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

No. 05-996 FILED ©

SEPR29 2906

-_— OFF: Pe

ijn Che ICE OF THE CLERK

Supreme Court of the Untled Stales

+

ROBERT LOUIS MARRAMA,

Petitioner,

Vv.

CITIZENS BANK OF MASSACHUSETTS AND

MARK G. DEGIACOMO, CHAPTER 7 TRUSTEE,

Respondents.

+

ON PETITION FOR WRIT OF CERTIORARI

To THE UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

+

BRIEF OF THE NATIONAL ASSOCIATION OF

BANKRUPTCY TRUSTEES AS AMICUS CURIAE

IN SUPPORT OF RESPONDENT,

MARK G. DEGIACOMO, CHAPTER 7 TRUSTEE

+

Lynne F. Riley

Counsel of Record

Maria C. Furlong

ALTMAN RILEY ESHER LLP

100 Franklin Street

Boston, Massachusetts 02110

(617) 399-7300

Counsel for Amicus Curiae

National Association of

Bankruptcy Trustees

THE LEX GROUP®© ¢ 1750 K Street N.W. @ Suite 475 ¢ Washington, DC 20006

(202) 955-0001 @ (800) 815-3791 @ Fax (202) 955-0022 ¢www.thelexgroupdc.com

TABLE OF CONTENTS

Page

TABLE OF CONTENT S.....u20s00.c.sccssccccsessosesnccserseseeneneenenonases i

TABLE OF AUTHORED TIES occcceciscosciccsccorscnsocsssssevstnvensions ili

STATEMENT « OF INTEREST OF THE

NATIONAL ASSOCIATION OF

BANKRUPTCY TRUSTEES AS AMICUS

ARGUMENT

I.

II.

BANKRUPTCY COURTS, BANK-

RUPTCY TRUSTEES, AND CHAPTER 7

DEBTORS ARE ALL DUTY BOUND TO

ENSURE THE INEGRITY OF THE

et omg Senn

SECTION 706(a) OF THE BANKRUPTCY

CODE IS UNAMBIGUOUS AND

AFFORDS DEBTORS ONLY A LIMITED

RIGHT TO CONVERT A CHAPTER 7

BANKRUPTCY CASE TO A CHAPTER

A. The Language of § 706(a) is Clear

on its Face, and Does Not afford

Debtors an Absolute Right to

Convert to Chapter 13............ss:sceesesssees

PT PP PREECE COCO COCOE ECC ORS ECCS ESE REE ESSE EE SEA AAA eee

B. The Legislative History of § 706(a)

as a Whole, Supports Limiting the

Right to Convert to Honest

SIND ciphesidiscsensiibsoninintinabtanllghecpalilcndiiit

Ill. THE BANKRUPTCY CODE DOES NOT

AFFORD ABSOLUTE RIGHTS OR

PRIVILEGES TO DEBTORS WHO ACT

IN BAD FAITH AND ABUSE THE

DAINIIRUE BON SYS TIM coccccsccisinccsccescseseccseceseses

I tenicensinsivinopenessssshidipiiiehantiieeliiiaievinctintiiedntantta

ili

TABLE OF AUTHORITIES

Page(s)

CASES

Alt v. United States (In re Alt),

ee ee Be Ge, BD occa nsecinesitnstoncctctsciesisiinn 26

Boroff v. Tully (In re Tully),

SIS F.2d 106 (24 Cir. 1967) ...cecscscrsccscovesccossosossssoses 5

Cabral v. Shamban (In re Cabral),

285 B.R. 563 (BAP 1% Cir. 2002)......... 18, 19, 22, 26

Chalik v. Moorland (In re Chalik),

748 F.2d 616 (11 Cir. 1984) 0... csessseteeneteeneee 6

Citizens Awareness Network, Inc. v. United States,

re a I cititiccssntrisanseicnteictntizace 13

Copper v. Copper (In re Copper),

426 F.3d 810 (6% Cir. 2005)... seeceseeseesees passim

Cusano v. Klein,

Be te FO Ge, BU ce ttctnticccsctzenssscorccsaiecssies 6

Croston v. Davis, (In re Croston),

313 B.R. 447 (BAP 9® Cir. 2004) ..............sccececceeee 26

Getsey v. Eiler (In re Cohen),

305 B.R. 886 (BAP 9% Cir. 2004) on... ceceeeeeeees 8

iv

Grogan v. Garner,

498 U.S. 279 (1991) ..ccccccccscccccccscsesssee:

Hannigan v. White (In re Hannigan),

409 F.3d 480 (15 Cir. 2005) ..esessssssee

Hartford Underwriters Inc. Co. v.

Union Planters Bank, N.A.,

WUR COME Le

In re Bank Vest Capital Corp.,

360 F.3d 291 (1% Cir.), cert. denied,

542 U.S. 919 (2004) cecccessssssssseeceenese

In re Brown,

293 B.R. 865

(Bankr. W.D. Mich. 2003) ..............

