Amicus Curiae Brief — Marrama v. Citizens Bank of Mass.

FILED

9 SEP 29 2006

L_OFFICE OF THE CLERK _

No. 05-996

In the Supreme Court of the Anited States

ROBERT LOUIS MARRAMA, PETITIONER

v.

CITIZENS BANK OF MASSACHUSETTS, ET AL.

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE SUPPORTING RESPONDENTS

PAUL D. CLEMENT

Solicitor General

Counsel of Record

THOMAS G. HUNGAR

ROBERTA A. DEANGELIS Deputy Solicitor General

Acting General Counsel LIsA S. BLATT

P. MATTHEW SUTKO Assistant to the Solicitor

KNIGHT ELSBERRY General

Attorneys Department of Justice

Executive Office for Washington, D.C. 20530-0001

United States Trustees (202) 514-2217

Washington, D.C. 20530

QUESTION PRESENTED

Whether 11 U.S.C. 706(a) deprives a bankruptcy

court of its inherent power to sanction and deter bad

faith conduct by denying a debtor’s request to convert a

chapter 7 bankruptcy case to chapter 13.

(I)

TABLE OF CONTENTS

Page

Interest of the United States ................0 cc cceeeeees 1

TT ctcbiithies cade nelaehenbendiassekteewiseteee 2

ED oo cc dennnneesceseuenbensenedoeee 7

Argument:

Bankruptcy courts possess inherent power to deny

conversions when sought by bad faith debtors ......... 10

A. — Bankruptcy courts possess the inherent power

B.

to sanction bad faith conduct .................. 10

The text of Section 706(a) does not restrict a

court’s inherent power to deny conversion

when requested by a bad faith debtor .......... 12

A bankruptcy court’s express power to dismiss

a chapter 13 case or convert it to chapter 7 does

not deprive the court of its inherent authority

to deny conversion in the first instance .......... 17

The legislative history of Section 706(a) does

not reveal a congressional intent to displace a

court’s inherent power to deny relief to a bad

DEE i ocutckce tenes ces edaetvedenetnees 23

A bankruptcy court properly exercises its

inherent power when it denies conversion of a

chapter 7 case based on the debtor’s bad faith . .. . 26

ie Cen cd cod cee Cee eeuebebeh Ghee 30

Cases:

TABLE OF AUTHORITIES

Alt v. United States (In re Alt), 305 F.3d 413 (6th Cir.

SEP sbGdnwcedeccccecoscbasbsscoesteeteeccsuced 17

Cases—Continued: Page

Boroff v. Tully (In re Tully), 818 F.2d 106 (1st Cir.

SRD evinces uscdedeeecdesencbbadenueseteseniwen 26

Calder, In re, 93 B.R. 739 (Bankr. D. Utah 1988) ...... 22

Chambers v. NASCO, Inc., 501 U.S. 32 (1991) .... passim

Citizens Bank & Trust Co. v. Case (In re Case),

937 F.2d 1014 (5th Cir. 1991) ......... cece eee eens 12

Copper, In re, 426 F.3d 810 (6th Cir. 2005) ......... 15, 21

DeVille, In re, 361 F.3d 539 (9th Cir. 2004) ........ 11, 12

Eisen v. Curry (In re Eisen), 14 F.3d 469 (9th Cir.

PUG 440d ecdensccbdadbscpnsenagumedadses i lal ath 17

Huckfeldt, In re, 39 F.3d 829 (8th Cir. 1994) ........... 12

Independent Fed’n of Flight Attendants v. Zipes, 491

SA ED ha dance cicdvenddeceecesceclantu 14

Jama v. Immigration & Customs Enforcement,

OE ER Sho rb ddcededictectendisisi na 14

Kontrick v. Ryan, 540 U.S. 443 (2004) ................ 16

Lilley, In re, 91 F.3d 491 (3d Cir. 1996) ............... 17

Link v. Wabash R.R., 370 U.S. 626 (1962) ...... 7, 8, 10, 17

Little, In re, 245 B.R. 351 (Bankr. E.D. Mo. 2000) ...... 26

Local Loan Co. v. Hunt, 292 U.S. 234 (1934) .......... 26

Love, In re, 957 F.2d 1350 (7th Cir. 1992) ............. 17

Mapother & Mapother, PSC v. Cooper (In re

Downs), 108 F.3d 472 (6th Cir. 1996) .............. 12

Marrama v. Citizens Bank (In re Marrama),

445 F.3d 518 (1st Cir. 2006) ................. 7, 29, 30

Cases—Continued: Page

Marrama v. DeGiancomo (In re Marrama), 316 B.R.

418 (BAP. ist Cir. 2004) .........ccceccceccces 6, 29

Martin v. Cox, 212 B.R. 571 (E.D. Ark. 1996), aff'd,

116 F.3d 480 (8th Cir. 1997) ..........2 2 cece eeeeee 21

Martin v. Franklin Capital Corp., 126 S. Ct. 704

SSE Ee eee a ae 14

Molitor v. Edison (Molitor, In re), 76 F.3d 218 (8th

I a Ea i i cee eenbesenes 17

Noll, In re, 172 B.R. 122 (Bankr. M.D. Fla. 1994) ...... 27

Northwest Bank Worthington v. Ahlers, 485 U.S. 197

DE ddotegudagubbadedbstdsessoseedcesscooccess 12

Pearson v. First N.H. Mortgage Corp., 200 F.3d 30

ED (ink tied edna ineaiaonhdovecsorcooes 12

Rimsat, Lid., In re, 212 F.3d 1039 (7th Cir. 2000) ...... 12

Roadway Express, Inc. v. Piper, 447 U.S. 752

i idipedieeediakddsbbddstsonooesencess 7, 10, “

Spencer, In re, 137 B.R. 506 (Bankr. N.D. Okla. 1992) .

Starkey, In re, 179 B.R. 687 (Bankr. N.D. Okla. 1995) .. eo"

Sully, In re, 223 B.R. 582 (Bankr. M.D. Fla. 1998) .. 21, 22

Sunshine Jr. Stores, Inc., In re, 456 F.3d 1291 (11th

ee ea eo seaseadeves 12

System Fed’n No. 91 v. Wright, 364 U.S. 642 (1961) .... 14

United States v. Hudson, 11 U.S. (7 Cranch) 32 (1812) .. 10

Wampler, In re, 302 B.R. 601 (Bankr. S.D. Ind.

ns ide ended peed dodenctcoeees 22, 26

Weinberger v. Romero-Barcelo, 456 U.S. 305

ill ieee ie ieee ele k cceedéaceeseoesoess 11

Case—Continued: Page

Weiss v. First Citizens Bank & Trust Co. (In re

Weiss), 111 F.3d 1159 (4th Cir.), cert. denied,

PEED Scceccccesovetosecuccesecesves 12

Statutes and rules:

Bankruptcy Code, 11 U.S.C. 101 et seg.:

Ch. 1, 11 U.S.C. 101 et seq.:

SEED sanevensoceestine 7, 8, 11, 12, 18, 19

Ch. 3, 11 U.S.C. 301 et seq.:

REE ebctdesecccveddcsescécnnnsdiccoes 2

ST Jd cistccdhinehnbetsseeiewedaseeela 2

SRD doccoccéccccewcceséonccesesesee 22

Ch. 5, 11 U.S.C. 501 et seq.:

