US Supreme Court: 05-996

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IN THE SUPREME COURT OF THE UNITED STATES

- - - - - - - - - - - - - - - - - x

ROBERT LOUIS MARRAMA, :

Petitioner :

v. : No. 05-996

CITIZENS BANK OF :

MASSACHUSETTS, ET AL. :

- - - - - - - - - - - - - - - - - x

Washington, D.C.

Monday, November 6, 2006

The above-entitled matter came on for oral

argument before the Supreme Court of the United States

at 10:04 a.m.

APPEARANCES:

DAVID G. BAKER, ESQ., Boston, Mass; on behalf of

the Petitioner.

G. ERIC BRUNSTAD, JR., ESQ., Hartford, Conn; on

behalf of the Respondents.

LISA S. BLATT, ESQ., Assistant to the Solicitor

General, Department of Justice, Washington, D.C.;

on behalf the United States, as amicus curiae,

supporting Respondents.

1Alderson Reporting Company



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C O N T E N T S

ORAL ARGUMENT OF PAGE

DAVID G. BAKER, ESQ.

On behalf of the Petitioner 3

ORAL ARGUMENT OF

G. ERIC BRUNSTAD, JR., ESQ.

On behalf of the Respondents 26

ORAL ARGUMENT OF

LISA S. BLATT, ESQ.

On behalf of the United States, as amicus

curiae, supporting Respondents 45

REBUTTAL ARGUMENT OF

DAVID G. BAKER, ESQ.

On behalf of Petitioner 53




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P R O C E E D I N G S

(10:04 a.m.)

CHIEF JUSTICE ROBERTS: We'll hear argument

first today in Marrama versus Citizens Bank of

Massachusetts. Mr. Baker.

ORAL ARGUMENT OF DAVID G. BAKER

ON BEHALF OF THE PETITIONER

MR. BAKER: Mr. Chief Justice, and may it

please the Court:

Section 706(a) of the Bankruptcy Code

provides that a debtor may convert a case under chapter

7 to a case under any other chapter of the Bankruptcy Code

at any time if the case has not been converted previously

from another chapter, and that any waiver of the right

to convert a case under the subsection is unenforceable.

Other subsections of section 706 give rules for the

Court to decide about conversion in the case where some

party other than the debtor requests conversion of the

case and also provides that the conversion must lead to

a chapter to which that debtor is qualified to be a

debtor.

CHIEF JUSTICE ROBERTS: Mr. Baker, as I

understand it subsequent to the grant of certiorari in

this case, your client filed for relief under Chapter 13

and that relief was denied. You're now seeking under --




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your petition seeks a conversion to Chapter 13 and I

guess I wonder what relief is still open to you.

MR. BAKER: In the present case or the new

case?

CHIEF JUSTICE ROBERTS: What relief is open

to you in this case? In other words, you're trying to

get a conversion to Chapter 13. Subsequently, you've

tried to apply for relief under Chapter 13 and that's

been denied. Why isn't the case moot in the sense that

that relief is not available to you now?

MR. BAKER: The circumstances of the new

case are entirely different. In fact, in that -- in the

present -- the new case, the court decided that he was not

eligible because his debt limit exceeded the statutory

limitations that exist section 109(e). There is a

three-year time span between the two, and we believe

that the existing case is not moot because he still has

remedies that he can obtain in Chapter 13.

JUSTICE GINSBURG: But if he isn't

eligible -- the new case determined that he was not

eligible because his debts were too high. He didn't

incur additional debts between the time of the

proceeding one and proceeding two?

MR. BAKER: Yes, Your Honor, he did.

JUSTICE GINSBURG: Or he didn't reduce the




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debt. If we have a finding from the bankruptcy court

that he is ineligible, that is number one condition

to convert into Chapter 13. If you don't meet that

condition, that's the end of the matter.

MR. BAKER: I wouldn't say it would be the

end of the matter in the present case because the

eligibility was never questioned below, was never a

factor below.

JUSTICE GINSBURG: But now there has been a

finding, and it's an essential finding, that there be

eligibility. And wouldn't the bankruptcy court's

findings in the later case have preclusive effect?