In re Caron,

82 F.3d 7 (15 Cir. 1996) ..cccsccscscssseeee

In re Coastal Cable T.V., Inc.,

709 F.2d 762 (15 Cir. 1983) ........es0e-

In re Carter,

285 B.R. 61 (Bankr. N.D. Ga. 2002)

In re Colvin,

288 B.R. 477 (Bankr. E.D. Mich. 2003) ...........s00. '

In re Copper,

314 B.R. 628 (BAP 6" Cir. 2004), aff'd,

426 F.3d 810 (6t Cir. 2005) ....ccsoooee

In re Finney,

Fe i © OU OR. TT acsenncenesescncccncccescsccccncesee 16

In re Gallagher,

283 B.R. 604 (Bankr. M.D. Fla. 2002)................... 22

In re Hall,

346 B.R. 420 (Bankr. W.D. Ky. 2006)............0:000+ 27

In re Integrated Telecom Express, Inc.,

SB4 FS 108 (Sd Cir. 2006)........c.cscecscsseercesseseorenenes 3

In re Johnson,

262 B.R. 75 (Bankr. E.D. Ark. 2001) ..........:0:00000 22

dn re Karl,

, 313 B.R. 827 (Bankr. W.D. Mo. 20084).................. 24

In re Koss,

319 B.R. 319 (Bankr. D. Mass. 2005) ................... 24

In re Love,

oe ee 26

In re Marcakis,

254 B.R. 77 (Bankr. E.D.N.Y. 2000) ............... 14, 21

In re Matter of Martin,

880 F.2d 857 (S® Cir. 1989).................csesessessesssseee 16

In re Miller,

303 B.R. 471 (BAP 10 Cir. 2008) ...ccccccccsccscsseee 16

vi

In re Nguyen,

ee ee Ge ee icecnctscctaleniesiiiteniins 22

In re Ponzini,

277 B.R. 399 (Bankr. E.D. Ark. 2002) ............ 16, 22

In re Porter,

276 B.R. 32 (Bankr. D. Mass. 2002)................ 22, 25

In re Robinson,

292 B.R. 599 (Bankr. S.D. Ohio 2003) ...............0000 6

In re Rolland,

317 B.R. 402 (Bankr. C.D. Cal. 2004).....5, 6, 15, 23

In re Spencer,

137 B.R. 506 (Bankr. N.D. Okla. 1992)................ 21

In re Starkey,

179 B.R. 687 (Bankr. N.D. Okla. 1995)................ 14

In re Thornton,

203 B.R. 648 (Bankr. S.D. Ohio 1996) .................. 22

In re Wampler,

302 B.R. 601 (Bankr. S. D. Ind. 2003).............0000.. 25

In re Weinstein,

ro g SR Fs ren 17

In re Young,

237 F.3d 1168 (10% Cir. 2001) .......cscssessvsveeeeeeeeee 16

Vii

Job v. Calder (In re Calder),

93 B.R. 734 (Bankr. D. Utah 1988), aff'd,

ee Oe 6

Kestell v. Kestell (In re Kestell),

pe Se rneeee 6

Kowal v. Malkemus (In re Thompson),

965 F.2d 1136 (1% Cir. 1992) .........c.ccccseresscoresceseeee 27

Kuntz v. Shamban (In re Kuntz),

233 B.R. 580 ( BAP 15t Cir. 1999)... .scsecsseseeeeees 21

Laaman v. Warden, New Hampshire State Prison,

Se ete BG, BI rrrinitenenennimnin 13

Ladd v. Ries (In re Ladd),

450 F.3d 751 (8® Cir. 2006).................cssscsssesessssees 15

Latman v. Burdette,

366 F.3d 774 (9% Cir. 2004) .........cccceseesesereeseeeenees 24

Marrama v. Citizens Bank of Mass. And DiGiacomo

(In re Marrama),

430 F.3d 474 (15 Cir. 2005), cert. granted,

me ') Ga, te | | passim

Martin v. Cox,

213 B.R. 571 (E.D. Ark. 1996), aff'd,

116 F.3d 480 (8 Cir. 1997) ooo. ecececcteeseeneee 21-22

Mertz v. Rott,

955 F.2d 596 (8 Cir, 1992) ...cccccccsesessesesssesesesessees 5

Vili

Payne v. Wood,

775 F.2d 202 (7* Cir. 1985), cert. denied,

475 U.S. 1085 (1986) ...ssscssscsscssecscecceseeceseee

Pepper v. Litton,

CE i as

Ryker v. Current (In re Ryker),

301 B.R. 156 (D.N.J. 2003) ...ccccssscsssssssessseeee

Schecter v. Hansen (In re Hansen),

325 B.R. 746 (Bankr. N.D. Ill. 2005)..........

Sullivan v. Sullivan (In re Sullivan),

326 B.R. 204 (BAP 1% Cir. 2005).............006

United States v. Mourad,

289 F.3d 174 (1% Cir. 2002), cert. denied,

eS ae

United States v. Thomas,

342 B.R. 758 (S.D. Tex. 2005) .............:cceee

Wilder v. Inter-Island Stream Nav. Co.,

211 US. 239, 29S. Ct. 53 (1908) .....c.ccceseee

STATUTES

Bankruptcy Abuse Prevention and Consumer

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

eee

Be CG 0 Te retesctresereserpnrencyseniscscnsaninvasestansensngetans .

haoaniees 26

11 USC. BD oencicevninnisicstnintvancontaisinineneinitccevineiusins passim

i ePiaie E sncsnrceresnsianietienamaiensnistnntiananiananitmeaningias 24

Be Weare 1 IEE ssceorivicnnercocintniecscesecsiniiicteinintnitnanalisenia 4,5,6

Be tie Oe SR racaceninscinsensseveinsintiitsindesbperaininiotendianigens 5

Be Pls: pe cictecinssncrscettemnianinieininnitticininiiagtncniaianesn 5

Fe isn ER cnsccsctninctainsnciimncesimspeapinsasaniinipititpiaineediteaninninanad 8

Se ass PTs csinscssosetsiasdisictenmnesnttinloatsiasiciiilaaiammelagniteiitiaiti 7

Bt Tics Ste concteneetnisossnovemnsnccnhiqnnttcntiopsinainigiatatiningiaeapisatta 7

is Fe eccssscisenievnossercntonsetinmsiidiibiedtibiubabitaadipeabiniaivins 8

Be Pn Fh FR ccvcesecerscennsesopentenemnonncateenienennegunriannns 4,7

Fe ieee OF ecretecernniiininsiniceivncesiilcsinginnarieisciniisntioeliin +

Be aa Ip Pa iccerentcnseroprignntsnnentanstaniattisitpeninpiiciataiii 9,15, 21

Oe RAs tp FID ccrcnuniinioriemnansayntntecintisiiniilaabndidil passim

ee ges IF PD civtcsespeecerivisstatnonictuinisnegeieiiiiidasniimbiinniinpes 24

Se es 1 PEEP cncctrnrescrmnictatnisinonsentnadeastniatippeimipabiddediliantl 8

eas OIE vivsenininsmntennentintnnnmeentitesssapiicaliidjihdatnininiibanas 11

et PI scrscysectnivilbonitecindduclscdabaninatagelduussiibanilind ii 11

¢

BE CAB, BD teriicctiasincstnser esneciniititeissseesssieneneneiininiteah 7

I I icctisticniiccckin-niniteadideempitstibaiciint 11, 27

Se iy Ae IE pevsiderncesnculisenanidionhinnsissnmcaiuimgbiabentaiieis 13

BE iss FBP we rirrncnsicscrnncininssncetinstiinneemteneseunenenisonnes 26

Be Chia 0h I cevctesosererrnieciconsninimininiinniomecnccmponmitneies 26, 27

Be CRI. FB ccetcccnsettccsnicinesrnsoreisntnsecsecninesessisienbion 28

TE CRA”. Be Prciccnseencncnrniasensoctensnnestvontmnccsnsstinassasens 27

RULES

re NTT Ee 5

Denk BR I: Fi, Tas sctiiciicnsieciseettniiorinininntinnniiots 15, 23

LEGISLATIVE HISTORY

S. Rep. No. 95-989 (1978),

reprinted in 1978 U.S.C.C.A.N. 5787, 5880...........0++. 9,17

H.R. Rep. No. 95-989 (1977),

reprinted in 1978 U.S.C.C.A.N. 5963, 6336 ......0ecceseeeese 9

HANDBOOKS AND REGULATIONS

Handbook for Chapter 7 Trustees,

US. Dept. of J., Exec. Off. of U.S. Trustee..............0 8,9

IN THE

Supreme Court of the Anited States

ROBERT LOUIS MARRAM/.,

Petitioner,

v.

CITIZENS BANK OF MASSACHUSETTS AND

MARK G. DEGIACOMO, CHAPTER 7 TRUSTEE,

Respondents.

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

STATEMENT OF INTEREST OF THE NATIONAL

ASSOCIATION OF BANKRUPTCY TRUSTEES

AS AMICUS CURIAE

The National Association of Bankruptcy

Trustees (“NABT”) is a non-profit association formed

in 1982 to address the needs of chapter 7 bankruptcy

trustees throughout the country, and to promote the

effectiveness of the bankruptcy system as a whole.!

There are currently 1,200 bankruptcy trustees receiving

new cases, and approximately 1,000 of these chapter 7

panel trustees are NABT members.

‘ Undersigned counsel for NABT authored this brief in its entirety,

and no other person or entity, other than NABT, has made any

monetary contribution to the preparation or submission of this

brief. Consent of all parties to the submission of amicus curiae

briefs has been lodged with the Clerk of the Court.