SUGMIEET. chi dcdocotedctccésvequcoensneeéues 3

SERIE cadecedcucadsedeccpedoosseowncee 28

ED: ccccccsccoanveoossconcéuncsoues 3

SPL TED. .ccccceeccctseneceeeeneossebens 3

ED. coccvesancésdnndacccsosuseuaes 3

SERED Sédcpdccccccdeccsdccdeccasecesuas 3

PED. cocccceccsscndancececctsseceser 3

SLE. ncncdvasceccecdésnbecoconncasndett 5

Ch. 7, 11 U.S.C. 701 ef seg. ......cceceesecees passim

karen rrr rT TTT 3

OF URE, FED cc ccccccccccvececdacccceveseses 3

SOE CD cccccccesccccadesecoccoeesesece 4

11 US.

11 US.C- d)

11 U.S.C. TOT(a) 2... cece cseccecccccsnecece 3, 28

Vil

Statutes and rules—Continued: Page

SEED cncncodcedeccsndcéucdscdedcccoeds 27

. & S pp En rer rr 3, 27, 30

DART ocstincddcubdanegdseecsaneseus 27, 30

RED cccccccnnoncecsndsessetenses 3, 27

EE «cc nu dccnsaddaeedoneeensianen 7

13 UBC. THD cc ccccccccccccccccccccces 3

ED dd dndadsdccdccdccéccestwicseses 3

Ch. 12, 13 UBC. 19GD Ose 2. ccc ccccccccccccces 2

SOLE ni dccdsaceddeedesaseseqecsenesas 4

RED acc ccéccantenetescessedeeseses 4

Re ED cocdcccccecoeccesccascennsdes 28

Ch. 12, 11 U.S.C. 1201 o€ 90g. ......ccccccccccccceee 2

i oct cndeesebeuoumes 4

SE ED. ndccacassanncnsoccontacacsens 28

Ch. 13, 11 U.S.C. 1301 et seg. .......--- ee eees passim

SRT CED Sev cccesccvcccccccceovccoes 3

SRG IEEE Sic cdbdevegaddedesessocdevesenans 3

BE a SEED cccccocccecccccceccesevesse 3, 22

Re EE dccenecdcetsabavevecesccevenes 4

jt & errr ree passim

ee ED kn cccconcesccccccsccosceces 3

DRED -widdowsenbesneceuntecenseaseses 19

SEED ecncedcncdcovcccesdcsceses 19

DUD ccnccecauesiusenaeeonaeets 22

LD vcvscccudesésaneseetnecses 19

ED cvnnccndconpethasotvesessssese 1

28 U.S.C. 1746

VIII

Statutes and rules—Continued: Page

PPE Sedddnetudsecasnacdincednasceedcteus 18

Bankruptcy Abuse Prevention and Consumer

Protection Act of 2005, Pub. L. No. 109-8, Tit. 1,

IID, eR bde Keidd nie Ned ieee 22

§ 102(g), 119 Stat. 33 (to be codified at 11 U.S.C.

I ici a a a a 22

Fed. R. Bankr. P.:

I iii id a a 3

DED GduGdsinsk deaneneisedeneudiieduaeks 28

CE init dd deh abcbiie nd Recess ae 16

SEE RES PRE Darn ere eee GaN Na FHSS 16

ED oh.ck TE eee da eee ees 16

DD tenigddc ne euaeedkhd iwienddensbatad 16

Fed. R. Civ. P.:

DEE sic abdedasdduvedwetbsawtiisiieamedéaianen 18

DD (édecuntiid deed snambonedonakialadee 17

Miscellaneous:

132 Cong. Rec. 28,610 (1986) ...............0eeeeeeee 11

H.R. Rep. No. 595, 95th Cong., Ist Sess. (1977) ...... 2, 24

S. Rep. No. 989, 95th Cong., 2d Sess. (1978) .... 6,9, 24, 25

US. Dep’t of Justice, United States Trustee Program

Strategic Plan FY 2005-2010 (visited Sept. 28,

2006) <http:/Awww.usdoj.gov/ust/eo/ust_org/

Strategic PlanFY2005-2010.pdf> .................. 2

In the Supreme Court of the United States

No. 05-996

ROBERT LOUIS MARRAMA, PETITIONER

v.

CITIZENS BANK OF MASSACHUSETTS, ET AL.

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE SUPPORTING RESPONDENTS

INTEREST OF THE UNITED STATES

The courts below found that petitioner, a debtor in

bankruptcy, had made false declarations about his as-

sets and financial affairs in furtherance of a scheme to

place his assets beyond the reach of his creditors. Be-

cause of petitioner’s bad faith conduct, the courts below

did not allow petitioner to convert his chapter 7 case to

chapter 13. Whether courts may act to deter and sanc-

tion a debtor’s bad faith conduct in that manner is an

issue of substantial importance to the United States.

The Attorney General appoints United States Trust-

ees to supervise the administration of bankruptcy cases

and trustees in regions comprising the vast majority of

the federal judicial districts. 28 U.S.C. 581-589a.

United States Trustees “serve as bankruptcy watch-

(1)

2

dogs to prevent fraud, dishonesty, and overreaching in

the bankruptcy arena.” H.R. Rep. No. 595, 95th Cong.,

lst Sess. 88 (1977). The United States Trustee Program

thus “acts in the public interest to promote the effi-

ciency and to protect and preserve the integrity of the

bankruptcy system.” U.S. Dep’t of Justice, United

States Trustee Program Strategic Plan FY 2005-2010, at

2 (visited Sept. 28, 2006) <http://www.usdoj.gov/ust/eo/

ust_org/StrategicPlanF Y2005-2010.pdf>. By statute,

“(t]he United States trustee may raise and may appear

and be heard on any issue in any case or proceeding un-

der this Title.” 11 U.S.C. 307.

In addition, the United States is the largest creditor

in the Nation, and numerous federal agencies, including

the Department of Housing and Urban Development,

the Commerce Department’s Economic Development

Administration, the Small Business Administration, the

Internal Revenue Service, and the Federal Deposit In-

surance Corporation, frequently appear as creditors in

chapter 7 proceedings. Because a bankruptcy estate’s

assets are typically scarce, the United States has an in-

terest in preventing and deterring chapter 7 debtors

from concealing assets that should be turned over to

satisfy claims of the United States.

STATEMENT

1. a. A debtor commences a voluntary bankruptcy

case by filing a petition in bankruptcy court. 11 U.S.C.

301. Four chapters—7, 11, 12, and 13—are potentially

available to an individual debtor, and the debtor is re-

quired to elect one by checking the appropriate box on

the petition. Fed. R. Bankr. P. Official Form 1.

Within 15 days after filing the petition, the debtor

must file under penalty of perjury a schedule of assets

3

and liabilities, a schedule of current income and current

expenditures, and a statement of the debtor’s financial

affairs. 11 U.S.C. 521(1); Fed. R. Bankr. P. 1007(c); Of-

ficial Form 6 (Schedules), Form 7 (Statement of Finan-

cial Affairs)).

b. Individual debtors typically file for relief under

chapter 7 or chapter 13. Chapter 7 provides for a liqui-

dation of a debtor’s assets in exchange for a discharge of

debts. 11 U.S.C. 701-727. Commencement of a chapter

7 case creates an “estate” that includes all of the

debtor’s interests in property as of the commencement

of the case. 11 U.S.C. 541(a). The debtor must surren-

der all non-exempt estate property to the chapter 7 trus-

tee, who takes custody of estate property, liquidates it,

and disburses the proceeds to creditors in accordance

with their rights and priorities under the Bankruptcy

Code. 11 U.S.C. 507, 521(3) and (4), 704(1), 726.

A chapter 7 debtor is entitled to a discharge of his

pre-petition debts unless the debtor is ineligible or the

debts are of a type excepted from discharge by the

Code. 11 U.S.C. 523, 727(a) and (b). Courts have the

authority, however, to dismiss a chapter 7 case “for

cause.” 11 U.S.C. 707(a). Similarly, notwithstanding

disbursement of estate assets to creditors, courts may

deny a chapter 7 discharge altogether in specified cir-

cumstances, including when the debtor has committed

acts of concealment or fraud. 11 U.S.C. 727(a)(2)-(6).

