May It Please the Court? The US Supreme Court to Soon Decide Whether a "Bad Faith" Debtor "May" Do as the Bankruptcy Code Pleases

Elementary courtroom etiquette, and indeed an absolute tradition in Supreme Court argument, requires counsel to first address the Court with the customary respectful opening of, "May it please the Court." 

The lone bankruptcy-related case before the US Supreme Court this coming term will resolve a split in the circuits (previously referenced here) regarding whether a chapter 7 debtor has an absolute right to convert under Bankruptcy Code section 706(a) from chapter 7 to chapter 13, or whether that right is subject to an exception for motions filed in "bad faith."  In so doing, the Court will expound upon the precise statutory meaning of "may" in Bankruptcy Code section 706(a) (which provides that a debtor "may convert a [chapter 7] case to a case under chapter 11, 12, or 13 ... at any time").  Marrama v. Citizens Bank of Mass., No. 05-996 (Argument Date:  11/6/06).

Last week, the chapter 7 debtor-petitioner, represented by Boston's David Baker, filed its opening brief (pdf / WL), and the National Association of Consumer Bankruptcy Attorneys (NACBA), led by WilmerHale's Seth Waxman and Craig Goldblatt, chimed in with a supporting amicus brief (pdf / WL).

The case began inauspiciously, as many cases that land in the Supreme Court do, when the debtor-petitioner's flooring business hit the wall in 2003.  Being unemployed, the debtor was ineligible to file for chapter 13 reorganization, and was limited to filing a chapter 7 liquidation.  He subsequently landed a  job, however, and then moved under Code section 706(a) to convert his case to chapter 13.  The bankruptcy court refused to let him do so, finding that the motion was filed in "bad faith."  The bankruptcy appellate panel (pdf/WL) and the First Circuit (pdf/WL) affirmed the bankruptcy court's decision.

As recounted in this prior post, the 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."

In Marrama, the Court will consider whether provisions of the Bankruptcy Code that seemingly provide a debtor with an absolute right to do something should be filtered through yet another lens, one that screens for the absence of "bad faith."  With supposed rampant debtor abuse of the Code's liberal "fresh start" provisions purportedly serving as the primordial mover behind Congressional passage of BAPCPA (though Texas's Judge Frank Monroe explains the real reason here), we'll see whether such an animus also moves the Justices to hold that a debtor must be free of "bad faith" if it is to take advantage of seemingly unrestricted permissive rights granted in the Code.  Stay tuned.

For those interested in the arguments advanced in the opening briefs, you'll find below the table of contents of the briefs filed by both the debtor-petitioner and NACBA:

The Debtor-Petitioner's Arguments

I. The Statutory Scheme of Bankruptcy ... 7

II. Statutory Construction and The Statute at Issue ... 9

III. The Decisions Below ... 11

IV. The Bright-line Rule Created by Congress ... 15

V. The policy underlying the right to convert. ... 19

VI. A debtor's due process rights and conversion ... 23

NACBA's Arguments

I. The Plain Meaning Of Section 706(a) Is That The Debtor Is Entitled To Exercise A One-Time Right Of Conversion Not Subject To Judicial Discretion ... 7

A. The Word "May" In Section 706(a) Permits Conversion By The Debtor Subject Only To Those Limitations Expressly Stated In The Statute ... 8

B. A Comparison Of Section 706(a) With Other Provisions Of The Bankruptcy Code Confirms That The Debtor's Right Of Conversion Is Absolute ... 10

C. According To The Canon Of Expressio Unius, Congress's Express Provision Of Two Exceptions To The Debtor's Absolute Right Of Conversion Indicates The Absence Of Unexpressed Exceptions ... 13

D. Section 105(a) Of The Bankruptcy Code Does Not Support The Court Of Appeals' Reading ... 16

E. The Code's Express Mechanisms For Checking Bad-Faith Proceedings In Chapter 13 Further Imply The Absence Of An Unexpressed Bad-Faith Exception To The Right To Convert ... 18 

II. The Legislative History Of Section 706(a) Confirms That Congress Did Not Intend For The Debtor's Right To Convert To Be Subject To Judicial Discretion ... 20

III. Congress Had Legitimate Policy Reasons For Allowing An Absolute Right Of Conversion Even Under Circumstances Where Prior Bad Faith Has Been Shown ... 23

 

Special thanks to Craig Goldblatt and David Baker for forwarding copies of the filed briefs!

© Steve Jakubowski 2006

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