This appeal addresses the issue of whether a

chapter 7 debtor has an absolute right to convert to a

chapter 13 case, despite factual findings that establish

bad faith and indicate that conversion would result in

an abuse of the bankruptcy process. NABT supports

the Respondent, Chapter 7 Trustee’s position that a

chapter 7 debtor does not have an absolute right to

convert to chapter 13. NABT’s support is important

because this Court's decision will affect the ability of

trustees throughout the country to effectively

administer chapter 7 cases in accordance with their

fiduciary mandates under the Bankruptcy Code.

Trustees are duty bound to assist in detecting

and prosecuting fraudulent or abusive conduct by

debtors. An absolute right to convert from chapter 7 to

chapter 13 enables dishonest debtors to obstruct

trustees from performing their statutory duties.

Accordingly, NABT urges this Court to affirm the

decision of the First Circuit Court of Appeals, holding

that conversion from chapter 7 to chapter 13 should be

denied in circumstances of bad faith and abuse of the

bankruptcy system.

SUMMARY OF ARGUMENT

Chapter 7 trustees, as the fiduciaries responsible

for the administration of all chapter 7 bankruptcy

cases, are charged with preserving and promoting the

system's integrity by, among other things, helping to

detect fraudulent or abusive conduct. Allowing courts

to refuse conversion in circumstances of bad faith

ensures that the integrity of the bankruptcy system is

not compromised.

Furthermore, the legislative policy of

encouraging honest debtors to repay debts in chapter

13 is not constrained by the exercise of judicial

discretion to deny conversion in situations where a

debtor seeks to deploy § 706(a) of the Bankruptcy Code

manipulatively and abusively. Indeed, to allow

dishonest debtors to convert to chapter 13 on the heels

of their own fraud and abuse, emasculates the Code’s

enforcement provisions and defeats the core

bankruptcy principle that the Bankruptcy Code must

not be used to further fraudulent purposes.

ARGUMENT

I. BANKRUPTCY COURTS, BANKRUPTCY

TRUSTEES, AND CHAPTER 7 DEBTORS

ARE ALL DUTY BOUND TO ENSURE THE

INTEGRITY OF THE BANKRUPTCY

SYSTEM.

The First Circuit recognizes a debtor’s general

good faith filing requirement as rooted in the basic

bankruptcy principle that bankruptcy courts must not

be used to further fraudulent purposes. In re Coastal

Cable T.V., Inc., 709 F.2d 762, 764-65 (15 Cir. 1983); see

also In re Integrated Telecom Express, Inc., 384 F.3d. 108,

119 (3d Cir. 2004) (“...good faith requirement ensures

that the Bankruptcy Code... is not undermined by

petitioners whose aims are antithetical to the basic

purposes of bankruptcy.”)

In Coastal Cable, the First Circuit said: “A

bankruptcy court, ‘in the exercise of its equitable

jurisdiction... has the power to sift the circumstances of

4

any claim to see that injustice or unfairness is not done

in the administration of the bankruptcy estate.’” In re

Coastal Cable at 764 (citing Pepper v. Litton, 308 U.S. 295,

304-05 (1939)). In this case, the First Circuit elaborated

further on this fundamental canon of the Bankruptcy

Code, stating that:

a bankruptcy court sitting in equity is

duty bound to take all reasonable steps to

prevent a debtor from abusing or

manipulating the bankruptcy process to

undermine the essential purposes of the

Bankruptcy Code, including the principle

that all the debtor’s assets are to be

gathered and deployed in a bona fide

effort to satisfy valid claims.

Marrama v. Citizens Bank of Mass. and DeGiacomo (In re

Marrama), 430 F.3d 474, 477 (15 Cir. 2005), cert. granted,

__ US. __, 126 S. Ct. 2859 (2006) (“Marrama”).

Under the Bankruptcy Code, chapter 7 trustees

are charged with statutory and general duties intended

to preserve the integrity of the bankruptcy system and

to promote the effective and efficient administration of

bankruptcy cases. Among other things, the chapter 7

trustee is charged with investigating the financial

affairs of the debtor, collecting and reducing to money

the property of the estate and closing the estate as

expeditiously as is compatible with the best interests of

parties in interest. 11 U.S.C. §§ 704(a)(1), (4).

Chapter 7 debtors are also charged with various

duties under § 521 of the Bankruptcy Code, likewise

designed to ensure the system’s integrity and

efficiency. These include the duty to file schedules of

assets and liabilities, schedules of income and

expenses, and a statement of financial affairs. 11 U.S.C.

§ 521(a)(1). Rule 1008 of the Federal Rules of

Bankruptcy Procedure requires that debtors file these

schedules and statements under the pains and

penalties of perjury. Fed. R. Bankr. P. 1008.

A debtor’s statutory mandate to file complete

and truthful schedules and statements ensures the

proper administration of a bankruptcy case, and

compliance is essential to maintaining the underlying

integrity of the bankruptcy process. See Boroff v. Tully

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

Rolland, 317 B.R. 402, 746 (Bankr. C.D. Cal. 2004);

Schecter v. Hansen (In re Hansen), 325 B.R. 746 (Bankr.

N.D. Ill. 2005). Furthermore, debtors are specifically

required by § 521(a)(3) of the Bankruptcy Code to

cooperate with chapter 7 trustees in the administration

of the bankruptcy estate.

Inasmuch as trustees often administer over one

thousand ‘cases each year, they rely on debtors to

perform their § 521 duties without the need to dig for

the truth and conduct independent investigations to

get to the facts. See Mertz v. Rott, 955 F.2d 596, 598 (8

Cir. 1992). As the Seventh Circuit articulated over

twenty years ago: “If debtors could omit assets at will,

with the only penalty that they had to file an amended

claim [or convert] once caught, cheating would be

altogether too attractive.” Payne v. Wood, 775 F.2d 202,

206 (7* Cir. 1985), cert. denied, 475 U.S. 1085 (1986).

Another keystone of the bankruptcy system is

the “fresh start” policy, which affords chapter 7 debtors

who provide full and accurate information and

cooperate with the trustee in the bankruptcy process a

full or partial discharge of their debts. See In re Hansen,

325 B.R. at 757. Debtors are granted this fresh start in

exchange for their “honest and forthright invocation”

of the Bankruptcy Code’s protections. Kestell v. Kestell

(In re Kestell), 99 F.3d 146, 149 (4% Cir. 1994). Hence, as

a condition precedent to invoking the privileges and

protections afforded by bankruptcy, debtors must

abide by their statutory duties under § 521 of the

Bankruptcy ode.

Judicial pronouncements on the importance of

debtors’ utmost compliance with their statutory duties

are plentiful. Id.; see, e.g., In re Colvin, 288 B.R. 477, 479-

81 (Bankr. E.D. Mich. 2003) (citations omitted); In re

Rolland, 317 B.R. 402, 413-414 (Bankr. C.D. Cal. 2004)

(citations omitted); In re Robinson, 292 B.R. 599, 607-08

(Bankr. $.D. Ohio 2003) (citations omitted); Job v. Calder

(In re Calder), 93 B.R. 734, 738 (Bankr. D. Utah 1988),

affd, 907 F.2d 953 (10% Cir. 1990) citing Chalik v.