MR. BAKER: In the prior case? I would say

no, Your Honor. First, because as I mentioned, the

issue of eligibility within the monetary limits was

never raised below. And in fact, if you look at his

schedules in the supplemental joint appendix, he is

clearly within the statutory limits based -- just

looking at his schedules.

JUSTICE GINSBURG: But that's a question you

can argue on appeal in -- from the recent decisions, but

for the moment you have a bankruptcy court making that

determination, which I think would be preclusive on

another bankruptcy court.

MR. BAKER: The -- well, the -- the




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bankruptcy court made a decision in the current case,

the new case, but they haven't dismissed it. Dismissal

is in fact on appeal to the District Court for the

District of Massachusetts. The reason is, in our view

is that the bankruptcy court in the new case incorrectly

looked back to the claims that had been filed in the prior

case.

Now, it is a difficult issue in some

respects because there is case law at least in

Massachusetts or the First Circuit that says a debtor

does not have standing to object to claims in a Chapter

7 case. So the fact that a number of claims were

filed and argued doesn't relate to, in a prior case,

does not have a preclusive effect in the new case.

Now we did, in fact, object to quite a

number of claims and the eligibility, and I think that

ultimately once the claim objections are resolved, we

will be within the statutory limits.

JUSTICE GINSBURG: If the decision is

affirmed on appeal to the First Circuit, do you think

you could still argue that there's qualification for

Chapter 13, after the court of appeals has affirmed a

determination that there isn't?

MR. BAKER: I'm -- I don't quite follow the

question. Would you mind restating it?




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JUSTICE GINSBURG: We have now a judgment that

this debtor is ineligible for Chapter 13. If that

judgment is affirmed on appeal to the court of appeals,

can you nonetheless argue that somehow there is no

preclusive effect?

MR. BAKER: Yes, Your Honor, because there's

a three-year difference between the two and

substantially different facts. The -- we have to go

back, I think, to the case that's at bar, because it is

those claims, the claims that were filed in the current

case that are the issue. As I say, we are in the process

of doing objections to those claims and I think that

ultimately we will come within them.

JUSTICE SCALIA: They're not at issue as far

as this mootness question goes. I mean, you're seeking

to have the right to file under 13.

And if, in fact, there's no eligibility to

file under 13, you're asking for the impossible. The

case is simply -- you know -- it's just air. So I

guess, perhaps you rely on the fact that the case is

still on appeal. Should we not take as a given that

there is a judgment that you don't qualify for 13, and

yet you're coming before us asking us to say that you

can apply under Chapter 13. It doesn't make any sense.

MR. BAKER: Well, I would respectfully say --




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suggest that it does, Your Honor, because once -- we don't

really get to the eligibility question until the court

below considers it in the context of the case that's at bar.

We have to, as I say, we are in the process of objecting to

claims and resolving them. Now the --

JUSTICE SCALIA: Well, didn't you make that

argument to the bankruptcy court that found that you

were not eligible?

MR. BAKER: No, Your Honor, because as I

mentioned before, the case law in the First Circuit up

to this point has held that a Chapter 7 debtor does not

have standing to object to claims. Now in the new case,

in fact, the bankruptcy court --

JUSTICE SCALIA: That's what I'm asking. A

Chapter 7 debtor doesn't, but a Chapter 13 debtor

presumably does. So didn't you make the same argument

to the bankruptcy court.

MR. BAKER: In the old case, yes, once we

converted the chapter.

JUSTICE SCALIA: And they rejected it?

MR. BAKER: No. I beg your pardon, Your

Honor. No, we did not address eligibility in the

present case.

JUSTICE SCALIA: I don't care about the

present case. I care about the Chapter 13 case in which

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Alderson Reporting Company



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you have been found not to qualify for Chapter 13

treatment. Didn't you make before that court the same

argument you're making now that some of the debts

shouldn't be counted.

MR. BAKER: I did.

JUSTICE SCALIA: They rejected it, right?

MR. BAKER: Pardon?

JUSTICE SCALIA: And they rejected it?

