers, I think the same principle applied.
The Court said, we don't need to wait and deal with these subsequently occurring procedures to remedy the problem.
We should do it now.
And that is the... that is the clear import of this Court's unanimous decision in Pepper versus Litton.
There was a remedy of equitable subordination for the fraudulent claim that could have been invoked far later in the proceeding.
And this Court unanimously said no, you don't have to wait for that proceeding later.
Where it's clear that there has been fraud, the creditor's scheme has been fraudulent, a fraudulent claim, the court can act at the time of allowance of the claim and simply deny the claim.
The reason for it, I think, is the reason articulated in Chambers.
The integrity of the court itself is implicated if it has to sit back idly by and watch the abusive process unfold.
Chief Justice Roberts: Well, I still haven't gotten an answer, I think, on what the prejudice is.
Who is prejudiced by the procedure set forth in the statute?
The conversion takes place.
The judge then says, because of this fraud, I'm going to reconvert it to Chapter 7.
Who suffers under that?
You say sit idly by, but I don't see the long passage of time.
Mr. Brunstad: Well, the creditors suffer, Mr. Chief Justice.
And they suffer because there are additional administrative costs that are incurred that compete with their distributions.
We're already talking about dividing up an inadequate pie to satisfy all claims in full.
Having a second set of procedures prejudices the creditors.
It prejudices the court.
Bankruptcy judges can have thousands and thousands of cases on their dockets.
To have to have a second set of procedures, a second hearing, it burdens the court unnecessarily.
And again, it also implicates, again, and I think this is fundamental, the integrity of the process.
Justice Breyer: Is it true or not what I said, because I don't know the area, that if in fact you had a dishonest debtor, the present... the proceeding is dismissed on 7.
He gets the papers back.
The papers permit him access to a hidden source of resources, and he steals them basically.
Is that possible or is that fanciful?
Mr. Brunstad: Justice Breyer, that is certainly possible, and I think that is why Congress has said you don't have an absolute right as a debtor under section 707 to dismiss your Chapter 7 case.
Chief Justice Roberts: Thank you, counsel.
Mr. Brunstad: Thank you.
Argument of Lisa Schiavo Blatt
Chief Justice Roberts: We'll hear from Ms. Blatt first.
Mr. BAKER: I beg your pardon.
Ms Blatt: Thank you, Mr. Chief Justice, and may it please the Court:
A bankruptcy court has the inherent authority to sanction a debtor who has acted in bad faith by denying his request to convert a Chapter 7 case to Chapter 13.
Courts have the inherent authority to take appropriate action to prevent an abuse of process.
Nothing in the Bankruptcy Code or section 706 purports to impair or limit the bankruptcy court's power to police the integrity of its own proceedings.
Justice Alito: Why isn't the power to reconvert sufficient?
Ms Blatt: The power to reconvert under section 1307(c) is in this case, where the court is already confronted with an adjudicated bad faith litigator, it's indirect, it's inefficient, and it's inadequate to protect the bankruptcy process.
The potential for abuse is very significant if the case languishes in Chapter 13 for any period of time because the bad faith debtor gets control over the very asset he fraudulently sought to conceal.
Chief Justice Roberts: Well, what are the odds that that's going to happen if you have a judge who's exercised enough by the fraud to exercise inherent authority to deny relief?
He's not going to let it languish under Chapter 13.
Ms Blatt: Well, he may or may not.
Bankruptcy courts have thousands of cases, and if there is an absolute automatic right to convert, a court with thousands of cases may put off that Chapter 13 reconversion to another day.
Moreover, there may be individual creditors without a sufficient stake to raise the issue, and the Chapter 7 trustee who typically will uncover the fraud cannot oppose conversion if there's a right to convert in bad faith, and the Chapter 13 trustee or the United States--
Chief Justice Roberts: Well, why wouldn't that trustee recommend to the bankruptcy judge that he reconvert it to Chapter 7?
Ms Blatt: --Well, the Chapter 7 trustee is, he's terminated on conversion.
It doesn't raise Chapter 13 issues.
The much more likely scenario is the Chapter 7 trustee will tell the United States trustee or the Chapter 13 trustee, but they may or may not learn about it until after the case converts.
In jurisdictions where there is--
Justice Kennedy: Why can't they just have an order to the bankrupt... to disclose the asset in the Chapter 13 proceeding?
Ms Blatt: --An order to disclose the asset?
Justice Kennedy: In the Chapter 13 proceeding.
Ms Blatt: Well, we're talking about a case the court may or may not know about the fraud, and the trustee may or may not tell someone in time.
Justice Kennedy: Well, in this case they knew about it, didn't they?
Ms Blatt: --Yes, and there was a basis to oppose conversion.
In jurisdictions where there's an absolute right, and bad faith is not a grounds for the conversion--
Justice Stevens: Whenever he denies the motion, he must know about it.
He must have a reason to deny.
Ms Blatt: --We're by hypothesis talking about an absolute right to convert, and what I'm trying to say, in jurisdictions where there is an absolute right, the practice of bankruptcy courts is not to simultaneously convert.