Moorland (In re Chalik), 748 F.2d 616, 618 (11 Cir. 1984).

As such, good faith reporting is essential to the

administration of chapter 7 cases, and vital to

maintaining the system’s integrity. In re Rolland, 317

B.R. 402 (Bankr. C.D. Cal. 2004); see Cusano v. Klein, 264

F.3d 936, 946 (9% Cir. 2001); In re Kestell, 99 F.3d at 149.

The duties of chapter 7 trustees are numerous,

and unique to their primary role of protecting the

interests of creditors, while at the same time -

shepherding honest debtors through the bankruptcy

process toward the fresh start that many desperately

need. The position advanced by the National

Association of Consumer Bankruptcy Attorneys

(“NACBA”), Amicus Curiae for Petitioner, in comparing

the duties of chapter 7 trustees with chapter 13 trustees,

is unpersuasive. NACBA summarily states that a

chapter 13 trustee would have the “same duties of

financial investigation and protection of estate value”

as a chapter 7 trustee. (Br. of Nat'l Ass’n of Consumer

Bankr. Atty’s at 5). This view does not comport with

the realities of bankruptcy practice.

Section 704(a)(1) of the Bankruptcy Code

provides that a chapter 7 trustee must collect and

reduce to money property of the estate, and close a

case expeditiously. This is not included in § 1302(b) as

a chapter 13 trustee’s duty, because in chapter 13, it is

the debtor, and not the trustee, who controls all

property of the bankruptcy estate. This distinction is

critical, and supports the position that a bankruptcy

court has the power to deny a chapter 7 debtor who

has acted in bad faith the opportunity to convert to

chapter 13 - as conversion would place this dishonest

debtor in full possession and control of the very assets

he intentionally misrepresented or sought to conceal.

Chapter 7 trustees bring myriad recovery

actions for the benefit of the bankruptcy estate,

including preferential transfers pursuant to § 547,?

fraudulent transfers pursuant to § 548,> unauthorized

211 USC. § 547.

311 U.S.C. § 548.

8

postpetition transfers pursuant to § 550,4 and various

other actions utilizing the trustee’s strong arm powers

contained in § 544 of the Bankruptcy Code.° Chapter

13 trustees, while statutorily allowed to bring such

actions, rarely have the incentive, or the means, to do

so.6 Perhaps most importantly, chapter 7 trustees have

the duty and authority to bring an action to deny a

debtor’s discharge pursuant to § 727 for various forms

of fraud and bad faith conduct? - there is no

comparable duty or authority for a chapter 13 trustee.

In the course of executing their duties, chapter 7

trustees are often in the best position to initially

identify fraud, which forms the basis for seeking denial

of a debtor’s discharge pursuant to § 727 of the

Bankruptcy Code. See Handbook for Chapter 7 Trustees,

US. Dept. of J., Exec. Off. of U.S. Trustee, March 2001,

8-44, 8-45; 11 U.S.C. § 727. In doing so, chapter 7

trustees establish practices and procedures for

identifying fraud - often nondisclosure or

undervaluation of assets intentionally concealed or

411 U.S.C. § 550.

311 U.S.C. § 544.

¢ Standing to bring these actions in chapter 13 cases is presently a

matter of some controversy in the courts, with many bankruptcy

and appellate courts acknowledging the practical necessity of

finding that debtors have standing to exercise the avoidance

powers of a trustee, based on the realities of bankruptcy practice

and the chapter 13 trustee's lack of incentive to bring such actions.

See Ryker v. Current (In re Ryker), 301 B.R. 156, 161 (D. N.J. 2003);

see also Getsey v. Eiler (In re Cohen), 305 B.R. 886, 894 (BAP 9% Cir.

2004) (noting limited role of chapter 13 trustee).

711 USC. § 727.

misrepresented by debtors - in furtherance of their

primary duty to act in the best interest of creditors of

the debtor's bankruptcy estate. See Handbook for

Chapter 7 Trustees, 8-44, 8-45.

The investigatory stance of chapter 7 trustees,

coupled with their recovery, avoidance and strong arm

powers enumerated above, are critical compliance and

. enforcement mechanisms under the Bankruptcy Code.

To allow conversion on the heels of an investigation

that uncovers hidden assets and prompts a recovery or

enforcement action by the trustee, undermines and

emasculates the role of the trustee in the Code’s

compliance regime, and thereby renders the system

ineffective.

Petitioner and NACBA unduly emphasize and

place unwarranted significance on certain language in

the legislative history of § 706(a) of the Bankruptcy

Code.’ Their arguments fail to recognize that a debtor

seeking conversion in direct response to a trustee's

investigation and recovery or enforcement action does

not seek conversion for the stated legislative purpose of

repaying creditors. On the contrary, these debtors seek

conversion to avoid the ramifications of their unlawful,

bad faith conduct which prompted action by the

chapter 7 trustee.

® 11 USC. § 706; see S.Rep. No. 95-989 at 94 (1978), reprinted in

1978 U.S.C.A.A.N. 5787, 5880; see also H.R. Rep. No. 95-595, at 380

(1977), reprinted in 1978 US.C.A.A.N. 5963, 6336 (“The policy of

the provision is that the debtor should always be given the

opportunity to repay his debts.)

10

Likewise, it is disingenuous to suggest that

funds that would be recovered by a chapter 7 trustee's

avoidance of a fraudulent transfer would readily be

surrendered by a dishonest debtor for repayment to

creditors in a chapter 13 case. And it is unlikely that a

debtor fleeing from a trustee’s objection to an ill-

claimed exemption in an intentionally undervalued

asset would voluntarily submit that asset to liquidation

and distribution in chapter 13. It is more likely, and

indeed often the case, that the debtor would convert to

chapter 13 but fail to file a plan or otherwise comply

with chapter 13 procedures, and the case would be

dismissed. The debtor could then file another chapter

7 petition at a later date, with a new chapter 7 trustee

appointed, having let a statute of limitations run, or

taken other steps to evade the basis for the original

trustee’s objection.

In the present case, the First Circuit Court of

Appeals conducted its analysis of whether a chapter 7

debtor who engages in bad faith conduct has an

absolute right to convert to chapter 13, in context of a

bankruptcy court’s paramount duty to adhere to the

purposes of the Bankruptcy Code and curb abuse and

manipulation of its provisions by debtors. See Marrama,

430 F.3d at 477 (citing United States v. Mourad, 289 F.3d

174, 178 (1% Cir. 2002), cert. denied, 537 U.S. 933 (2002).

Section 105(a), the Bankruptcy Code’s anti-abuse

provision, enables a bankruptcy court to “issue any

order, process, or judgment that is necessary or

appropriate to carry out the provisions of this title.” 11

US.C. § 105(a). Accordingly, the bankruptcy court is

statutorily vested with broad, discretionary power to

take action or to make any determination it deems

11

necessary or appropriate to prevent abuse of the

bankruptcy process.

Moreover, a bankruptcy court is duty bound to

invoke its equitable powers under § 105 whenever

dishonest debtors act abusively and the integrity of the

bankruptcy system is thereby threatened. This

enforcement mechanism ensures that the bankruptcy

court, as the court of first impression, has the means to

curb abuse of its court and provide all participants in

the bankruptcy system with an honest, stable process.