MR. BAKER: The bankruptcy court did reject

it, yes. But they rejected it because, as I say, up to

that point the case law had held that we did not have

standing to object to the claims, so we were bound by

what was there.

JUSTICE SCALIA: But you said it was only a

Chapter 7 debtor who couldn't object.

MR. BAKER: Right.

JUSTICE SCALIA: But you are applying under

Chapter 13.

MR. BAKER: Right. What I'm trying to say

is in the previous Chapter 7 case we lacked standing to

object to those claims and that in the new Chapter 13

case the court took the Chapter 7 case claims and said,

you're bound by these in the new chapter 13 case.

JUSTICE SCALIA: Didn't you object to that

and say you should look at these claims afresh?

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MR. BAKER: Yes.

JUSTICE SCALIA: And what did the court say?

Did it say it had to or that it did so and still found

them over the limit.

MR. BAKER: It -- the bankruptcy court in

the new case said -- pardon? The bankruptcy court in

the new case said that there are circumstances under

which a debtor would have standing. This was in effect

a new rule of law for that, for this district. So

subsequent to that decision we did, in fact, object to

quite a number of claims and substantially reduced the

total of those claims, and I think that once --

JUSTICE SCALIA: What did the bankruptcy

court say?

MR. BAKER: The bankruptcy court sustained

our objections to those claims and in fact reduced the

total substantially.

JUSTICE SCALIA: I don't understand that.

But did it reduce it to a level that you qualified for

Chapter 13 treatment?

MR. BAKER: We are not finished with the

claims objection process. I believe that once we are --

JUSTICE SCALIA: Of course you are. They've

rendered a decision. How could you not be finished with

the claims objection process if the bankruptcy court has

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rendered a final decision.

MR. BAKER: Because the bankruptcy court

rendered a final decision which is on appeal in the new

case. We are objecting to the Chapter 7 claims in the

old case. I apologize if this is confusing.

JUSTICE SCALIA: It is terribly confusing.

It seems to me that the Chapter 13 bankruptcy court had

the responsibility for determining whether you qualified

under the, you know, under the amount of debt.

MR. BAKER: And it did so by reference to

the claims that had been filed in the previous Chapter 7

case. We can't object to claims in a Chapter 13 case

that haven't been filed. So procedurally, we had to go

back to the Chapter 7 case and do the claims objections

within the context of the old Chapter 7 case.

Now, in the Chapter 13 case we used the --

the bankruptcy court used the total of those claims that

had been filed in the Chapter 7 case to determine

eligibility in the 13.

In doing so, the bankruptcy court basically

announced a new rule of law that the claims that had

been filed would be essentially I suppose, res judicata

in the subsequent case, but that in some cases a

Chapter 7 debtor --

JUSTICE SCALIA: And you objected to that, I

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gather?

MR. BAKER: Sorry?

JUSTICE SCALIA: You objected to that, to

that ruling?

MR. BAKER: Not necessarily, because it does

give you a vehicle to go back to the old Chapter 7 case

and do the procedural claims objections in that case,

which is what we did, and we substantially reduced the

total of the claims.

JUSTICE GINSBURG: What is the status of the

Chapter 7 case? I was under the impression it had been

dismissed and a determination of no discharge had

been made.

MR. BAKER: A determination of no discharge

had been entered. However, it was an asset case, so it

remains open, it remains open at this point, until the

Chapter 7 trustee makes a distribution to creditors or

files his final report with the court. It has not been

dismissed.

JUSTICE GINSBURG: But there's a

determination that you're not entitled to a discharge?

That has been made.

MR. BAKER: That's correct.

JUSTICE BREYER: If we just could go to the

merits for a second here. You're saying this word,

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where it says, the word is you "may convert," and that

means you can convert no matter what?

MR. BAKER: The plain language of the

statute says that, yes, Your Honor.

JUSTICE BREYER: No matter what? Okay,

suppose they repeal Chapter 13 before you convert. Then

can you convert?

MR. BAKER: I'm sorry. Would you repeat

that?

JUSTICE BREYER: I'm just producing examples

where it's clear you can't convert. Now, suppose

Congress -- there is no Chapter 13. Could you convert

then?

