Cracking the Code, the blog of the American Bankruptcy Institute, reports on In re Marrama, 2005 WL 2840634 (1st Cir., 10/31/05), and In re Copper, 2005 WL 2648960 (6th Cir., 10/18/05), in which the 1st and 6th Circuits held that where the case had not been previously converted, a debtor’s right to convert a case from chapter 7 to chapter 13 under Bankruptcy Code section 706 “is not absolute but is subject to an exception for motions filed in bad faith.”
According to the post’s author, Mark P. Williams, of Norman, Wood, Kendrick & Turner; Birmingham, Alabama:
The Copper court noted a split of authority on the issue with some courts holding that 11 U.S.C. §706 conferred an absolute right to convert from chapter 7 to chapter 13 where the case had not been previously converted and rejected this view holding that a debtor’s right to convert from chapter 7 to chapter 13 is subject to a bad-faith exception. The Copper court found support for this position in its prior ruling that courts may dismiss a chapter 13 petition that is not filed in good faith. The Copper court adopted the conclusions of the appellate panel that the motion to convert was filed to avoid a determination that the debtor was not entitled to a discharge and not by a desire to repay his creditors, and that the motion to convert, therefore, represented an improper attempt to manipulate the Bankruptcy Code.
The Copper court next rejected the debtor’s contention that the plain language of 11 U.S.C. §706 mandates a one-time absolute right to convert. The court ruled that the phrase providing that the debtor may convert “at any time” refers to a time frame and does not mean “regardless of circumstances.” The language protecting the debtor from any waiver of the right to convert was intended to render such waiver provisions in contracts of adhesion unenforceable and does not apply to any impairment of the right due to the debtor’s own misconduct. Lastly, the court noted that if Congress had intended to strip the bankruptcy court of its discretion, it would have used the more mandatory phrase “shall be able to convert” found in 11 U.S.C. §1307(b).
The First Circuit followed a virtually identical rationale in reaching the same result in the Marrama decision.
8/18/06 Update: The US Supreme Court granted the debtor’s petition for certiorari in the Marrama case. Here’s a post discussing the issues raised in the opening briefs of the debtor-petitioner and his amicus, NACBA.
© Steve Jakubowski 2005