The U.S.Supreme Court decided the case of Marrama v. Citizens Bank on February 21, 2007, affirming the decision of the First Circuit Court of Appeals by a 5-4 vote. This case was closely watched by consumer bankruptcy lawyers as it made it way up to the Supreme Court because it addressed an issue which had been subject to conflicting decisions by Courts of Appeals around the country. The Supreme Court held that bankruptcy courts have the authority to deny a debtor the opportunity to convert a case from Chapter 7 to Chapter 13 if the debtor has acted in bad faith before and during the bankruptcy case.
Marrama filed a Chapter 7 bankruptcy case in Massachusetts, but failed to adequately list real estate he owned in Maine. Marrama also tried to fraudulently convey the real estate to a trust prior to filing bankruptcy to protect it from creditors. The Chapter 7 trustee sought to sell the Maine real estate. Marrama's response was to try to convert his case to Chapter 13 in order to retain the property and pay for its value through a Chapter 13 plan. The bankruptcy court denied Marrama's motion to convert his case on the grounds that Marrama had acted in bad faith. The First Circuit court of Appeals affirmed the decision of the bankruptcy court.
Some bankruptcy courts and commentators had argued that a debtor's right to convert a case from one Chapter of the Bankruptcy code to another was absolute, and that a ambiguous "bad faith" standard for denying a conversion was not supported in the Code. The Supreme Court's decision puts that issue to rest. Debtors who try to conceal or fraudulently convey assets before or during a bankruptcy case do so at their peril.