Converting From a Chapter 7 to a Chapter 13 Is Not an Absolute Right!

Marc P. Barmat
Furr and Cohen, P.A.
One Boca Place, Suite 337 West
2255 Glades RoadBoca Raton, FL 33431
mbarmat@furrcohen.com

Palm Beach County Bar Association Bulletin, April 2007

The United States Supreme Court recently ruled in a 5-4 decision that a Chapter 7 debtor does not have the absolute right to convert his/her bankruptcy case to a case under Chapter 13 of the Bankruptcy Code. Marrama v. Citizens Bank of Massachusetts, et al., — S.Ct –, 2007 WL 517340 (U.S).

In Marrama, the debtor filed a Chapter 7 bankruptcy petition. In his bankruptcy schedules, the debtor, among other things, misrepresented the value of a parcel of real property and failed to disclose the fact that he transferred that parcel of real property within a year of filing his bankruptcy. Upon the bankruptcy trustee’s discovery of the value of the real property, the trustee stated his intention to recover the property as an asset of the bankruptcy estate. Thereafter, the debtor moved to convert the Chapter 7 to a Chapter 13. The trustee and the principal creditor objected to the debtor’s attempted conversion on the basis that the request to convert was in bad faith due to the debtor’s attempt to conceal the real property from his creditors. The bankruptcy judge agreed with the trustee and creditor and denied the debtor’s request to convert. Subsequently, the Bankruptcy Appellate Panel for the First Circuit and the United Sates Supreme Court affirmed the Bankruptcy Court’s decision.

In affirming the Bankruptcy Court’s decision, the Supreme Court found subsections (a) and (d) of 11 U.S.C. § 706 to be most relevant. 11 U.S.C. § 706(a) states that a Chapter 7 debtor “may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at any time, if the case has not been converted under section 1112, 1208, or 1307 of this title.” Section 706(a) further provides that “any waiver of the right to convert a case under this subsection is unenforceable.” Section 706(d) states that “notwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter.”

Relying on the statute’s legislative history, which stated that the provision gave a debtor “the one-time absolute right of conversion,” the debtor contended that 706(a) created an unqualified right of conversion. The Supreme Court, however, found a Senate report’s reference to an absolute right of conversion to be “more equivocal than petitioner suggests.” The Supreme Court stated further that the broad description of the conversion right as “absolute” failed to give full effect to the express limitation in subsection (d), which expressly conditions the debtor’s right to convert on his ability to qualify as a “debtor” under Chapter 13.

The Supreme Court concluded that a debtor who has acted in bad faith does not qualify as a “debtor” under Chapter 13. In support thereof, the Supreme Court cited 11 U.S.C. § 1307(c) which provides that a Chapter 13 proceeding may be either dismissed or converted to a Chapter 7 proceeding “for cause.” The Court explained that “[i]n practical effect, a ruling that an individual’s Chapter 13 case should be dismissed or converted to Chapter 7 because of prepetition bad-faith conduct, including fraudulent acts committed in an earlier Chapter 7 proceeding, is tantamount to a ruling that the individual does not qualify as a debtor under Chapter 13.” Accordingly, the Supreme Court found that “[t]he text of 706(d) therefore provides adequate authority for the denial of the debtor’s motion to convert.”