None Too Pleased With The "Bad Faith" Debtor: US Supreme Court Rules There's No Unqualified Right to Convert from Chapter 7 to Chapter 13

As discussed here, the US Supreme Court last term surprised many by deciding that the "plain meaning" of a bankruptcy statute must be filtered through a prism that, "in the main, secure[s] equal distribution among creditors [and] take[s] into account, as well, the complementary principle that preferential treatment of a class of creditors is in order only when clearly authorized by Congress."

Yesterday, as summarized in this post by Scott Riddle at the Georgia Bankruptcy Blog, the US Supreme Court ruled that provisions of the Bankruptcy Code that seemingly provide a debtor with an absolute right to do something (i.e., convert its case from chapter 7 to chapter 13) should be filtered through a lens that screens for the absence of "bad faith."  Marrama v. Citizens Bank of Massachusetts, No. 05-996 (2/21/07) (pdf/WL) (previewed here).

The decision isn't surprising given bankruptcy's equitable roots and the lack of sympathy one can muster for a "bad faith" debtor like Marrama.  More on the case later, as today I'm delivering the following two presentations for this scheduled event at the Licensing Executive Society Winter 2007 Meeting in San Francisco, and thus have neither the time nor the background briefs and transcripts at hand to provide much more insight into the case:

  • IP Licensing & BankruptcyAn Issue Spotting Checklist for Analyzing Questions Regarding Assumption, Rejection, and/or Assignment of IP Licenses in Bankruptcy

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Those wanting an insightful and controversial early look at the case, be sure to check out Professor Todd Zywicki's lengthy post at the Volokh Conspiracy.

2/27/07 UpdateHere's my follow up post on the Marrama decision, entitled 5-4 US Supreme Court Majority Extends a Bankruptcy Court's Power to Curtail a "Bad Faith" Debtor's Seemingly Absolute Rights Under the Code.

© Steve Jakubowski 2007

Written By:John Majors On February 23, 2007 10:20 AM

As to end results, it really should not matter much. In the W.D.KY, I have seen a judge acknowledge that a debtor may have an absolute right to convert; therefore he converted the debtor's case then, with his next words, ordered the case re-converted to chapter 7, on "bad faith" grounds.

Written By:Debt Consolidation Lansing On February 9, 2010 7:59 PM

This is exactly what I needed, it clarified some opposition I had heard.