The following argument recap is by Erik Zimmerman of the Stanford Supreme Court Litigation Clinic. His preview of this case is here.
Monday’s argument in Marrama v. Citizens Bank of Massachusetts et al. (No. 05-996) signaled that the Court is likely to hold in favor of the respondents, although a potential mootness issue arose that may prevent the Court from reaching the merits altogether. The question presented in Marrama is whether a bankruptcy court may deny a debtor’s request to convert his case from chapter 7 to chapter 13 of the Bankruptcy Code based on a finding that the debtor has acted in bad faith. The petitioner, Robert Louis Marrama, contends that a court may not deny a debtor’s requested conversion under the plain language of Section 706(a) of the Code, whereas the respondents suggest that a bankruptcy court possesses the inherent authority to sanction bad faith conduct by denying a conversion.
In a bit of a surprise, almost half of the petitioner’s argument time revolved around an issue that had not appeared in the briefs: whether the case had been rendered moot by subsequent proceedings below. The Chief Justice immediately brought up the fact that Marrama had filed a new bankruptcy petition under chapter 13 after certiorari had been granted in this case. In that new case, the bankruptcy court found that Marrama was ineligible to file under chapter 13 because of his debt level. Eligibility to be a debtor under chapter 13 is an explicit prerequisite of conversion under Section 706(d) of the Bankruptcy Code, so a number of justices (and particularly Justice Scalia) expressed concern in their questions that Marrama’s ineligibility to file under chapter 13 would render the case currently before the Court moot. If Marrama were ineligible to proceed under chapter 13 because of his debt level after all, then a finding that he has a right to convert despite any bad faith would provide him no actual relief. David G. Baker argued on behalf of the petitioner that the case before the Court was not moot, because there was a difference in three years between the filing of the two bankruptcy petitions and so the finding of ineligibility in the later case did not imply ineligibility under the different facts of the earlier case.
Those arguments did not seem to satisfy the Court’s concerns. However, when Justice Scalia asked both the respondent and the United States as amicus to the respondents whether Marrama’s case was moot, both took the position that mootness was not a problem here. G. Eric Brunstadt, Jr., arguing on behalf of the respondents, posited that the bankruptcy court did not actually have jurisdiction over the second case because it is improper to have two simultaneous bankruptcy cases involving a single debtor. And Lisa S. Blatt, arguing on behalf of the United States, took the position that the case before the Court was not moot because the second bankruptcy case was still on appeal to the U.S. District Court for the District of Massachusetts. Those answers appeared to satisfy the Justices’ concerns on the mootness issue, at least for the moment.
When the Court’s questions did turn to the merits (if only “for a second,†as Justice Breyer put it), the Court appeared generally hostile to Marrama’s position. Much of the argument focused on the bankruptcy court’s power under Section 1307(c) of the Bankruptcy Code to reconvert a case from chapter 13 to chapter 7 based on a finding of bad faith. Justices Ginsburg, Souter, and Alito all seemed skeptical that a bankruptcy court should be forced to convert a case to chapter 13 if it can simply reconvert the case almost immediately. Justice Souter even went so far as to call such a requirement “ridiculous†and “foolish.†The Justices seemed much more willing to accept the position of the respondents and the United States that forcing the bankruptcy court to convert and then reconvert would constitute a needless spinning of the court’s wheels, and that the bankruptcy court should therefore be allowed to deny conversion in the first instance. Only the Chief Justice appeared willing to accept the opposite position. The Chief Justice suggested, quite forcefully at times, that the fact that conversion might be a waste of time does not overcome the plain language of the statute, and that there might actually be some benefit, both to the debtor and to his creditors, in allowing the debtor to convert to chapter 13 and thereby to propose a repayment plan before the case is reconverted.
Justice Breyer also strongly opposed Marrama’s position that a debtor’s right to convert to chapter 13 is absolute. Justice Breyer suggested a number of hypothetical situations in which he assumed that a debtor would not be able to convert—for example, if the debtor were dead or insane. Mr. Baker took the position, however, that a debtor would still be able to convert his case in such circumstances, a position that Justice Breyer found perplexing. Justice Breyer also expressed concern several times about the dangers of allowing a bad faith debtor to convert his case to chapter 13 and thereby gain access to assets that he might be able to steal.
So, at least four Justices (Souter, Ginsburg, Breyer, and Alito) appeared quite skeptical of Marrama’s arguments on the question presented, with only the Chief Justice openly appearing to favor the petitioner’s position. It appears likely, therefore, that the Court will hold for the respondents that a bankruptcy court may deny a debtor’s request to convert from chapter 7 to chapter 13 based on a finding of bad faith. The Chief Justice might write a dissenting opinion if that were to be the outcome. The possible issue still lurking, however, is that of mootness. If the Court finds that the case currently before it has become moot, the Court might avoid reaching the merits in Marrama altogether. That result seems unlikely, however, based on the fact that all of the parties at argument took the position that the case had not been rendered moot.
CLICK HERE FOR FULL VERSION OF THIS STORY