Chapter 13 provides for the adjustment of debts of

an individual with regular income. 11 U.S.C. 1301-1330.

In contrast to chapter 7, a chapter 13 debtor remains in

possession of estate assets and receives a discharge of

his debts only after he pays his creditors under a plan

confirmed by the court. 11 U.S.C. 1304, 1306(b), 1821-

1328.

4

c. Debtors may convert their cases from one chapter

to another. 11 U.S.C. 706(a), 1112(a), 1208(a), 1307(a).

As relevant here, Section 706(a) provides that “(t]he

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.” The Code also authorizes a court in a

proceeding under chapter 13 to dismiss the case or con-

vert it to a chapter 7 case “for cause.” 11 U.S.C. 1307(c).

2. On March 11, 2003, petitioner filed a voluntary

bankruptcy petition under chapter 7. In petitioner’s

schedules of assets, petitioner declared, under penalty

of perjury, that (a) his Gloucester, Massachusetts, resi-

dence was the only real property interest he held; (b) he

was the 100% beneficiary of Bo-Mar Realty Trust, a

spendthrift trust that held real property in Maine; (c)

the current market value of his interest in the trust was

zero; and (d) the Internal Revenue Service (IRS) owed

him no tax refunds. Pet. App. 10, 30.

Respondent Mark G. DeGiacomo is the chapter 7

trustee appointed in petitioner’s case. Based on the

trustee’s investigation of petitioner’s financial affairs

(see 11 U.S.C. 704(4)), the trustee concluded that peti-

tioner had failed to disclose two estate assets in his

schedules and statement of financial affairs. First, peti-

tioner had not disclosed that he, within one year before

filing his chapter 7 petition, transferred residential real

estate in York, Maine, having an unencumbered value of

$85,000 to the Bo-Mar Realty Trust for no consideration

and designated himself sole beneficiary and his girl-

friend sole trustee. J.A. 29a-31a; Pet. App. 12, 30. Peti-

tioner’s acknowledged intent in that transaction was to

protect the property from the claims of his creditors.

Id. at 30. Second, petitioner had failed to disclose that

5

in July 2002, he had filed an amended tax return that

sought a tax refund from the IRS. /d. at 26-27, 30; J.A.

30a-3la. The chapter 7 trustee subsequently informed

petitioner that the trustee would seek to avoid the trans-

fer of the Maine property to the trust as a fraudulent

conveyance. Pet. App. 14; J.A. 30a; see 11 U.S.C. 548.

Thereafter, petitioner filed a notice under Section 706(a)

seeking to convert his case to chapter 13. J.A. lla.

The chapter 7 trustee opposed the conversion on the

ground that petitioner had acted in bad faith by inten-

tionally failing to disclose his requested federal tax re-

fund and his transfer of the Maine property to the trust

seven months before his chapter 7 petition. Pet. App.

30-31; J.A. 13a-18a. Respondent Citizens Bank of Mas-

sachusetts, a secured creditor, also opposed conversion

on the ground that the debtor had acted in bad faith.

Pet. App. 13; J.A. 19a-25a. Petitioner responded that his

misstatements and omissions were inadvertent and that

he sought to convert his case to chapter 13 because he

had acquired additional rental income and gainful em-

ployment. Pet. App. 31; J.A. 33a.

3. a. After conducting a hearing on petitioner’s re-

quest to convert, the bankruptcy court denied conver-

sion on the ground that petitioner’s misrepresentation

of his financial affairs constituted “bad faith.” Pet. App.

15, 31; J.A. 34a-35a; Supp. J.A. 33. The Bankruptcy Ap-

pellate Panel of the First Circuit affirmed. Jd. at 9-28.

b. The First Circuit affirmed. Pet. App. 29-46. Af-

ter examining the statutory text of Section 706(a), the

court concluded that it could “discern no evidence that

the Congress intended to override the presumptive

power and responsibility of the bankruptcy court to

weed out abuses of the bankruptcy process at any stage

in the bankruptcy proceedings.” Jd. at 33. The court

6

also rejected (id. at 37-38) petitioner’s reliance on the

Senate Report accompanying Section 706(a), which

states that Section 706(a) gives the debtor “the one-time

absolute right of conversion” and reflects the policy

“that the debtor should always be given the opportunity

to repay his debts.” S. Rep. No. 989, 95th Cong., 2d

Sess. 94 (1978). The court of appeals explained that

those statements, when read in context, did not “ne-

gate[] nor undermine[] the overarching principle that

the bankruptcy courts are duty bound to take all reason-

able steps to preclude debtors from abusing or manipu-

lating the bankruptcy process in order to undermine the

essential purposes of the Bankruptcy Code.” Pet. App.

38.

The court of appeals further observed that “the Code

accords the bankruptcy court discretion to reconvert a

chapter 13 case to chapter 7 * * * where the debtor

bas acted in ‘bad faith.’” Pet. App. 39; see 11 U.S.C.

1307(¢). The court explained that “it would ill serve gen-

eral policies aimed at promoting the efficient adminis-

tration of bankruptcy cases to insist that a bankruptcy

court—already confronted with clear evidence of a

debtor’s bad faith—must indulge in the technical formal-

ity of converting the chapter 7 case to chapter 13, know-

ing full well that eventually the case must be

reconverted by reason of that same evidence of bad

faith.” Pet. App. 39. The court also determined that the

record “amply supported” the bankruptcy court’s find-

ing that petitioner acted in bad faith. Jd. at 41.

c. While petitioner’s appeal of the denial of his con-

version motion was pending, the chapter 7 trustee recov-

ered the Maine property from the trust in order to liqui-

date it for the benefit of petitioner’s creditors. Mar-

rama v. DeGiacomo (In re Marrama), 316 B.R. 418,

7

421-422 (B.A.P. lst Cir. 2004). Furthermore, Citizens

Bank of Massachusetts filed a complaint under 11 U.S.C.

727(a)(2) seeking to deny the debtor a discharge on the

grounds that petitioner had engaged in pre-bankruptcy

transfers to defraud his creditors. The bankruptcy

court granted the denial of a discharge. That order was

affirmed by the court of appeals, which concluded that

petitioner “transferred valuable assets belonging to him,

less than a year before he petitioned for bankruptcy pro-

tection, with the actual intent to defraud his creditors.”

Marrama v. Citizens Bank (In re Marrama), 445 F.3d

518, 524 (1st Cir. 2006).

SUMMARY OF ARGUMENT

A. Courts have the inherent power to respond to a

party’s misconduct in litigation by entering sanctions

such as dismissal of the lawsuit or an award of attor-

ney’s fees. Chambers v. NASCO, Inc., 501 U.S. 32

(1991); Roadway Express, Inc. v. Piper, 447 U.S. 752

(1980); Link v. Wabash R.R., 370 U.S. 626 (1962). Simi-

larly, Congress indicated in Section 105(a) of the Bank-

ruptcy Code that bankruptcy courts may “tak[e] any

action or mak[e] any determination necessary or appro-

priate to enforce or implement court orders or rules, or

to prevent an abuse of process.” 11 U.S.C. 105(a).

B. Nothing in the text of Section 706(a) strips the

bankruptcy court of its inherent authority, reinforced in

Section 105(a), to prevent and deter abuses of the bank-

ruptcy system by denying a debtor relief to which he

would otherwise be entitled. Section 706(a) provides

that the “(t]he 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 previously con-

verted to chapter 7 under another chapter. 11 U.S.C.

8

706(a). The statute does not confer an absolute right,

and nothing in the statutory text even mentions,

much less impairs, the bankruptcy court’s inherent dis-

cretion to deny relief in the face of a debtor’s bad

faith—discretion that is explicitly confirmed in Section

105(a).

