Marrama, Robert v. Citizens Bank of Massachusetts, et al. (02/21/2007)

Question presented: Whether the right to convert a chapter 7 bankruptcy case to another chapter can be denied notwithstanding the plain language of the statute and its legislative history?

BY SONIA NEZAMZADEH, MEDILL NEWS SERVICE

Robert Marrama first learned about the flooring trade as a teenager. He honed his craft for years and finally built his own business from the ground up.

"It was like a child [for me]," Marrama said. "It's how I supported my family, it's the only thing I ever did."

At the pinnacle of Marrama's 16-year career, his flooring business boomed into a multi-million dollar company, employing about 90 workers.

"It grew so much so fast," Marrama recalled.

But in 2002, his sweet success would take a sharp turn for the worse.

Marrama had a line of credit at Citizens Bank of Massachusetts, which he was asked to pay in full. When he did not, the bank sued him. Marrama had accrued over $800,000 of debt and was forced to file for bankruptcy, which closed the doors of his business.

With no job and no income, Marrama said was advised by a former attorney to file under Chapter 7 – liquidation – meaning he would turn over all non-exempt assets to aee as a way to pay creditors. At that point, he did not have the option to file under Chapter 13 because he was out of a job and didn't have a steady income. However, he was under the impression he could convert once he regained employment, as indicated under Chapter 13.

Chapter 13 allows debtors with a steady income to keep property, like a mortgaged house or a car, that they otherwise might lose. In Chapter 13, the court approves a repayment plan that allows the debtor to pay off during a three-to-five year period, rather than surrender the property. Once payments are complete, debtors who file under Chapter 13 receive a discharge of the debts.

Chapter 7, on the other hand, liquidates all assets that are not exempt. Exempt property may include cars, work-related tools and basic household furnishings. Some of the property may be sold by aee and turned over to creditors. One of the key differences between Chapters 13 and 7 is that through Chapter 7, debtors can only receive a discharge of debts once every six years.

After several months, Marrama began working at his brother's Massachusetts flooring company at an annual salary of $104,000.

At that time, Marrama tried to convert his bankruptcy case from a Chapter 7 to a Chapter 13 case, allowing him to keep his assets and enter a payment plan to repay creditors with future income.

Chapter 13 repayment plans must be approved by the bankruptcy court. But the court denied the conversion, citing bad faith.

"Here I was, able to pay [some of the debt] back, and wanting to pay, and no one would take it," he said.

Trustees accused Marrama of trying to conceal two of his assets when filing under Chapter 7: real estate in York, Maine, valued at $85,000, which Marrama had transferred to his girlfriend's name seven months prior to filing for bankruptcy and an $11,000 tax refund.

But according to Marrama's attorney, David Baker, failing to report those two assets were mistakes for which Baker faults himself.

"We knew about the [real estate] transfer but somehow it didn't get onto the form, but the judge misinterpreted that as trying to conceal the asset," said Baker.

As for the $11,000 tax refund, Marrama claims he didn't know it existed.

"I was being accused of a lot of things. I never lied, I don't lie," he said.

He appealed the bankruptcy court's decision.

In bankruptcy cases, there are two appeals levels: the Bankruptcy Appellate Panel hears the case first. In the Marrama case, the BAP affirmed the ruling, which rejected his attempt at conversion.

From there, the case went onto the 1st Circuit Court of Appeals.

On Oct. 31, 2005, a 1st Circuit Court of Appeals panel unanimously upheld the decision. Writing for the panel, Senior Judge Conrad Cyr concluded that "[section] 706 (a) [of the bankruptcy code] does not grant a debtor an absolute right to convert [from Chapter 7 to Chapter 13]; rather, the right to convert is presumptive and should be granted unless there are extreme circumstances showing that the debtor is abusing the jurisdiction of the bankruptcy court. While there is no specific test for determining "extreme circumstances" that constitute bad faith, one important factor is whether a debtor intentionally attempted to conceal assets from creditors."

"You can't play a game of let's file a [Chapter] 7 and hide these assets in hopes no one will discover them," said Mark DeGiacomo, the bankruptcyee in Marrama's case.

DeGiacomo said most debtors with assets seek relief by converting to Chapter 13 because often their case is assigned to a differentee and they end up having a greater opportunity of getting their cases dismissed, keeping their assets and paying the value of those assets over time.

On June 12, 2006, the U.S. Supreme Court accepted the case for review.

The question the Supreme Court is being asked to address is whether or not debtors, like Marrama, have an absolute right to a conversion from Chapter 7 to another Chapter [13].

Currently, there is discrepancy among the federal circuit courts on this point. The 5th, 9th, and 10th circuits have ruled that the right to convert is absolute. The 1st and the 6th have said it is not.

With the lower courts split on the issue, legal experts predict a heated but necessary debate in the high court.

University of Chicago professor Douglas Baird, a bankruptcy law expert, said the issue presented in the Marrama case comes down to plain language.

"[The case will] pull the Supreme Court in two different directions," said Baird. "[Justice Antonin] Scalia isn't going to be sympathetic with a debtor, but he's a demon about literal interpretation… and the bankruptcy code doesn't say anything explicit about [denying] conversions."

So bankruptcy attorneys are perched to hear from the Supreme Court on whether debtors should always be given the opportunity to repay debt. And what should happen if a debtor is discovered concealing assets in bad faith? Should they, too, be guaranteed that same absolute right?

DeGiacomo said the answer will depend on how the justices interpret the statute in section 706 (a) of the Bankruptcy Code that states: "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."

Trustees argue that the Congressional use of the word may (indicates existence of a privilege, not an absolute right) as opposed to shall (meaning mandatory) brings into question the issues of legislative intent and statutory interpretation.

"Hopefully [the justices] will set the status for courts to go along with," said DeGiacomo. He added that a uniform rule would close the current escape hatch for dishonest debtors.

"They'll know if they file a Chapter 7 and hide assets, they won't be able to switch to [Chapter] 13 ifees find out [they have concealed assets]."

Attorney Lynne Riley who filed a friend-of-the-court brief on behalf of the National Association of Bankruptcy Trustees, calls the issue of an absolute right to conversion one of national importance.

"The policy overlay of the entire [bankruptcy] code is at stake here, which is a lack of bad faith," she said. Furthermore, as indicated in her brief, Riley makes the argument that granting debtors an absolute right to convert would make it harder for "potentially everyee in the country to effectively and expeditiously administer Chapter 7 cases… under the bankruptcy code."

"What matters most of all is that [the issue] gets decided," said Baird. "A large part of the Supreme Court's docket is making sure there is consistency across circuit courts, and once the Supreme Court speaks, it ends it. [We] want clear answers to these questions."

As for Marrama, clear answers would mean finally wrapping up this "roller coaster ride" that he has been on for the past five years.

"I'm bitter, I'm angry and I'm frustrated," he said. "I wouldn't wish this on anyone."

On Feb. 21, 2007, the Court frustrated Marrama one more time, holding by a slim 5-4 majority that he had forfeited his right to proceed under Chapter 13.

The broad description of the right to convert as "absolute" in Senate and House Committee Reports, wrote Justice John Paul Stevens, fails to give full effect to the express limitation of "706(d), which provides that "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."

That text expressly conditioned Marrama's right to convert on his ability to qualify as a Chapter 13 "debtor," the majority concluded.

Justices Samuel Alito, Antonin Scalia, Clarence Thomas and Chief Justice John Roberts dissented.