Accordingly, the First Circuit correctly observed that

the duty of the bankruptcy court to curb abuse under

§ 105(a) “looms large” in an analysis of whether the

language of § 706(a) affords a bankruptcy court the

discretion to deny conversion from chapter 7 to chapter

13 when facing a patently abusive motion to convert.

Marrama, 430 F.3d at 477.

Il. SECTION 706(a) OF THE BANKRUPTCY

CODE IS UNAMBIGUOUS AND AFFORDS

DEBTORS ONLY A LIMITED RIGHT TO

CONVERT A CHAPTER 7 BANKRUPTCY

CASE TO A CHAPTER 13 CASE.

A. The Language of § 706(a) of the

Bankruptcy Code is Clear on its Face,

and Does Not Afford Debtors an

Absolute Right to Convert to Chapter 13.

Sectibn 706(a) of the Bankruptcy Code provides

that a 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. Any waiver of the right

12

to convert a case under this subsection is

unenforceable.” 11 U.S.C. § 706(a).

In this case, the First Circuit Court of Appeals

affirmed the decisions of the Massachusetts

Bankruptcy Court and the Bankruptcy Appellate Panel

for the First Circuit, recognizing that a debtor's right to

convert under § 706(a) of the Bankruptcy Code is

restrained by the bankruptcy court's discretion to deny

conversion in circumstances of bad faith conduct by the

debtor. See Marrama, 430 F.3d at 481. The First Circuit

commenced its analysis of the terms of § 706(a) by

stressing the utmost importance of preserving the core

principle of maintaining the system's integrity, and the

bankruptcy court’s power and duty under § 105(a) to

advance that principle. The Court continued its

analysis, mindful of this paramount preservation

mandate.

It is well-settled that if the plain language of a

statute resolves an interpretive issue, its manifest

meaning must control. See In re BankVest Capital Corp.,

360 F.3d 291, 297 (1st Cir.), cert. denied, 542 US. 919

(2004). Utilizing plain language analysis, the First

Circuit found that the plain meaning of this subsection

resolved the issue before it:

Turning to the particular language

utilized in subsection 706(a), we can

discern no evidence that Congress

intended to override the presumptive

power and _ responsibility of the

bankruptcy court to weed out abuses of

13

the bankruptcy process at any stage in the

bankruptcy proceedings.

Marrama, 430 F.3d at 478.

Courts interpret the meaning of a statute by first

assuming that the words used in the statute comport

with ordinary meaning and accurately express

legislative intent. See Laaman v. Warden, New Hampshire

State Prison, 238 F.3d 14, 16 (1% Cir. 2001). The

language of § 706(a) indicates judicial discretion, and

contains two distinct protections against judicial or

other encroachment upon the debtor's qualified right

to convert. Neither of these stated protections

describes the right to convert as absolute.

Section 706(a) provides that the debtor “may”

convert his case at “any time.” The First Circuit found

the use of the word “may,” which signifies

conditionality, instead of the more imperative term

“shall,” to be a compelling distinction. The Court

noted that the use of the word “shall” in other sections

of the Bankruptcy Code, such as § 1307(b),?

demonstrates that the drafters knew how to use

statutory language that confers little to no discretion on

the bankruptcy court, and chose not to use such

compulsory language in § 706(a). Accordingly, the

Court held that the word “may” indicates the existence

of a privilege, rather than an absolute right, reserving

discretion in the bankruptcy court to deny conversion

in certain circumstances. See Marrama, 430 F.3d at 477-

78 (citing Citizens Awareness Network, Inc. v. United

States, 391 F.3d 338, 346 (1st Cir. 2004)) (“Congress’ use

911 USC. § 1307(b).

14

of differential language in various sections of the same

statute is presumed to be intentional and deserves

interpretive weight.”).

NACBA suggests that the word “may” connotes

discretion, and argues that use of the word in § 706(a)

means that Congress has granted the debtor a

permissive right to convert his chapter 7 case at his

own discretion. (Br. of Nat'l Ass’n of Consumer Bankr.

Atty’s at 8). As the First Circuit aptly points out,

however, “may” often suggests conditionality,

signifying that a debtor might normally succeed in an

attempted conversion, but not necessarily in all

circumstances. Under this reading, “may” still

connotes discretion, but the discretion is held by the

court and not the debtor. This reading of the word

“may” is bolstered by a comparison to other sections of

the Bankruptcy Code that use the word “shall” to

expressly eliminate the bankruptcy court's discretion.

See Marrama, 430 F.3d at 478, see also In re Marcakis, 254

B.R. 77, 82 (Bankr. E.D. N.Y. 2000) (“simply put, ‘shall’

means ‘must,’ something mandatory, and ‘may

connotes the permissive, the possible”).

The First Circuit similarly found that the phrase

“at any time” merely suggests that conversion is not

subject to temporal restrictions. The phrase, by its

ordinary meaning, does not grant debtors broad

permission to convert because “at any time” simply

does not mean “regardless of the circumstances.” See

Marrama, 430 F.3d at 479; see also Copper v. Copper (In re

Copper), 426 F.3d 810 (6% Cir. 2005); In re Starkey, 179

B.R. 687, 692 (Bankr. N.D. Okla. 1995).

15

In correlation, Rule 1009 of the Federal Rules of

Bankruptcy Procedure similarly provides that a debtor

“may” amend a voluntary petition, list, schedule or

statement “at any time” before the case is closed. Fed.

R. Bankr. P. 1009. Judicial interpretation of this same

quoted language in context of a debtor's asserted

“absclute” right to amend exemptions is instructive.

This same language has consistently been interpreted

as allowing courts discretion to deny amendments to

exemptions where the debtor has acted in bad faith by

concealing or undervaluing assets, or where the

debtor’s concealment and delay in seeking amendment

unfairly prejudices creditors. See Ladd v. Ries (in re

Ladd), 450 F.3d 751, 755 (8% Cir. 2006); Hannigan v.

White (In re Hannigan), 409 F.3d 480, 481-82 (1% Cir.

2005); In re Rolland, 317 B.R. 402, 414 (Bankr. C.D. Cal.

2004). These cases further illustrate that bankruptcy

courts are loathe to grant absolute rights and privileges

to debtors who intentionally conceal or undervalue

assets, further supporting the First Circuit's

interpretation of § 706.

The second sentence in § 706(a) provides that

“any waiver of the right to convert is unenforceable.”

The First Circuit correctly interpreted this phrase as a

consumer protection provision against contracts of

adhesion, rejecting the Petitioner's argument that the

language means a debtor cannot be divested of the

right to convert even where the outcome of conversion

is to shield the debtor from his own willful misconduct

and abuse. See Marrama, 430 F.3d at 479.

Therefore, the two explicit protections stated in

§ 706(a) are limited by the language of the section itself.

16

While § 706(a) contains these explicit protections of the

debtor's right to convert, it does not state that the right

is absolute. If Congress intended the debtor's right to

convert to be absolute, the statutory language would so

provide. The First Circuit accordingly found that the

plain language of § 706(a) is consistent with the

bankruptcy court’s presumptive authority to take such

steps as it deems necessary to thwart abuse of the

bankruptcy process, including denial of conversion

from chapter 7 to chapter 13 in instances of bad faith

conduct by the debtor. See Marrama, 430 F.3d at 480.