C. The bankruptcy court’s inherent power to deny

conversion to chapter 13 is not foreclosed by Section

1307(c), which permits the court to dismiss a chapter 13

case or convert it to chapter 7 for cause (including the

debtor’s bad faith). To the contrary, that provision only

underscores the appropriateness of denying conversion

to chapter 13 in circumstances such as this. Congress’s

express authorization to convert a chapter 13 case into

a chapter 7 liquidation indicates that a denial of rights

under chapter 13 is a proper sanction for fraud. Section

1307(c) cannot be read to preclude a court from address-

ing fraud that is evident before the attempted conver-

sion to chapter 13 or to require a conversion just so that

the case can be reconverted to chapter 7. Under this

Court’s precedents, moreover, statutory and procedural

sanctions generally do not displace a court’s inherent

power. Chambers, 501 U.S. at 42-51; Link, 370 U.S. at

630-632. |

It would make little sense for the bankruptcy court

to convert a case to chapter 13 under Section 706(a)

when the court has already determined that the debtor

has acted in bad faith such that his case should not pro-

ceed under chapter 13. Nor should a bad faith debtor

have a right to convert to chapter 13 so that he may pro-

pose a plan under that chapter. The Code nowhere con-

fers such a right, because Section 1307(c) allows the

court, “for cause,” to dismiss the chapter 13 case or con-

9

vert it to chapter 7 at any time without any prerequisite

that the debtor first be permitted to propose a plan.

D. Section 706(a)’s legislative history does not estab-

lish that Congress intended to displace the bankruptcy

court’s power to sanction bad faith debtors. The Senate

Report to Section 706(a) states that the provision con-

fers on the debtor “the one-time absolute right of con-

version” so that “the debtor should always be given the

opportunity to repay his debts.” S. Rep. No. 989, 95th

Cong., 2d Sess. 94 (1978). The off-hand reference to the

debtor’s “absolute” right may simply be a recognition of

the fact that the right cannot be waived by agreement.

The Report did not address the situation in which the

right to convert has been forfeited by fraud, and it would

be a mistake to assume that Congress intended to immu-

nize fraud on courts and creditors. A Senate Report is

not written and should not be read like legislative text,

and petitioner’s argument shows the hazards of doing so.

In any event, the legislative history, when read in con-

text, reflects an intent to confer rights only on an honest

debtor who intends to “repay his debts.” bid. The stat-

ute’s history thus does not purport to cabin a court’s

inherent power to prevent an abuse of process.

E. A bankruptcy court has the discretion to deny

conversion when the debtor intentionally misleads the

trustee, creditors, or the bankruptcy court as to the

debtor’s financial affairs. A debtor who comes to the

bankruptcy court seeking relief from his debts, but who

in bad faith fails to disclose assets that are to be used to

pay creditors, commits gross misconduct that threatens

both the foundation and the integrity of the bankruptcy

process. Because the bankruptcy court found that peti-

tioner’s misstatements of his financial affairs were

made in bad faith, the court properly denied conversion

10

in order to sanction the debtor and to prevent further

abuse of process.

ARGUMENT

BANKRUPTCY COURTS POSSESS INHERENT POWER

TO DENY CONVERSIONS WHEN SOUGHT BY BAD

FAITH DEBTORS

A. Bankruptcy Courts Possess The Inherent Power To

Sanction Bad Faith Conduct

1. This Court’s precedents have “recognized the

‘well-acknowledged’ inherent power of a court to levy

sanctions in response to abusive litigation practices.”

Roadway Express, Inc. v. Piper, 447 U.S. 752, 765

(1980) (citing Link v. Wabash R.R., 370 U.S. 626, 632

(1962)). “It has long been understood that ‘[cJertain

implied powers must necessarily result to our Courts of

justice from the nature of their institution,’ powers

‘which cannot be dispensed with in a Court, because they

are necessary to the exercise of all others.’” Chambers

v. NASCO, Inc., 501 U.S. 32, 43 (1991) (quoting United

States v. Hudson, 11 U.S. (7 Cranch) 32, 34 (1812)).

“These powers are ‘governed not by rule or statute but

by the control necessarily vested in courts to manage

their own affairs so as to achieve the orderly and expedi-

tious disposition of cases.’” Jbid. (quoting Link, 370

U.S. at 630-631).

“A primary aspect” of a court’s inherent powers is

“the ability to fashion an appropriate sanction for con-

duct which abuses the judicial process.” Chambers, 501

U.S. at 44-45. A court thus confronted with a party’s

bad faith conduct in seeking judicial relief or in litigat-

ing his cause of action has the discretion to respond with

a variety of sanctions. This Court has recognized that

11

“outright dismissal of a law suit * * * is within the

court’s discretion” and that “the ‘less severe sanction’ of

an assessment of attorney’s fees is undoubtedly within

a court’s inherent power as well.” Jd. at 45 (quoting

Roadway Express, Inc., 447 U.S. at 765).

A clear expression of congressional intent is required

to displace a court’s inherent power to sanction bad faith

conduct. Chambers, 501 U.S. at 47. Accordingly, al-

though “the exercise of the inherent power of lower fed-

eral courts can be limited by statute and rule,” this

Court will “not lightly assume that Congress has in-

tended to depart from established principles,’ such as

the scope of a court’s inherent power.” /bid. (quoting

Weinberger v. Romero-Barcelo, 456 U.S. 305, 313

(1982)).

2. The Bankruptcy Code, far from displacing the

inherent powers of courts, expressly recognizes the

bankruptcy court’s authority to sanction litigants for

abusive litigation practices. The Code states that “[n]o

provision of this title providing for the raising of an is-

sue by a party in interest shall be construed to preclude

the court from, sua sponte, taking any action or making

any determination necessary or appropriate to enforce

or implement court orders or rules, or to prevent an

abuse of process.” 11 U.S.C. 105(a) (emphasis added);

see 132 Cong. Rec. 28,610 (1986) (statement of Sen.

Hatch) (Section 105(a) “allows a bankruptcy court to

take any action on its own, or to make any necessary

determination to prevent an abuse of process and to help

expedite a case in a proper and justified manner”).

Thus, it is well established that bankruptcy courts have

12

the power to sanction parties or counsel for bad faith

conduct in bankruptcy proceedings.’ |

To be sure, Section 105(a) does not empower bank-

ruptcy courts to act contrary to other direct commands

of the Code. Cf. Northwest Bank Worthington v.

Ahlers, 485 U.S. 197, 206 (1988) (“whatever equitable

powers remain in the bankruptcy courts must and can

only be exercised within the confines of the Bankruptcy

Code”). But it does expressly caution against reading

provisions allowing a party to raise an issue as confer-

ring an absolute right that would trump a court’s ability

to sanction misconduct. More broadly, Section 105(a)

reflects Congress’s intent not to displace the established

power of courts to impose appropriate orders to prevent

an abuse of process. Thus, absent an express provision

in the Code that limits a court’s inherent power, the

bankruptcy court retains the discretion to impose appro-

priate sanctions in response to a litigant’s bad faith.

B. The Text Of Section 706(a) Does Not Restrict A Court's

Inherent Power To Deny Conversion When Requested

By A Bad Faith Debtor

1. Section 706(a) does not expressly address, much

less limit, a court’s inherent power to sanction bad faith

' See, e.g., Jn re Sunshine Jr. Stores, Inc., 456 F 3d 1291, 1304-1306

(11th Cir. 2006); In re DeVille, 361 F.3d 539, 548-551 (9th Cir. 2004); Jn

re Rimsat, Lid., 212 F.3d 1039, 1046-1049 (7th Cir. 2000); Pearson v.

First N.H. Mortgage Corp., 200 F 3d 30, 42 n.7 (1st Cir. 1999); Weiss v.