It does happen on occasion, but the more likely scenario is that a significant period of time passes.
But the other point is that if there's a simultaneous conversion it's a completely pointless and burdensome process, and here's why: A conversion and simultaneous conversion causes the termination and reappointment of the Chapter 7 trustee, the appointment and the immediate termination of the Chapter 13 trustee, and to the extent there's already pending Chapter 7 proceedings for dismissal or denial of discharge, the conversion would appear to us to moot those proceedings and require their reinstatement.
And this is a completely unnecessary waste of everyone's time and energy.
Justice Stevens: May I just clear up one detail that's confusing to me.
The... are there two judges?
Does the same judge rule on both the motion to convert and the motion to reconvert?
Ms Blatt: Yes, in the majority of jurisdictions.
There are one or two jurisdictions where there are different judges, but the vast majority it's before the same judge.
But a... if a... if there's a... if there's a right to convert in bad faith, all you have is a notice of conversion and, assuming the eligibility is met and it hasn't previously converted, a court may say, well--
Chief Justice Roberts: I wouldn't call it a right to convert in bad faith.
If it's a right, it's a right to convert despite the allegation of bad faith.
It's not a right to convert in bad faith.
No one is arguing for that.
Ms Blatt: --Well, I think that our point is that the absence of bad faith is implicit in the statute because there is this background rule.
When a litigant comes to a court that's already abused the court's process or seeks relief of bad faith, it is a core element of a court's inherent authority to simply deny relief.
You can toss out an entire complaint when a litigant seeks it in bad faith.
If there was an apparent benefit to this, go to 13 first or deny it, the United States trustee wouldn't be here.
We see no benefit to the debtor to require the court to convert and then reconvert.
All it is is an unnecessary waste of everyone's time, and this is a core element of an inherit authority.
Chief Justice Roberts: What about the idea that the debtor can come in and say under 13, look, whether the facts bear this out in this case or not, I've got a job now.
I can pay off my debtors... my creditors according to this plan, and, as the statute requires, the creditors get more under 13 than under under 7.
That's a benefit to everybody.
Ms Blatt: Here's why.
I don't think there's any dispute under--
Chief Justice Roberts: And he says, I'm sorry about that bad faith business.
Ms Blatt: --Sure.
And there's nothing to stop a debtor who truly converts and has found religion and wants to come clean for arguing: Let me convert, it's in the interest of everybody if I do convert.
This is a discretionary right to deny relief.
The court is free to allow conversion.
But under the plain terms of section 1370(c), the court has the power to dismiss or reconvert a case to Chapter 7 without waiting for a plan to be filed.
There's no requirement that the court has to sit there for 15 days and see if there's a plan.
A Chapter 7... excuse me--
Chief Justice Roberts: If the statute didn't provide that a Chapter 13 plan could be reconverted to a Chapter 7, would the court have the inherent equitable authority to do that?
Ms Blatt: --To reconvert to Chapter 7?
Chief Justice Roberts: Sure.
Ms Blatt: I don't know if that would be an appropriate remedy.
It might be because you can have an involuntary Chapter 7 case.
But on this point about a court sitting in Chapter 13, if on day one a Chapter 13 debtor files a plan in bad faith, the debtor can say: Please wait, I've got a plan, I'm working on it, give me a couple extra weeks, and the court can say: No, I have the authority to throw it out.
And what's particularly odd about this proposal is that in 2005 a court is categorically prohibited from allowing a Chapter 13 debtor to proceed under Chapter 13 if the petition is filed in bad faith.
The court can't confirm a plan.
So Congress had no interest in protecting bad faith debtors after 2005 and they didn't before 2005.
There's no policy preference in the code for bad faith debtors or allowing a debtor either proceeding in Chapter 13 or moving from Chapter 7 to Chapter 13, and we think this is a modest exercise of a court's inherent authority simply to deny relief when the court is already confronted with a clear case of abuse while the case is in Chapter 7 or the debtor has otherwise abused the bankruptcy process.
The last thing I'd like to say is--
Chief Justice Roberts: Well, what about the difference in language under 706(a) and the other provisions?
706(a) says the debtor may.
The other provisions call for action by the court, which suggests at least that the authority to convert is greater under 706(a).
Ms Blatt: --I think section 706(a) is fairly read as granting a statutory right to convert absent the two statutory exceptions or the court's proper exercise of inherent authority.
But the 706(b) and (c) just explain that the court may do something or the court may not, or the court shall do something.
So we think our position... section 706(a) isn't even addressed to the court at all.
It just gives the debtor the right to convert, and it doesn't purport to limit or speak to the situation when the debtor seeks that relief in bad faith or has otherwise abused the bankruptcy process.
And I'd just like to end by saying that a debtor's bad faith concealment of assets or misrepresentation of financial affairs is really the most serious abuse you can have in a chapter 7 case.
It threatens the very structural foundation of the code and its integrity.
Justice Scalia: Does the government have any position on the mootness question here?
Ms Blatt: Well, our position is that it's not moot because it's on appeal.