Most appellate courts reviewing this issue agree

that the language of § 706(a) does not grant debtors an

absolute right to convert. See In re Copper, 426 F.3d 810;

In re Matter of Martin, 880 F.2d 857 (5® Cir. 1989)

(recognizing that the language of § 706(a) seems to

qualify the right to convert with an extreme

circumstances exception); In re Finney, 992 F.2d 43 (4th

Cir. 1993) (declining to rule on whether the right to

convert under § 706(a) is absolute); In re Young, 237

F.3d 1168 (10% Cir. 2001) (declining to discuss the plain

meaning of § 706(a)); see also In re Brown, 239 B.R. 865,

871 (Bankr. W.D. Mich. 2003); In re Ponzini, 277 B.R.

399, 404 (Bankr. E.D. Ark 2002) (“recent rulings on this

issue reveal a large number of courts adopting what

was previously referred to as the minority view”). But

see In re Miller, 303 B.R. 471 (BAP 10" Cir. 2003)

(finding right of conversion to be absolute based on the

statutory language of § 706(a)).

17

B. The Legislative History of § 706(a) as a

Whole, Supports Limiting the Right to

Convert to Honest Debtors.

When the meaning of a statute is clear and

unambiguous on its face, courts must not look beyond

the statute’s text to examine the relevant legislative

history. See In re Weinstein, 272 F.3d 39, 43 (1% Cir.

2001) (citing Hartford Underwriters Ins. Co. v. Union

Planters Bank, N.A., 530 U.S. 1, 6, 10 (2000)). The First

Circuit determined it was nevertheless appropriate to

examine the legislative history in this case, in light of

controversy among the various bankruptcy and

appellate courts in interpreting § 706(a).

The legislative history in support of § 706(a)

describes the debtor’s right to convert as “absolute.”!°

This language is cited and relied upon by Petitioner

and NACBA in their arguments, and is cited in cases

holding that a bankruptcy court lacks the discretion to

deny a debtor’s conversion from chapter 7 to 13. In

response to these arguments, the First Circuit

determined that the term “absolute” cannot be taken

out of context, and that the collective language of §

706(a) and § 105 clearly indicates that conditions exist

that could defeat the debtor’s motion to convert. See

Marrama, 430 F.3d at 480.

The First Circuit reasoned that while the

pronounced policy of § 706(a) is that a debtor always

be given an opportunity to repay his debts, implicit in

this policy is that this opportunity is available only to

honest debtors:

10 See S. Rep. No. 95-989, at 94; see also supra note 2.

18

Nothing in the legislative history

remotely negates nor undermines the

overarching principle that the bankruptcy

courts are duty bound to take all

reasonable steps to preclude debtors from

abusing or manipulating the bankruptcy

process in order to undermine the

essential purposes of the Bankruptcy

Code.

Id.

The First Circuit reviewed the bankruptcy

court’s assessment of the facts for clear error, with

reference to the “totality of circumstances” approach.

Under this approach, a court reviews various factors to

determine whether the particular circumstances are

sufficiently egregious to warrant a finding of bad faith

and denial of conversion to chapter 13. See Marrama,

430 F.3d at 482; see also Sullivan v. Solimani (In re

Sullivan), 326 B.R. 204 (BAP 1st Cir. 2005); see also Cabral

v. Shamban (In re Cabral), 285 B.R. 563 (BAP 1% Cir.

2002).

Factors utilized by some courts in examining the

totality of circumstances in the chapter 7 to 13

conversion context include: (1) the debtor's accuracy in

stating debts and expenses; (2) the debtor’s honesty in

the bankruptcy process, including whether he or she

has attempted to mislead the court or has made

misrepresentations; (3) whether the Bankruptcy Code

is being unfairly manipulated; and (4) the debtor's

motivation in seeking chapter 13 relief. See Marrama,

19

430 F.3d at 482; In re Sullivan, 326 B.R. at 212; see also In

re Cabral, 285 B.R. at 573.

Reviewing the record before it, the First Circuit

upheld the finding of the bankruptcy court that the

Petitioner’s conduct, including his failure to disclose

assets and prepetition'transfers of property on ‘his

schedules, and misrepresentation of the value of

vacation property placed in trust shortly before the

filing of the petition, constituted bad faith.

Accordingly, the Court correctly affirmed that the

bankruptcy court acted within its discretion in denying

the debtor’s motion to convert to chapter 13. See

Marrama at 481-83.

Il. THE BANKRUPTCY CODE DOES NOT

AFFORD ABSOLUTE RIGHTS OR

PRIVILEGES TO DEBTORS WHO ACT IN

BAD FAITH AND ABUSE THE

BANKRUPTCY SYSTEM.

The First Circuit correctly framed the issue in

this case as whether a chapter 7 debtor has an

“absolute” right to convert to chapter 13, and then held

that both the terms of the statute and the policies

contained in the legislative history dictate that a debtor

does not. See Marrama, 430 F.3d at 477. Two weeks

previous, the Sixth Circuit Court of Appeals similarly

held that a chapter 7 debtor’s motion to convert to

chapter 13 could and should be denied in the absence

of the debtor’s good faith. See Copper v. Copper (In re

Copper) 426 F.3d 810, 816 (6% Cir. 2005)(quoting at

length and adopting the position of the Sixth Circuit

20

Bankruptcy Appellate Panel contained in In re Copper,

314 B.R. 628 (BAP 6% Cir. 2004)).

In Copper, the Sixth Circuit Court of Appeals

based its holding on: (1) the similar logic in a court's

ability to dismiss a chapter 13 case as filed in bad faith;

(2) § 706(a)’s use of the word “may” instead of “shall”; —

(3) inconsistencies contained in the legislative history;

and (4) the common sense notion that a bankruptcy

court should have the authority to police the integrity

of its proceedings. See In re Copper, 426 F.3d at 817.

The Copper Court found that legislative history

purporting to suggest a one-time absolute right to

convert cannot be implemented without looking at the

policy behind that right, (as stated in the same

legislative history), which is to give debtors an

opportunity to repay their debts. The Sixth Circuit

observed that where a debtor seeks conversion not for

the opportunity to repay debts, but instead to abuse the

bankruptcy system and thwart attempts to collect

assets, allowing conversion “turns on its head the

policy reason for providing a debtor with such a right.”

See Id. (citing In re Copper, 314 B.R. at 634-47).

Similarly, the First Circuit expressly

acknowledged the general policy that a debtor should

be given a chance to effectuate a chapter 13 plan.

However, it further noted that it is “plainly implicit in

this legislative observation . . . that such an opportunity

is to be accorded only to honest debtors.” See Marrama,

430 F.3d at 480 (emphasis in original).

21

Unfortunately. but in relatively few instances, a

debtor’s motivation in seeking conversion is not to

repay creditors. Rather, it is to utilize § 706(a)

manipulatively, abusively, in bad faith, or under gross

inequities. Therefore, if the impetus for the policy fails

to exist in a particular case, then so should the policy

itself. See In re Spencer, 137 B.R. 506, 512 (Bankr. N.D.