First Citizens Bank & Trust Co. (In re Weiss), 111 F.3d 1159, 1171-

1172 (4th Cir.), cert. denied, 522 U.S. 950 (1997); Mapother &

Mapother, PSC v. Cooper (In re Downs), 103 F.3d 472, 477 (6th Cir.

1996); In re Huckfeldt, 39 F.3d 829, 832 (8th Cir. 1994); Citizens Bank

& Trust Co. v. Case (In re Case), 937 F.2d 1014, 1023-1024 (5th Cir.

1991).

13

conduct by denying relief to which the debtor would oth-

erwise be entitled. Section 706(a) provides:

The 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 sec-

tion 1112, 1208, or 1307 of this title. Any waiver of

the right to convert a case under this subsection is

unenforceable.

11 U.S.C. 706(a). As an initial matter, the text is ad-

dressed to the debtor, and does not refer to the court’s

powers at all. By providing that “/t/he debtor may con-

vert” a chapter 7 case to another chapter, Congress indi-

cated its intent that conversion is to be initiated by the

debtor, rather than another party or the court. But the

language does not confer an absolute right on the debtor

and does not direct the court to convert automatically

upon the debtor’s request.

In any event, the statutory text, at most, gives rise to

a presumptive right of the debtor to a one-time conver-

sion; it does not restrict, either expressly or implicitly,

the ability of the court to exercise its inherent power to

respond to abusive tactics or bad faith by the debtor.

Section 706(a) is best understood as giving the right to

raise the issue of conversion, but in keeping with the

approach expressed in Section 105(a), such a provision

should not be read to prevent courts from “taking any

action * * * to prevent an abuse of process.” 11 U.S.C.

105(a). Nor does Section 706(a) purport to confer rights

on bad faith debtors. The statutory language “contains

no intimation that the debtor should be accorded protec-

tion against his own willful misconduct, such as an inten-

tional abuse of the bankruptcy process.” Pet. App. 36.

14

Relying on this Court’s recognition that “[t}he word

‘may’ customarily connotes discretion,” Jama v. Immi-

gration & Customs Enforcement, 543 U.S. 335, 346

(2005), petitioner’s amicus argues that Section 706(a)

vests debtors with unbounded discretion to decide

whether to convert, thereby stripping the court of any

power to deny relief. National Ass’n of Consumer

Bankr. Att’ys (NACBA) Amicus Br. 8-13. The word

“may,” however, does not remotely rise to the level of a

clear indication that Congress intended to restrict a

court’s inherent power to sanction a party’s bad faith

conduct by denying statutory relief to which that party

would otherwise be entitled. While it is no doubt true

that the term “may” suggests discretion, it is equally

true that “in a system of laws discretion is rarely with-

out limits.” Martin v. Franklin Capital Corp., 126 S.

Ct. 704, 710 (2005) (quoting Independent Fed’n of Flight

Attendants v. Zipes, 491 U.S. 754, 758 (1989)); see Sys-

tem Fed’n No. 91 v. Wright, 364 U.S. 642, 648 (1961)

(“discretion is never without limits‘). Considerably

more than the mere recognition of a discretionary right

would be required to demonstrate that Congress

stripped the courts of their inherent authority to deny

relief sought in bad faith.”

? The example proffered by petitioner’s amicus (NACBA Amicus Br.

8) serves only to confirm the implausibility of petitioner’s interpreta-

tion. A neighbor’s statement to another that “You may use my rake at

any time” may well “grant{] the other neighbor permission to use the

rake at the latter’s discretion,” ibid., but it does not confer unlimited

discretion. Surely, for example, the other neighbor is not thereby

authorized to grab the rake unceremoniously out of its owner’s hands

while the latter is raking his yard. Nor is it obvious that the discretion

to borrow the rake would survive an intervening misuse of a borrowed

shovel.

15

For similar reasons, petitioner’s amicus errs in rely-

ing on the fact that Section 706(a) specifies two express

preconditions to conversion—({1) absence of a prior con-

version and (2) eligibility as a debtor, see 11 U.S.C.

706(d)—but does not expressly impose a good faith re-

quirement. NACBA Amicus Br. 13-16. The expressio

unius canon has no application to a requirement that a

litigant refrain from bad faith, because that requirement

is necessarily implicit whenever a party seeks relief

from a court. In other words, because “[aJll courts have

inherent power and duty to prevent abuse of their juris-

diction,” “Congress does not have to add to each and

every statutory su »section and committee comment

thereon the proviso, ‘subject to bad faith.’” In re

Starkey, 179 B.R. 687, 693 (Bankr. N.D. Okla. 1995).

2. The court of appeals also correctly concluded that

Congress’ use of the statutory phrase “at any time” in

Section 706(a) refers to the time frame in which the

debtor may convert; it does not speak to the circum-

stances under which conversion may occur. At most,

that phrase confers an absolute right to convert without

regard to time frame, not an absolute right to convert no

matter what. Thus, “the debtor may seek to convert at

any time during the pendency of the bankruptcy case, or

in other words, * * * no artificial time constraints

should impede an election to convert.” Pet. App. 35.

But that temporal phrase “hardly equates to the more

broad circumstantial permission which Congress could

have conferred, for example, by employing a phrase

such as ‘regardless of the circumstances.’” /bid.; accord

In re Copper, 426 F.3d 810, 816 (6th Cir. 2005).

Likewise, a court’s inherent power to sanction abuse

is not affected by the second sentence of Section 706(a),

16

which provides that “[aJny waiver of the right to convert

a case under this subsection is unenforceable.” 11

U.S.C. 706(a). “{I]n context this sentence functions

strictly as a consumer protection provision against adhe-

sion contracts, whereby a debtor’s creditors might be

precluded from attempting to prescribe a waiver of the

debtor’s right to convert to chapter 13 as a non-negotia-

ble condition of its contractual agreements.” Pet. App.

35. There is a difference between waiver and forfeiture,

see, ¢.g., Kontrick v. Ryap, 540 U.S. 443, 458 n.13 (2004),

and an anti-waiver provision does not necessarily pre-

clude a party from forfeiting a right through affirmative

misconduct or immunize a party from the court’s inher-

ent authority to sanction misconduct.®

* Petitioner also argues (Br. 26) that conversion cannot be denied on

the basis of a debtor’s bad faith because the Bankruptcy Rules do not

specifically require motions to convert under Section 706(a) to be

treated as contested matters under Rule 9014. As the court of appeals

observed, however, the Code contemplates that parties in interest may

contest at least some factual pre-conditions to conversion, such as “the

absence of any prior conversions to chapter 13, and the debtor’s ability

to meet the eligibility requirements to file a chapter 13 petition in the

first instance.” Pet. App. 45. Moreover, the Rules provide that a debtor

requesting conversion under Section 706(a) must seek that relief by

motion. See Fed. R. Bankr. P. 1017(f(2), 9013. The Rules thus also

contemplate that the bankruptcy court will review the matter before

ordering relief. In any event, nothing in Rule 9014(c) addresses, much

less displaces, a court’s inherent power to act, sua sponte or on motion

of a party, in the face of a debtor’s abuse of the bankruptcy process, nor

do the Rules limit the court's ability to hold any hearing that may be

necessary in such instances to resolv 2 contested issues of material fact.

17

C. A Bankruptcy Court’s Express Power To Dismiss A

Chapter 13 Case Or Convert It To Chapter 7 Does Not

Deprive The Court Of Its Inherent Authority To Deny

Conversion In The First Instance ©

1. Section 1307(c) provides that “on request of a

party in interest or the United States trustee and after

notice and a hearing, the court may convert a case under

[chapter 13] to a case under chapter 7 * * * , or may

dismiss a case under (chapter 13], whichever is in the

best interest of creditors and the estate, for cause.” 11

U.S.C. 1307(c). A debtor’s bad faith constitutes cause

under Section 1307(c).* Petitioner and his amicus argue

that because Congress empowers a bankruptcy court to

respond to a debtor’s bad faith by dismissal of the chap-

ter 13 case or by reconversion of the case to chapter 7,

Congress left no room under Section 706(a) for courts to

deny conversion in the first instance even when the

debtor seeks conversion in bad faith or the court is

aware of pre-conversion efforts to defraud the court and

creditors. Pet. Br. 24; NACBA Amicus Br. 18-20. That

contention lacks merit.

