Argument Preview: Marrama v. Citizens Bank of Massachusetts

The following argument preview was written by Erik Zimmerman of the Stanford Supreme Court Litigation Clinic.

On Monday, November 6, the Court will hear argument in Marrama v. Citizens Bank of Massachusetts et al.No. 05-996). The question presented in this case 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.

David G. Baker will argue on behalf of the petitioner. G. Eric Brunstad, Jr. of Bingham McCutchen LLP will argue on behalf of the respondents. He will share his time with Lisa S. Blatt, Assistant to the Solicitor General, who will argue on behalf of the United States as an amicus in support of the respondents. The parties’ briefs are available here.

Background in Bankruptcy Law

A debtor may file a voluntary bankruptcy petition under one of four chapters (7, 11, 12, 13) of the Bankruptcy Code. Under chapter 7, a trustee takes possession of the debtor’s property interests, sells them, and distributes the proceeds to creditors; the debtor then receives a discharge of his debts. Under chapter 13, the debtor—who must have a regular income—retains possession of her property and repays her debtors over time according to a plan that must be approved by the bankruptcy court. At issue in Marrama is the debtor’s right to file his case under chapter 7 and subsequently convert the case to chapter 13. Section 706(a) of the Bankruptcy Code provides that “[t]he debtor may convert a case under [chapter 7] to a case under chapter 11, 12, 13 of this title at any time,” provided that the debtor has not previously converted his case to chapter 7. The major source of debate in Marrama is the meaning of the word “may” in Section 706(a).

Facts and Procedural History

Petitioner Robert Louis Marrama filed a voluntary chapter 7 petition in March 2003. Marrama was ineligible to file under chapter 13 at that time because he was unemployed. Respondent Mark G. DeGiacomo was appointed as the chapter 7 trustee in Marrama’s case, while respondent Citizens Bank was one of Marrama’s secured creditors.

Marrama subsequently filed a notice seeking to convert his case to chapter 13. Both respondents opposed the conversion, arguing that Marrama had acted in bad faith by failing to disclose the true value of two of his assets in his chapter 7 petition. Marrama responded that those inaccuracies were inadvertent and that he was trying to convert his case to chapter 13 because he had recently obtained a job.

The bankruptcy court denied the request for conversion on the ground that Marrama had acted in bad faith by concealing the true value of his assets. The Bankruptcy Appellate Panel of the First Circuit affirmed. The First Circuit also affirmed, holding that under Section 706(a), a bankruptcy court has the discretion to deny a debtor’s request to convert based on a finding that the debtor has acted in bad faith.

Arguments Before the Court

Marrama and his amicus, the National Association of Consumer Bankruptcy Attorneys (NACBA), argue primarily that the plain meaning of Section 706(a) and its use of the word “may” provide the debtor a one-time right to convert that is not subject to judicial discretion. NACBA also contends that principles of statutory construction, including a comparison of the use of “may” in Section 706(a) to its use in other sections of the Bankruptcy Code, confirm that the debtor may not be denied a conversion. According to Marrama and NACBA, the legislative history of Section 706(a) reinforces their reading of that section, as the Senate Report states that a debtor has a “one-time absolute right of conversion.” And Marrama and NACBA read the word “absolute” as expressing Congress’s intent that a debtor not be denied his right to convert his case at least once.

Respondent Citizens Bank and its amicus, the United States, counter that bankruptcy courts have inherent authority to sanction bad faith conduct in the litigation process, which includes the ability to deny conversion of a case. They find support for this inherent authority in Supreme Court precedent outside of the bankruptcy context and in the provisions of the Bankruptcy Code, including Section 105(a), which provides that the Code should not be construed to preclude a bankruptcy court from taking appropriate action to “prevent an abuse of process.” Citizens Bank and the United States conclude that because nothing in Section 706(a) affirmatively restricts this inherent power of a bankruptcy court, a court may deny conversion in order to sanction a debtor who has acted in bad faith. Respondent DeGiacomo makes a slightly different claim, arguing that Section 706(a) and its use of the word “may” affirmatively confer on the bankruptcy court the discretion to deny a conversion. The respondents also insist that the legislative history of Section 706(a) does not support an unqualified right to convert. They suggest that the petitioner is interpreting the word “absolute” in the Senate Report too broadly, because a debtor does have to meet certain requirements to convert his case (for example, he must be eligible to be a debtor under another chapter). They also contend that the legislative history implicitly refers only to the rights of an honest debtor.

A pivotal issue in Marrama will be how the Court interprets the word “may” in Section 706(a). An interchange between NACBA and the United States elucidates the heart of this issue. NACBA argues that the “commonsense” interpretation of Section 706(a)’s use of the word “may” is that it gives the debtor permission to convert solely at his discretion. NACBA supports this argument with an everyday example: suppose Jack and Kate are neighbors, and Jack tells Kate: “You may use my rake at any time.” NACBA contends that this use of “may” confers permission on Kate to use the rake solely at her discretion. The United States responds, however, that Jack’s statement would not actually give Kate unlimited discretion to use the rake. The United States points out, for example, that Kate presumably could not grab the rake out of Jack’s hands while he is using it.

The issue explored in this exchange is whether Section 706(a) should be interpreted based on the commonsense meaning of the language in that section, or whether it must be read in a broader context. Marrama and NACBA argue that if one simply reads Section 706(a) in a commonsense way, it is obvious that the debtor’s ability to convert does not hinge on the court’s discretion, just as Kate has permission to use the rake in the above example. But Citizens Bank and the United States respond that bankruptcy courts have inherent authority to prevent a conversion premised in bad faith, just as Jack has inherent authority over his rake. And they argue that the word “may” in § 706(a) does not affirmatively limit that inherent authority, just as Jack’s use of “may” does not limit his inherent authority to use his own rake. Which of these interpretations of the word “may” in Section 706(a) the Court will accept will be an important issue in Marrama, if not the decisive one.