Okla. 1992), citing In re Marcakis, 254 B.R. 77, 81 (Bankr.

E.D. N.Y. 2000); see also Kuntz v. Shambam (In re Kuntz),

233 B.R. 580, 583 (BAP 1% Cir. 1999).

Accordingly, while the legislative history

underscores the importance of giving debtors the

opportunity to repay debts, this opportunity does not

rise to the level of an absolute right or privilege.

Rather, the circuit courts in Copper and Marrama would

restrain a debtor’s right to convert only where denial of

conversion does not offend the policy of § 706. On the

contrary, and out of necessity, in order to advance the

fundamental principle that bankruptcy courts must not

be used to further fraudulent purposes, courts

adhering to the Copper and Marrama reasoning have

barred motions under § 706 only where the motivation

for conversion contravenes basic bankruptcy policy.

As such, cases where conversion has been

denied include instances where debtors: (1) fail to

disclose assets; (2) file inaccurate schedules and

statements, falsify documents, or testify falsely in

bankruptcy proceedings; (3) convert to prevent the sale

of assets or to impact pending litigation; and (4)

otherwise impede the administration of the case and

the liquidation of assets. See, e.g., Martin v. Cox, 213

B.R. 571 (E.D. Ark. 1996), affd, 116 F.3d 480 (8th Cir.

22

1997); In re Cabral, B.R. at 575; In re Brown, 293 B.R. 865

(Bankr. W.D. Mich. 2003); In re Carter, 285 B.R. 61, 65

(Bankr. N.D. Ga. 2002); In re Gallagher, 283 B.R. 604

(Bankr. M.D. Fla. 2002); In re Ponzini, 277 B.R. 399

(Bankr. E.D. Ark 2002); In re Porter, 276'B.R. 32 (Bankr.

D. Mass. 2002); In re Johnson, 262 B.R. 75, 79 (Bankr.

E.D. Ark. 2001); In re Thornton, 203 B. R. 648 (Bankr.

S.D. Ohio 1996). = *

These bad faith conversion cases in all instances

revolve around a dishonest and manipulative debtor

who seeks conversion to escape from the perils he

himself has created. These are not cases involving

honest mistakes or inadvertent omissions by debtors.

Instead, the debtors’ conduct in these cases present

extreme circumstances of fraud or abuse, which rise to

the level of bad faith. Therefore, under the Copper and

Marrama rationale, conversion from chapter 7 to

chapter 13 would only be denied in those rare instances

where a dishonest debtor seeks to abuse and

manipulate the process to further his own fraudulent

purposes.

Case law in other areas where bad faith conduct

by debtors is denounced by bankruptcy courts

demonstrates that denial of conversion is only one of

the ramifications of bad faith conduct. For example,

while exemptions are liberally construed under the

Bankruptcy Code,!! and amendments to schedules are

11 See Wilder v. Inter-Island Stream Nav. Co., 211 US. 239, 29S. Ct. 53

(1908); In re Caron, 82 F.3d 7 (1% Cir. 1996); In re Nguyen, 211 F.3d

105 (4% Cir. 2000).

23

freely allowed,!2 a debtor who intentionally fails to file

accurate schedules and statements and is found to be

acting in bad faith may forfeit assets ordinary protected

by the exemption provisions of the Bankruptcy Code.

See In re Rolland, 317 B.R. 402, 413-14 (Bankr. C.D. Cal.

2004).

To illustrate, the First Circuit recently upheld

the bankruptcy court’s denial of the debtors’

amendment to their schedules seeking to increase the

value of their homestead exemption, as a sanction for

intentionally concealing a 34 acre “back parcel” and

undervaluing their residence (including this back

parcel), on their schedules. See Hannigan v. White (In re

Hannigan), 409 F.3d 480, 483 (1% Cir. 2005). More

remarkable, in In re Rolland, 317 B.R. at 414-16, the

California Bankruptcy Court denied the debtors’

amendment to increase their homestead exemption

where the debtors intentionally undervalued their

residence in their schedules, filed numerous

amendments in response to the trustee’s nine

continued meetings of creditors where discrepancies in

the debtor’s schedules were belatedy revealed, and

then sabotaged the chapter 7 trustee’s efforts to sell the

property by employing such “scorched earth” tactics as

obstructing access to prospective buyers, uprooting

signage, posting home defects and crime statistics, and

presenting an appearance of disorder and neglect.

% Rule 1009 of the Federal Rules of Bankruptcy Procedure

provides that a debtor “may” amend a voluntary petition, list,

schedule or statement “at any time” before the case is closed. Fed.

R. Bankr. P. 1009. See discussion supra under Argument II(A),

noting the same discretionary language in used both § 706(a) of

the Bankruptcy Code and Bankruptcy Rule 1009.

24

Similarly, post-petition bad faith conduct by the

debtor, such as concealment or conversion of estate

assets or failure to turn over property of the estate to

the chapter 7 trustee, may cause a bankruptcy court to

invoke its equitable powers pursuant to § 105(a) and

“surcharge” a debtor’s exempt property. See Latman v.

Burdette, 366 F.3d 774, 786 (9% Cir. 2004); In re Koss, 319

B.R. 319, 323 (Bankr. D. Mass. 2005); In re Karl, 313 B.R.

827, 831 (Bankr. W.D. Mo. 2004). Consistent in all

these cases is the bankruptcy court's refusal to enable

debtors to invoke the Bankruptcy Code in bad faith for

the purpose of manipulating and abusing the

bankruptcy system, while simultaneously enjoying its

benefits and protections.

Under the totality of circumstances approach

articulated in Copper and Marrama, debtors who abide by

the basic bankruptcy principle that courts must not be used

to further fraudulent purposes, and are otherwise

eligible, encounter no difficulty in converting to

chapter 13 in order to repay their debts, as encouraged

by the underlying policy of § 706(a). Indeed, this

category encompasses the vast majority of debtors.

Excluded are only those few unscrupulous, dishonest

debtors who seek to use the bankruptcy process to

thwart and defraud creditors rather than attempt to

repay them to the best of their ability.

For example, in one recent case the bankruptcy

court denied a chapter 7 debtor’s motion to convert to

chapter 13, finding that the motion was not motivated

13 See 11 U.S.C. § 706(d) (to convert under § 706(a) the debtor must

be eligible for relief under chapter 13 as set forth in 11 USC.

§ 109%(e)).

25

by the debtor’s desire to repay debts, but was merely

the debtor's latest attempt to manipulate the

bankruptcy process and avoid the sale of certain real

property by the chapter 7 trustee. See In re Brown, 293

B.R. 865, 871 (Bankr. W.D. Mich. 2003). In the course of

his chapter 7 case, the debtor had undervalued his

property on his schedules, failed to timely pay his

filing fee, repeatedly failed to appear at rescheduled

meetings of creditors, refused to testify when he did

appear, and denied the trustee and prospective

purchasers access to the property despite court orders

compelling him to do so. See id. at 867-68. The debtor

filed a motion to convert to chapter 13 only after the

trustee sought and received permission to sell the

subject property.