The law is clear that “the inherent power of a court

can be invoked even if procedural rules exist which sanc-

tion the same conduct.” Chambers, 501 U.S. at 49.

Thus, in Link, 370 U.S. at 630-632, this Court held that

a court had the inherent authority to dismiss a suit sua

sponte for lack of prosecution notwithstanding the fact

that Federal Rule of Civil Procedure 41(b) appears to

* See, e.g., Altv. United States (In re Alt), 305 F.3d 413, 418-420 (6th

Cir. 2002); Jn re Lilley, 91 F.3d 491, 496 (3d Cir. 1996); Molitor v.

Eidson (In re Molitor), 76 F.3d 218, 220 (8th Cir. 1996); Eisen v. Curry

(In re Eisen), 14 F.3d 469, 470 (9th Cir. 1994); Jn re Love, 957 F.2d

1350, 1354 (7th Cir. 1992).

18

require a motion by a party. Similarly, in Chambers, 501

U.S. at 42-50, the Court held that a court’s inherent

power to impose attorney’s fees as a sanction was not

foreclosed by Federal Rule of Civil Procedure 11 and 28

U.S.C. 1927, which authorize the imposition of attorney’s

fees as a sanction in specified circumstances. The Court

explained that other mechanisms of sanctioning miscon-

duct, either “taken alone or together, are not substitutes

for the inherent power,” and accordingly that federal

courts are not “forbidden to sanction bad-faith conduct

by means of the inherent power simply because that

conduct could also be sanctioned under the statute or

the Rules.” Chambers, 501 U.S. at 46, 50. Thus, “if in

the informed discretion of the court, neither the statute

nor [procedural rules] are up to the task, the court may

safely rely on its inherent power.” /d. at 50.

There is no basis for limiting the court’s inherent

discretion to enter sanctions at the earliest appropriate

opportunity, ze., by denying conversion in the first in-

stance. “[{I]t would ill serve general policies aimed at

promoting the efficient administration of bankruptcy

cases to insist that a bankruptcy court—already con-

fronted with clear evidence of a debtor’s bad

faith—must indulge in the technical formality of con-

verting the chapter 7 case to chapter 13, knowing full

well that eventually the case must be reconverted by

reason of that same evidence of bad faith.” Pet. App. 39.

As the court of appeals of appeals observed, the Code

does not require “such pointless spinning of judicial

wheels.” Jbid. Inceed, far from undermining the au-

thority to deny conversion as a sanction for bad faith,

Section 1307(c) underscores the appropriateness of re-

quiring chapter 7 liquidation as a sanction. The fact that

19

Congress expressly contemplated dismissal or conver-

sion of chapter 13 proceedings as a sanction for bad faith

conduct should not preclude a court hearing a chapter 7

case from imposing a like sanction for bad faith that pre-

cedes an effort to convert to chapter 13.

2. Petitioner and his amicus contend that forcing a

court to grant a debtor’s motion to convert, even in the

face of fraud on the court or other egregious misconduct

by the debtor, would serve the purpose of giving the

debtor an opportunity to propose a repayment plan un-

der 11 U.S.C. 1322. Pet. Br. 22-26; NACBA Amicus Br.

18-20, 23-24. In a similar vein, petitioner’s amicus ob-

serves that the bankruptcy court cannot confirm a chap-

ter 13 plan unless unsecured creditors will receive at

least as much as they would under chapter 7. /d. at 19-

20 (citing 11 U.S.C. 1325(a)(4), 1828(b)(2)). Amicus ar-

gues that those provisions, along with the power of the

chapter 13 trustee to investigate the debtor’s financial

affairs, “provide{] powerful assurance that a debtor can-

not convert a case to chapter 13 in order to evade his

creditors.” Jd. at 19. Those contentions are flawed in

several fundamental respects.

Section 1307(c) contains no requirement that a bank-

ruptcy court must wait for a debtor to propose a repay-

ment plan before the court can exercise its statutory

power to dismiss or reconvert the case to chapter 7 upon

a finding of a debtor’s bad faith. The notion that bank-

ruptcy courts cannot act under Section 1307(c) without

a prior proposal by the debtor of a plan also conflicts

with Section 105(a), which permits a court to raise, on its

own motion, the issue of dismissal or conversion to pre-

vent an abuse of process. 11 U.S.C. 105(a) (“No provi-

sion of this title providing for the raising of an issue by

20

a party in interest shall be construed to preclude the

court from, sua sponte, taking any action or making any

determination necessary or appropriate * * * to pre-

vent an abuse of process.”) (emphasis added).

The bankruptcy court’s dismissal and conversion

power under Section 1307(c), moreover, defeats the sug-

gestion that Congress intended to confer on a bad faith

debtor the right to propose a plan under chapter 13.

And there is “neither a theoretical nor a practical reason

that Congress would have chosen to treat a first-time

motion to convert a chapter 7 case to chapter 13 under

subsection 706(a) differently from the filing of a chapter

13 petition in the first instance.” Pet. App. 36.

Petitioner’s position similarly creates anomalous re-

sults that Congress could not have intended, as it would

accord preferential treatment to bad faith debtors who

initially sought relief under chapter 7, instead of chapter

13. For instance, when confronted with a bad faith

debtor who initially files under chapter 13, a court un-

questionably has the power to dismiss or convert the

case pursuant to Section 1307(c), without waiting for the

debtor to file a plan. By contrast, in petitioner’s view, a

bad faith debtor who initially requests chapter 7 relief

but subsequently seeks to convert to chapter 13 is enti-

tled to file a chapter 13 plan without the possibility of

intervention by the court to prevent an abuse of process,

at least until a plan is filed. Petitioner’s proposal is

wholly implausible; it finds no support in the Code, and

it would frustrate the underlying purpose of the bank-

ruptcy court’s power to sanction bad faith conduct,

namely, to protect the integrity of the bankruptcy sys-

tem and deter similar abuses by other debtors.

21

In any event, there is no guarantee that creditors will

be protected once a bad faith debtor converts his case to

chapter 13. A debtor who has tried to defraud his credi-

tors in chapter 7 may not mend his ways just because his

case converts to chapter 13, particularly because the

chapter 7 trustee will have been replaced by a new chap-

ter 13 trustee (who presumably will have less experience

with the debtor’s past misconduct) and the debtor will

have gained control over the assets of the estate. See,

e.g., 1n re Copper, 426 F.3d at 810-816 (debtor lied about

assets and, on the eve of trial in which divorce-decree

debt would be determined to be non-dischargeable,

moved to convert with no intent to pay ex-wife under

chapter 13); Jn re Sully, 223 B.R. 582, 583-586 (Bankr.

M.D. Fla. 1998) (debtor hid settlement of personal in-

jury action from trustee, and once misconduct was dis-

covered, debtor moved to convert under chapter 13 with

no intent to pay creditors); Martin v. Cox, 213 B.R. 571,

572-574 (E.D. Ark. 1996) (debtor who, inter alia, falsi-

fied documents, failed to list significant assets in peti-

tion, made false representations to bankruptcy court,

and violated a bankruptcy court’s preliminary injunction

order attempted to convert to chapter 13 with no intent

to propose chapter 13 plan), aff’d, 116 F.3d 480 (8th Cir.

