The Now-Limited Rights to Convert from Chapter 7 to 13 & from Chapter 13 to 7: the U.S. Supreme Court's Marrama and the 9th Circuit's Rosson Opinions

Marrama v. Citizens Bank of Massachusetts
127 S.Ct. 1105
Decided February 21, 2007



In a Bulletin on this website in September entitled There's An Absolute Right for a Debtor to Dismiss a Chapter 13 Case, Right? NO, the Ninth Circuit Said on 9/24/08, I summarized the Ninth Circuit opinion Rosson v. Fitzgerald (In re Rosson),---- F. 3d ----, 2008 WL 4330558 (9th Cir 2008), which addressed conversion of a Chapter 13 case to a Chapter 7 one. In that opinion the Ninth Circuit expressly overturned a long-standing Ninth Circuit BAP opinion, based on the authority of the 2007 U.S. Supreme Court Marrama opinion cited above. Marrama dealt with conversion of a Chapter 7 case to Chapter 13, while Rosson dealt with conversion from Chapter 13 to 7. Because of its differences from and broader application than Rosson, and simply because it is one of the relatively rare Supreme Court bankruptcy opinions, Marrama is definitely worth knowing well.

Supreme Court Holding
Marrama involved the right of a debtor to convert a Chapter 7 case to Chapter 13 under § 706(a). The Supreme Court held "that the right to convert to Chapter 13 was impliedly limited by the bankruptcy court’s power to take any action necessary to prevent bad-faith conduct or abuse of the bankruptcy process."

Statute

conflict between a Chapter 13 debtor's right to dismiss his case "at any time" and the bankruptcy court's power to convert the case to a Chapter 7 case "for cause" if it "is in the best interests of creditors and the estate," between § 1307(b) and § 1307(c) of the Bankruptcy Code. This Ninth Circuit Rosson opinion is very important because: 1) this specific question is one of first impression in this Circuit, 2) there is a conflict among other Circuits, 3) this opinion expressly overturned a long-standing Ninth Circuit BAP opinion, 4) the Court let stand the conversion in spite of the bankruptcy court's failure to provide the debtor the required notice and hearing on the matter, and 5) the Opinion provides a vague standard for determining when debtor's have a right to dismiss, but its very vagueness demands that it be understood in order to counsel clients on this issue.

The debtor in Rosson based his argument for the absolute right to dismiss on the well-known 9th Circuit BAP opinion, Beatty v. Traub (In re Beatty), 162 B.R. 853 (B.A.P. 9th Cir. 1994), which had clearly held that "[t]he better reasoned view is that a court must dismiss the case upon the debtor's request for dismissal under section 1307(b) if that request is made prior to the [formal] order converting the case to Chapter 7."

The Ninth Circuit's justification for overturning Beatty is a 2007 U.S. Supreme Court opinion, Marrama v. Citizens Bank of Massachusetts, 127 S.Ct. 1105, although that opinion involved the right of a debtor to convert a Chapter 7 case to Chapter 13 under § 706(a). The Supreme Court held "that the right to convert to Chapter 13 was impliedly limited by the bankruptcy court’s power to take any action necessary to prevent bad-faith conduct or abuse of the bankruptcy process."

But the Ninth Circuit in Rosson glossed over (in a brief footnote) the differences in language between § 1307(b) at issue in Rosson, and § 706(a) at issue in Marrama, especially § 1307(b)'s use of the mandatory "shall" (as in "[u]pon request of the debtor . . . the court shall dismiss a case under [Chapter 13]") and § 706(a)'s use of the permissive "may." The Rosson Court simply said that "[h]ere, the different formulations are not dispositive," without saying why not. This Court ironically hinges its rationale that these two different provisions are analogous on a 9th Circuit BAP opinion, Croston v. Davis (In re Croston), 313 B.R. 447, 450 (B.A.P. 9th Cir. 2004), which came after Beatty and which had EXTENDED the Beatty absolute right to dismiss a Chapter 13 under § 1307(b) to an absolute right to convert to Chapter 13 under § 706(a). In Rosson the Ninth Circuit reasoned that since Marrama had directly overturned Croston, and Croston had relied on Beatty, Marrama had logically invalidated Beatty as well. It held that "although Marrama did not address the exact issue decided in Beatty, it is clear that, after Marrama, Beatty . . . is no longer good law, insofar as it held that a Chapter 13 debtor has an absolute right to dismiss under § 1307(b)."