Marrama v. Citizens Bank of Mass.
Headline: Bankruptcy ruling allows courts to block debtors from switching from Chapter 7 to Chapter 13 when they hid assets, affirming denial of conversion and protecting creditors from abuse.
Holding: The Court held that a bankrupt individual who fraudulently conceals assets may forfeit the statutory right to convert a Chapter 7 case into Chapter 13, and the denial of his conversion was affirmed.
- Allows judges to deny conversion when a debtor fraudulently conceals assets.
- Protects creditors by preventing debtors from regaining control to hide or dissipate property.
- Clarifies that conversion is conditional, not an absolute right for bad-faith filers.
Summary
Background
A man who filed for Chapter 7 bankruptcy listed a Maine house as having no value and denied recent transfers, though he had moved the house into a trust to protect it from creditors. The Chapter 7 trustee said he would recover the house as estate property. The debtor then tried to convert the case to Chapter 13, which lets people keep property while repaying debts. The trustee and the debtor’s main bank objected, saying the conversion was requested in bad faith. A bankruptcy judge denied the conversion, and the appeals panels and court of appeals agreed.
Reasoning
The Justices examined the statute that lets a debtor convert from Chapter 7 to Chapter 13 and a related rule that says conversion can occur only if the person can qualify under the destination chapter. The Court said that a debtor who fraudulently conceals assets can be treated as not qualifying for Chapter 13. The Court explained that protecting a debtor from having to waive conversion is not the same as protecting a debtor from losing the right through misconduct. The judges said bankruptcy courts have the authority to deny conversion when a debtor’s prior fraud would abuse the process.
Real world impact
After this decision, bankruptcy judges can bar conversion to Chapter 13 if a debtor’s prefiling or filing conduct shows serious fraud or concealment. That limits options for people who try to hide assets and gives trustees and creditors more protection. The Court did not adopt a single definition of “bad faith,” saying such denials should be limited to atypical, extraordinary cases.
Dissents or concurrances
A dissent argued the Code plainly grants an unconditional conversion right unless specific statutory limits apply and warned that the Court’s rule overrides Congress’s text and procedures.
Opinions in this case:
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