1997) (Table). Indeed, it has been the experience of the

United States Trustees that bad faith debtors who con-

vert to chapter 13 on the heels of the chapter 7 trustee’s

discovery of concealed assets often never file a plan.

Requiring a court to respond to a debtor’s bad faith

only after the debtor has proposed a chapter 13 plan

would thus shift to innocent creditors the risk that a

chapter 13 plan will never be proposed or confirmed.

And even if a plan is confirmed, there is no assurance

22

that the debtor, who has already once attempted to de-

fraud his creditors, will make payments under the plan.

Similarly, there is no guarantee that creditors would

be protected while the case languishes in chapter 13 or

even if the case is ultimately converted back to chapter

7. When a chapter 7 case is converted to chapter 13, the

chapter 7 trustee no longer has the power to collect and

liquidate assets or administer the estate for the benefit

of creditors. 11 U.S.C. 348(e). Instead, conversion to

chapter 13 permits the debtor to rega‘n control of all

estate assets. 11 U.S.C. 1306(b). Petitione s proposal

would thus unjustifiably open the door for bad faith

debtors to mishandle or squander their assets in fur-

therance of a scheme to defraud creditors. See, e.g., /n

re Wampler, 302 B.R. 601, 606 (Bankr. S.D. Ind. 2003)

(after trustee learned of debtor’s recovery of class action

settlement, debtor refused to turn over recovery, sought

conversion to chapter 13, and placed a large portion of

the recovery “in a Certificate of Deposit, thereby dimin-

ishing its immediate value due to the penalty for earlier

withdrawal”); In re Sully, 223 B.R. at 585 (“Conversion

would afford the Debtor the use of the settlement funds,

and shift the risk to creditors without any feasible likeli-

hood of repayment.”); Jn re Calder, 93 B.R. 739, 740

(Bankr. D. Utah 1988) (denying conversion to “prevent

the debtor from further abuse of the system”).

Finally, an approach that would require a court to

wait for a chapter 13 plan to be filed before responding

to the debtor’s bad faith is even less justified for cases

governed by the Bankruptcy Abuse Prevention and Con-

sumer Protection Act of 2005, Pub. L. No. 109-8, 119

Stat. 23. For bankruptcy cases filed after October 17,

2005, the bankruptcy court may confirm a chapter 13

23

plan only if “the action of the debtor in filing the petition

was in good faith.” § 102(g)(3), 119 Stat. 33 (to be codi-

fied at 11 U.S.C. 1325(a)(7)). Although petitioner’s case

was filed in 2003, before those changes became effective,

the regime advanced by petitioner and his amicus would

require a bankruptcy court, when confronted with a bad

faith debtor’s request to convert to chapter 13, to con-

vert and give the debtor the opportunity to file a plan

that Congress has categorically determined cannot be

confirmed. Nothing in Section 706(a) requires that bi-

zarre result.

D. The Legislative History Of Section 706(a) Does Not Re-

veal A Congressional Intent To Displace A Court’s In-

herent Power To Deny Relief To A Bad Faith Debtor

Petitioner asserts (Br. 20-23) that the legislative his-

tory of Section 706(a) supports his view that chapter 7

debtors who proceed in bad faith are nonetheless enti-

tled to convert to chapter 13. There is no warrant for

petitioner’s apparent assumption that statements in con-

gressional committee reports could suffice to override

the inherent authority of the federal courts. As dis-

cussed, this Court will not “lightly assume” that Con-

gress has limited or narrowed the scope of the inherent

power. Chambers, 501 U.S. at 47. In any event, peti-

tioner’s interpretation of the legislative history is with-

out merit.

1. The history of Section 706(a) contains no hint that

Congress intended to require conversion when sought

by a debtor acting in bad faith. The Senate Committee

report accompanying Section 706(a) states:

Subsection (a) of this section gives the debtor the

one-time absolute right of conversion of a liquidation

case to a reorganization or individual repayment plan

24

case. If the case has already once been converted

from chapter 11 or 13 to chapter 7, then the debtor

does not have that right. The policy of the provision

is that the debtor should always be given the oppor-

tunity to repay his debts, and a waiver of the right to

convert a case is unenforceable.

S. Rep. No. 989, 95th Cong., 2d Sess. 94 (1978); accord

H.R. Rep. No. 595, 95th Cong., lst Sess. 380 (1977).

Placing emphasis on the words “absolute” and “always”

in that passage, petitioner and his amicus argue that

Congress intended to render bankruptcy courts power-

less to deny a bad faith debtor’s attempt to convert a

chapter 7 case to another chapter. Pet. Br. 19-23;

NACBA Amicus Br. 20-22.

Petitioner and his amicus make the mistake of read-

ing the legislative history as if it were statutory text.

But a Senate Report is not written, and should not be

read, in that fashion. The Senate Report attempts to

explain the operation of Section 706(a), and in doing so

makes an off-hand reference to an “absolute right.”

Whatever the meaning of that phrase were it included in

the operative statutory text, it is clear from context that

the phrase reflects an effort to explain the text’s right to

file a conversion motion free from any time bar, so long

as the case has not previously been converted. That

reading is consistent with the sentencing following the

reference to the debtor’s “one-time absolute right,” as

that sentence makes clear that “[i]f the case has already

once been converted from chapter 11 or 13 to chapter 7,

then the debtor does not have that right.” S. Rep. No.

989, supra, at 94. As the court of appeals observed, the

reference to the debtor’s “absolute” right may also be

25

referring to the fact that “the debtor’s right to conver-

sion cannot be waived by contract.” Pet. App. 37.

Under any reading of the Code, moreover, the Re-

port’s reference to an “absolute” right cannot be under-

stood in the all-encompassing sense urged by petitioner,

because conversion is expressly prohibited—and the

right thus inoperative—when the debtor is not qualified

to be a debtor under the other chapter. 11 U.S.C.

706(d). Nor is it literally true, as petitioner’s reading of

the Report suggests, that debtors “always” have the

opportunity to repay their debts under chapter 13: Sec-

tion 1307(c) permits the court to dismiss or convert a

chapter 13 case for cause, and thus a bad faith debtor

has no right whatsoever to repay his debts under chap-

ter 13.

In any event, Section 706(a)’s legislative history does

not mention, much less purport to remove, a court’s in-

herent power to sanction and deter abuses of the bank-

ruptcy system. There is no suggestion in the quoted

passage above that Congress was addressing a dishon-

est debtor who was trying to defraud his creditors with

no intention of repaying his debts. To the contrary, the

passage is obviously referring to the honest debtor, as

the overarching intent of Section 706(a) is to confer

rights on a debtor who actually intends “to repay his

debts.” S. Rep. No. 989, supra, at 94 (emphasis added).

But “[wJhere conversion to [chapter] 13 amounts to an

attempt to escape debts rather than to repay them, the

reason for the rule ceases.” Jn re Spencer, 137 B.R. 506,

512 (Bankr. N.D. Okla. 1992).

As the court of appeals correctly concluded, “{a] leg-

islative policy aimed at encouraging able debtors to un-

dertake the voluntary repayment of their lawful credit

26

obligations plainly is not served where the bankruptcy

court has determined, as a threshold finding of fact, that

the debtor is utilizing his subsection 706(a) conversion

rights to advance an ongoing scheme to retain his non-

exempt assets from bona fide creditors.” Pet. App. 39;

see In re Wampler, 302 B.R. at 605 (“(T]he statute was

intended to give only the honest debtor an opportunity

to voluntarily repay his debts * * *. Section 706(a) was

not intended as a way for the dishonest debtor to abuse

the bankruptcy process, perpetrate a fraud or engage in

bad faith behavior.”). Section 706(a)’s legislative history

thus provides no support for stripping bankruptcy

courts of their power to prevent an abuse of process or

to sanction and deter bad faith conduct.