The Brown Court refused to apply § 706(a) in a

“restrictive and rigid manner,” finding instead that a

debtor's request to convert should be granted in “all

but the most egregious circumstances.” See In re Brown,

293 B.R. at 869; see also In re Wampler, 302 B.R. 601, 606

(Bankr. S.D. Ind. 2003) (conversion denied on objection

of chapter 7 trustee following debtor’s failure to turn

over funds obtained from recovery of non-exempt

lawsuit); In re Porter, 276 B.R. 32, 37-38 (Bankr. D. Mass.

2002) (conversion denied on objection of chapter 7

trustee following trustee’s discovery of pre-petition

transfer of assets to family members not disclosed in

schedules).

In addition to sanctioning bad faith conduct by

dishonest debtors, allowing bankruptcy courts limited

discretion to deny a debtor’s motion to convert

increases overall coherence of the Bankruptcy Code. A

26

motion to convert a chapter 7 case to chapter 13 under

§ 706(a) amounts to the debtor filing anew in chapter

13. In re Brown, 293 B.R. at 870. It is well settled that a

debtor cannot file a chapter 13 petition in bad faith. As

the First Circuit points out - a bankruptcy court has

“unquestioned authority” to dismiss a chapter 13 case

based upon a showing of a debtor’s bad faith. Marrama

430 F.3d at 479 (citing, inter alia, In re Alt, 305 F.3d 413,

418-19 (6 Cir. 2002); see also In re Love, 957 F.2d 1350,

1354 (7* Cir. 1992); In re Cabral, 285 B.R. at 575. Hence,

“[i]f a chapter 13 petition may be dismissed for lack of

good faith, it is logical to conclude that conversion

from chapter 7 to chapter 13 may also be denied in the

absence of good faith.” In re Brown, 293 B.R. at 870

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

Cir. 2002)).

Even those courts finding an absolute right to-

convert under § 706(a), recognize that once the debtor

has converted to chapter 13, a bankruptcy court may

sua sponte reconvert the debtor’s case to chapter 7 for

lack of good faith. See 11 U.S.C. § 1307(c); Croston v.

Davis (In re Croston), 313 B.R. 447, 453 (BAP 9% Cir.

2004); In re Cabral, 285 B.R. at 572. These cases, while

achieving the proper outcome, do so by acquiescing to

the notion that even dishonest debtors who abuse the

system have a right to become, albeit momentarily,

debtors in possession of the assets they fraudulently

misrepresent or conceal.

The requirement that a chapter 13 petition be

filed in good faith is now explicit in the Bankruptcy

Code, as amended by the Bankruptcy Abuse

Prevention and Consumer Protection Act of 2005

27

(“BAPCPA”). BAPCPA amended § 1325, by adding

subsection (a)(7), providing that plan confirmation is

dependent upon whether “the action of the debtor in

filing the petition was in good faith.” 11 USC. §

1325(a)(7). While the debtor in the instant case is not

subject to the provisions of BAPCPA, today, upon a

finding of bad faith, the debtor would not be eligible

for chapter 13, and therefore would not meet the

express requirements for conversion in § 706(a). See In

re Hall, 346 B.R. 420 (Bankr. W.D. Ky. 2006) (pursuant

to amended Bankruptcy Code, a bankruptcy court can

either dismiss case or deny confirmation of proposed

plan if it finds that the debtor’s petition was filed in

bad faith).

In fact, both the Petitioner and NACBA

acknowledge that a case in which a debtor acts in bad

faith is subject to dismissal or reconversion to chapter 7

pursuant to § 1307 at the bankruptcy court's discretion.

(Br. of Nat’l Ass’n of Consumer Bankr. Atty’s at 18; Br.

of Pet. at 23-24); see 11 U.S.C. § 1307. NACBA suggests

that giving a bankruptcy court similar discretion to

deny conversion would amount to a duplicative

remedy. This is not the case, as the First Circuit Court

of Appeals articulates. First, it hardly promotes

efficient administration or use of judicial resources to

force a court faced with patently bad faith conduct to

allow a conversion, only to reconvert or dismiss that

same case due to precisely the same conduct.

Moreover, these two sections are not duplicative, as

bad faith justifying dismissal of a converted case can

occur post-conversion, as well as pre-conversion. See

Marrama, 430 F.3d at 481; Kowal v. Malkemus (In re

Thompson), 965 F.2d 1136, 1145 (1% Cir. 1992).

28

NACBA further suggests that creditors are

sufficiently protected by the “best interest of creditors’

test,”14 which precludes confirmation unless creditors

receive at least as much as they would in a chapter 7

case, and also by the presence of the chapter 13 trustee.

(Br. of Nat'l Ass’n of Consumer Bankr. Atty’s at 18).

As argued earlier, and contrary to NACBA’s assertions,

the chapter 13 trustee does not exercise the same

powers of financial investigation and oversight as the

chapter 7 trustee. Also, delaying reconversion to

chapter 7 until confirmation wastes the time and

resources of the court and creditors, and does not

address the overarching issues of bad faith and abuse

of the bankruptcy process. This abuse includes the

debtor’s potential inactivity intended to prompt a

dismissal, thereby evading the chapter 7 trustee’s

pursuit of a recovery or enforcement action, and then

awaiting the expiration of a statute of limitations, or

taking other evasive action, before filing another

bankruptcy petition.

While bankruptcy offers a fresh start to those

individuals who genuinely need it, this opportunity

does not include the right to ignore the duties and

obligations inherent in the bankruptcy process. United

States v. Thomas, 342 B.R. 758, 762 (S.D. Tex. 2005).

Both policy and coherence of the Bankruptcy Code

favor the stance that a debtor’s right to convert under §

706(a), while compelling, is not absolute. As shown,

both the language of § 706(a) and its legislative history

substantiates this interpretation. Indeed, the most

fundamental bankruptcy policy itself dictates that there

1411 US.C. § 1325(a)(4).

29

are no absolute rights or privileges afforded to those

who manipulate and abuse the bankruptcy system.

CONCLUSION

The Bankruptcy Code’s_ provision for

discharging debts and providing a fresh start to

debtors is not the equivalent of an absolute right.

Instead, it is a privilege reserved for those honest but

unfortunate debtors who provide candid and complete

disclosures and cooperate within the bankruptcy

system. See In re Hansen, 325 B.R. at 757; see also Grogan

v. Garner, 498 U.S. 279, 287 (1991).

In situations where debtors exhibit bad faith and

disregard their statutory mandate of complete and

accurate disclosures and cooperation with the chapter 7

trustee in the administration of the case, bankruptcy

courts are obligated to restrict privileges and

protections ordinarily available to honest debtors. To

comply with this duty, bankruptcy courts are

empowered under § 706(a) and § 105(a) of the

Bankruptcy Code to take reasonable steps to prevent

such abuse and manipulation of the bankruptcy

process, including the ability to deny conversion from

chapter 7 to chapter 13.

Based on the foregoing, the National Association

of Bankruptcy Trustees, as Amicus Curiae in support of

Respondent, Mark G. DeGiacomo, Chapter 7 Trustee,

respectfully requests that the decision of the First

Circuit Court of Appeals be affirmed.

30

Respectfully submitted,

NATIONAL ASSOCIATION

OF BANKRUPTCY TRUSTEES,

LYNNE F. RILEY

Counsel of Record

MARIA C. FURLONG

ALTMAN RILEY ESHER LLP

100 Franklin Street

Boston, MA 02110

(617) 399-7300