If that decision is affirmed, it would in a sense practically be moot because there would be an alternative grounds and the debtor wouldn't be eligible under Chapter 13 in any event.
But we didn't see that as necessarily an Article III mootness problem.
Chief Justice Roberts: I guess I've been assuming... but the eligibility under Chapter 13 even under the present case is a present day question, right?
In other words, we don't go back and see if he was eligible for Chapter 13 when the conversion was denied?
The question would be whether he's eligible now?
Ms Blatt: We have not compared the two, the two chapters... well, there was never a Chapter 13 petition.
We have not compared the Chapter 7 petition with the... after this case, this Court granted certiorari, then the Chapter 13.
But it is on appeal to the district court, so it's not presently moot.
We would ask for those reasons that the First Circuit's decision be affirmed.
Rebuttal of David G. Baker
Chief Justice Roberts: Thank you, Ms. Blatt.
Now, Mr. Baker.
Mr. Baker: Thank you, Your Honor and Mr. Chief Justice.
Chief Justice Roberts: I'm sorry.
two minutes remaining.
Mr. Baker: Thank you, Your Honor.
The first thing I would like to say is that, having been counsel to a Chapter 13 trustee many years ago, I can assure the Court the Chapter 13 trustees exercise all of the powers and authority that a Chapter 7 trustee does, with the exception, as was said, of possession of property of the estate.
The property of the estate remains vested, however, in the Chapter 13 trustee throughout the length of the case.
It does not revest in the debtor until the case is either dismissed, a discharge is issued, and the case is closed.
So the concerns about leaving a debtor to do anything it wants to with property of the bankruptcy estate simply is not a reality, and I think it does a disservice to the many fine Chapter 13 trustees that there are around the country.
Justice Scalia: I'm not sure I understood what you just said.
You said until the plan is filed and approved the property remains in the possession of the Chapter 13 trustee.
Mr. Baker: No, it does not remain in her possession.
The Chapter 13 trustee technically never has possession.
The title remains vested in the Chapter 13 trustee.
Justice Breyer: So is it possible if it's in 13 that then the debtor, let's say a dishonest debtor, could get back pieces of paper which would admit that debtor to the possession of certain property which he could then take and hide in a way that that couldn't happen in 7?
Is that possible or not possible?
Mr. Baker: It's certainly possible.
But then again, there are statutory and rule-based remedies for that sort of activity.
And our position is that those rules and those statutes are what should control in the case.
Thank you very much, Your Honor.
Chief Justice Roberts: Thank you, Mr. Baker.
The case is submitted.
Argument of Speaker
Ms Blatt: Justice Stevens has the opinion in 05-996, Marrama v. Citizens Bank of Massachusetts.
Argument of Justice Stevens
Mr. Stevens: This is a bankruptcy case.
The petitioner filed a voluntary petition to discharge his debts under Chapter 7 of the Bankruptcy Code.
In verified schedules attached to his petition, petitioner made several statements about his principal asset; a house in Maine that turned out to be misleading or inaccurate.
After petitioner’s examination of the meeting of creditors required by the code, the trustee of the state indicated his intention to recover the Maine property as an asset of the state.
Petitioner then moved to convert his case to a case under Chapter 13.
Proceeding under Chapter 13, enables a debtor with regular income to retain possession of his property and to discharge his debts as he completes payment of a plan approved by the bankruptcy court.
The bankruptcy court denied petitioner’s conversion request on the ground that the motion had been made in bad faith.
Both the Bankruptcy Panel for the First Circuit and the First Circuit Court of Appeals affirmed.
We granted certiorari to decide whether a Chapter 7 debtor has an absolute right to convert to Chapter 13, not withstanding or finding by the bankruptcy court that the conversion motion was brought in bad faith.
We affirm, Section 706(a) of the Bankruptcy Code provides that a debtor may convert a case under Chapter 7 to a case under Chapter 11, 12 or 13 at any time, if the case had not previously been converted, relying primarily on this language as well as the language in the house in Senate Committee reports on the provision.
Petitioner argues that he has an unqualified one time right to convert to Chapter 13, we disagree.
Under Section 706(d) of the code, a Chapter 7 debtor may not convert to Chapter 13 unless he is eligible to be a Chapter 13 debtor.
Under 1307(c), Section 1307(c) provides a non-exhaustive list of reasons that constitute cause for dismissal of a Chapter 13 debtor’s case because bankruptcy courts routinely pre-petition bad faith conduct as one such cause.
It follows that a Chapter 7 debtor, who has been determined to have acted in bad faith, maybe deemed ineligible to convert to Chapter 13.
In addition, Section 105(a) of the court which provides that a bankruptcy court may take any action necessary or appropriate to prevent an abusive process authorizes the court to deny a motion to convert to Chapter 13, when due to the debtor’s bad faith conduct, the Chapter 13 case is destined for immediate dismissal or re-conversion to Chapter 7.
Justice Alito has filed a dissenting opinion in which the Chief Justice, Justice Scalia and Justice Thomas have joined.