Marrama v. Citizens Bank of Mass.
The Court ruled that a man who hid the value of his Maine property and lied about transferring it could not switch his bankruptcy case from Chapter 7 liquidation to Chapter 13 repayment, because his bad-faith conduct meant he did not qualify as an eligible Chapter 13 debtor.
The decision means bankruptcy judges can shut the door on debtors who try to game the system through fraud or concealment, rather than forcing courts to let the case convert first and sort out the bad faith later.
“A statutory provision protecting a borrower from waiver is not a shield against forfeiture.”
The Court's key distinction between protecting debtors from forced waivers and letting them forfeit rights through bad faith.
How it got here: A bankruptcy judge denied conversion for bad faith; the First Circuit's bankruptcy appellate panel and then the Court of Appeals affirmed, and the Supreme Court agreed to hear the case.
The Case in Depth
What happened
Robert Marrama filed for Chapter 7 bankruptcy but understated the value of his Maine property and falsely denied transferring it to a trust shortly before filing, doing so to shield it from creditors. When the bankruptcy trustee said he intended to recover the property for the estate, Marrama tried to switch his case to Chapter 13, which his trustee and his bank, his main creditor, opposed as an act of bad faith.
The question before the Court
Could a bankruptcy court block a person from switching his bankruptcy case from Chapter 7 to Chapter 13 because he had hidden assets in bad faith?
Why it matters
Bankruptcy judges nationwide gained clear authority to immediately deny a debtor's request to switch from Chapter 7 to Chapter 13 when the debtor has acted in bad faith, instead of having to allow the conversion and only later dismiss or reconvert the case. This protects creditors from debtors using the switch to stall or hide assets, and it resolves a split among lower courts over whether the right to convert was truly absolute.
What changes now
This is a final merits ruling, not a remand for further factfinding on the merits; the lower court's denial of conversion stands, and Marrama's Chapter 7 case proceeds without the option of Chapter 13 relief. Bankruptcy courts going forward can rely on this decision to deny conversion motions immediately in cases of demonstrated prepetition bad faith, rather than allowing conversion and only later dismissing or reconverting the case.
What this does not decide
The Court did not define precisely what conduct counts as bad faith sufficient to block conversion, saying only that it must be atypical and extraordinary. It also did not decide whether Marrama was ineligible for Chapter 13 under the separate debt-limit rules, leaving that question aside.
Concurrences and dissents
Dissent — Justice Alito
“Because the imposition of this condition is inconsistent with the Bankruptcy Code, I respectfully dissent.”Alito's summary of why he would not allow bad faith to block a debtor's conversion right.
Justice Alito argued the bankruptcy code gives Chapter 7 debtors an unqualified right to convert to another chapter twice-limited only by the one-time-use rule and eligibility requirements spelled out elsewhere in the code, and that nothing in the text lets a judge deny conversion simply for bad faith. He would have required the case to convert to Chapter 13 first, with any bad-faith concerns addressed through the code's existing dismissal and reconversion procedures, which provide notice and a hearing. He also warned that the majority's approach discards procedural safeguards Congress built into the reconversion process.
How the Court got there
The legal reasoning, step by step
- The Court read two provisions of the bankruptcy law together: one that lets a Chapter 7 debtor convert to Chapter 13, and another that blocks conversion unless the debtor actually qualifies to be a debtor under the destination chapter.
- Because a separate provision lets a bankruptcy court dismiss or convert a Chapter 13 case 'for cause,' and courts have long treated bad-faith conduct as such a cause, the Court reasoned that a debtor who would immediately face dismissal for bad faith does not truly qualify as a Chapter 13 debtor in the first place.
- The Court rejected the argument that legislative history describing the conversion right as 'absolute' controlled, explaining that this description did not override the statute's own express limitation requiring debtor eligibility.
- The Court distinguished a provision barring creditors from forcing debtors to waive their conversion right, explaining that protection against forced waiver is different from protection against forfeiting the right through one's own bad-faith conduct.
- The Court concluded that bankruptcy judges already have broad statutory power to prevent abuse of the bankruptcy process, and that this power is enough to let a judge deny a conversion motion outright rather than approving it and immediately reversing course.
Doctrinal impact
Cases affected by this decision
Reaffirms Grogan v. Garner (498 U. S. 279)
The Court relied on this case's description of bankruptcy's purpose to protect only 'honest but unfortunate' debtors.