E. A Bankruptcy Court Properly Exercises Its Inherent

Power When It Denies Conversion Of A Chapter 7 Case

Based On The Debtor’s Bad Faith

1. A bankruptcy court acts within its discretion in

denying a debtor’s request to convert to another chapter

when the debtor intentionally misrepresents his finan-

cial condition in the bankruptcy proceeding. Such mis-

conduct constitutes an egregious abuse of the bank-

ruptcy system, which has always limited relief to the

“honest but unfortunate” debtor. Local Loan Co. v.

Hunt, 292 U.S. 234, 244-245 (1934) (emphasis added).

“(TJhe successful functioning of the bankruptcy act

hinges both upon the bankrupt’s veracity and his will-

ingness to make a full disclosure” of his assets and fi-

nancial condition. Pet. App. 33 (quoting Boroff v. Tully

(In re Tully), 818 F.2d 106, 110 (1st Cir. 1987)); In re

Little, 245 B.R. 351, 353-354 (Bankr. E.D. Mo. 2000)

(“Perhaps to a greater degree than any other segment

of our justice system, Bankruptcy depends on the integ-

27

rity of the information supplied by its principal partici-

pant, the debtor.”).

The importance of honest and full disclosure of a

debtor’s assets is particularly acute in cases filed under

chapter 7. That chapter generally grants the debtor a

complete discharge of his pre-petition debts. 11 U.S.C.

727. But the Code explicitly conditions such relief on the

debtor’s release to creditors of a/! his pre-petition and

non-exempt assets. 11 U.S.C. 725, 726, 727(a). A debtor

who files under chapter 7 thus has an incentive to try to

conceal assets to obtain the benefit of relief from all of

his debts while shielding assets from the prospect of

liquidation. Such efforts strike at the structural founda-

tion upon which chapter 7 is premised. Accordingly, a

court may properly deny conversion relief to chapter 7

debtors either to prevent further abuse of process or to

sanction and deter similar misconduct.

Petitioner contends that permitting courts to re-

spond to debtor’s bad faith would not be administrable

or provide debtors fair notice of what conduct is permis-

sible because “[w]hat constitutes ‘extreme circum-

stances’ is not ‘capable of pragmatic and mechanical ap-

plication.’” Pet. Br. 17 (quoting Jn re Noll, 172 B.R. 122,

124 (Bankr. M.D. Fla. 1994)). The bankruptcy court’s

power under Section 105(a) to act in the face of abuse of

process, however, puts debtors on clear notice that the

court has discretion to take appropriate action when

confronted with misconduct. Section 105(a) likewise

necessarily recognizes that bankruptcy courts are fully

competent to determine whether a litigant is engaging

in an abuse of process. In any event, petitioner has no

plausible claim that debtors are unaware of their obliga-

tion of complete candor and disclosure in their state-

28

ment of financial affairs and schedule of assets, as those

obligations are expressly set forth in the Code and

Rules. 11 U.S.C. 521; Fed. R. Bankr. P. 1008 (requiring

“(a]ll petitions, lists, schedules, statements and amend-

ments thereto” to be verified or supported by a declara-

tion under penalty of perjury pursuant to 28 U.S.C.

1746).

“Bad faith,” moreover, is a familiar concept in the

law, and bankruptcy courts routinely consider whether

a debtor’s conduct constitutes bad faith in the course of

assessing the existence of “cause” for dismissal or con-

version to chapter 7 under 11 U.S.C. 1307(c). See p. 17

& n.4, supra; see 11 U.S.C. 707(a) (authorizing dismissal

for cause); 11 U.S.C. 1112(b) (authorizing dismissal or

conversion to chapter 7 for cause); 11 U.S.C. 1208(c)

(authorizing dismissa! for cause). Thus, the bankruptcy

courts that have denied conversion relief under Section

706(a) for bad faith have adopted a standard that is sub-

stantially similar to the standard applied in determining

whether a debtor’s bad faith warrants dismissal or con-

version to chapter 7 under Section 1307(c). As the court

of appeals observed, courts generally consider “the to-

tality of the circumstances,” including such factors as

“the accuracy of the debtor’s financial statements,” “any

other attempts by the debtor to mislead the bankruptcy

court or manipulate the bankruptcy process,” and “the

debtor’s motivation in seeking to convert to chapter 13.”

Pet. App. 41.

2. The bankruptcy court here properly exercised its

discretion to deny conversion of petitioner’s case to

chapter 13 because of petitioner’s bad faith in filing his

chapter 7 case. As the court of appeals observed, “[t}he

instant case comports in all material respects with the

29

classic profile of playing fast and loose with the bank-

ruptcy process.” Pet. App. 42. Before filing for bank-

ruptey relief, petitioner transferred valuable property in

an acknowledged attempt to shield it from his creditors,

and he failed to disclose the transfer in filing for bank-

ruptcy. While petitioner was prepared to face liquida-

tion of the estate absent the fraudulently concealed as-

sets, when the trustee discovered the non-disclosure and

initiated steps to reclaim the property for the benefit of

creditors, petitioner sought to convert the case to chap-

ter 13, presumably not only to oust the chapter 7

trustee, but also to retain petitioner’s interest in the

concealed property and shield it from liquidation. /bid.*

In refusing to transfer the case from chapter 7, the

bankruptcy court properly sanctioned the debtor for his

misconduct while preserving the interests of creditors.

Because the case remained in chapter 7, the chapter 7

trustee was able to recover petitioner’s Maine property

and liquidate it for the benefit of creditors. Marrama,

316 B.R. at 421-423. In addition, based upon a finding

that petitioner intended to defraud his creditors, peti-

tioner was denied a discharge of his debts under

* Petitioner challenges the bankruptcy court’s factual finding that he

acted in bad faith and the court's failure to conduct an evidentiary

hearing. Pet. Br. 11, 22,24. Both the bankruptcy appellate panel and

the court of appeals rejected those contentions, Pet. App. 25-27, 41-44,

and the petition did not seek this Court’s review of those factbound

issues. Pet. i. Moreover, as a result of subsequent proceedings in

petitioner's chapter 7 case the court of appeals held that petitioner

“transferred valuable assets belonging to him, less than a year before

he petitioned for bankruptcy protection, with the actual intent to

defraud his creditors.” Marrama v. Citizens Bank (In re Marrama),

445 F.3d 518, 524 (1st Cir. 2006). It does not appear that petitioner

sought further review of that decision, which is now final, so he is

precluded from challenging that factual determination.

30

11 U.S.C. 727. Marrama v. Citizens Bank (In re Mar-

rama), 445 F.3d 518 (1st Cir. 2006).

Denial of a chapter 7 discharge thus enabled peti-

tioner’s creditors to obtain estate assets under 11 U.S.C.

726, as well as to pursue any outstanding claims against

petitioner post-bankruptcy. By contrast, converting the

case to chapter 13 to permit petitioner to propose a plan

would expose petitioner’s creditors to the possibility of

further abuse of the bankruptcy process, and would in-

evitably delay the proper disposition of the case. See pp.

20-22, supra. The bankruptcy court’s denial of conver-

sion to chapter 13 thus protected the rights of peti-

tioner’s innocent creditors and enabled the court to en-

sure the integrity of the bankruptcy process, in keeping

with the core purposes of the court’s inherent authority.

CONCLUSION

The judgment of the court of appeals should be af-

firmed.

Respectfully submitted.

PAUL D. CLEMENT

Solicitor General

THOMAS G. HUNGAR

ROBERTA A. DEANGELIS Deputy Solicitor General

Acting General Counsel LISA 8. BLATT *

P. MATTHEW SUTKO — to the Solicitor

KNIGHT ELSBERRY eneral

Attorneys

Executive Office for

United States Trustees

SEPTEMBER 2006