MR. BAKER: Not if there's no Chapter 13.

JUSTICE BREYER: No, okay. Suppose he dies.

Could you convert then?

MR. BAKER: If the debtor dies?

JUSTICE BREYER: Yes. No inheritance, no

nothing.

MR. BAKER: Well, there is a rule, I believe

it's --

JUSTICE BREYER: Even though there's no such

person existing any more. He's gone and his whole

family is gone, and there's no inheritors, nothing.

Then can he convert? No.

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MR. BAKER: Right. I think the rule 2009

says, the Federal Rules of Bankruptcy --

JUSTICE BREYER: I'm trying to produce

ridiculous examples. Maybe -- all right, so you say

even if he's dead and there's no family he still could

convert. That's an extreme test of my hypothetical, but

okay. What about if, in fact, he goes insane? No.

MR. BAKER: Well, again, Your Honor, the

rule says --

JUSTICE BREYER: What about if, in fact, the

conversion is part of a scheme to defraud millions of

people in a foreign country because it will be viewed as

a signal that they should mail their life savings into a

particular account in Switzerland? Can he convert then?

MR. BAKER: The statute is plain, Your

Honor.

JUSTICE BREYER: You say yes on that?

MR. BAKER: I would say yes.

JUSTICE BREYER: Even though it's going to

bilk people out of millions of dollars?

MR. BAKER: I think that the statute is

plain and says that the debtor may convert.

JUSTICE BREYER: No matter what? Even if

he's dead, even if he's insane?

MR. BAKER: Even if he's insane.

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JUSTICE BREYER: Well alright, then I can't

get anywhere with my hypotheticals.

(Laughter.)

JUSTICE BREYER: I would have thought the

answer was no, but there we are.

JUSTICE GINSBURG: Mr. Baker, couldn't the

-- let's say the conversion goes through. The first

thing that the bankruptcy court does in the Chapter 7

converted to Chapter 13 is say: I'm going to dismiss

this suit, the -- the bad faith taint stays with the

case, it doesn't get -- you can't erase it; and so back

you go to the Chapter 7. Why couldn't the bankruptcy

court now sitting as a Chapter 13 court say: We're not

going to let a debtor who has conducted himself in bad

faith proceed in this court?

MR. BAKER: The bankruptcy court could

certainly do that. The procedural safeguards of due

process require, obviously, notice and hearing of the

court's reasons for wanting to say that.

JUSTICE SOUTER: Yes, but your claim doesn't

rest on a due process denial of hearing does it? That's

not, that's not the question you brought to us. So it

seems to me that Justice Ginsburg's question is not

answered by saying, well, he'd get a hearing in that

case. The fact remains that in that case the, as I

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understand it, the judge in Chapter 13 could immediately

deconvert to Chapter 7, couldn't he?

MR. BAKER: Well, I wouldn't say he could

immediately reconvert. Again, there is the due process

requirement that the debtor have an opportunity to be

heard on the issue.

JUSTICE SOUTER: But due process is not the

issue here. The fact is the bankruptcy court could

deconvert or reconvert to Chapter 7, in effect,

following the election that the debtor makes. That's

so, isn't it?

MR. BAKER: Yes.

JUSTICE SOUTER: Well then, why would we

have a system as ridiculous as to preclude the court

from looking at fraud or bad faith at the moment of

election, go through the paperwork and the folderol of

converting to 13, and immediately turn around,

admittedly having the power, to deconvert? That would

be a rather foolish system.

MR. BAKER: Well, perhaps, but it is the

system that Congress has given us. Congress has said

the debtor may convert at any time so long as it has not

been converted previously.

CHIEF JUSTICE ROBERTS: When cases are

reconverted to Chapter 7, is that typically done before

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or after the filing of the Chapter 13 plan?

MR. BAKER: Most of the time, a plan is -- I

don't do it this way, but most practitioners will file a

plan at the same time as they file the notice, the

motion to convert.

JUSTICE SOUTER: But they don't have to.

MR. BAKER: They don't have to.

JUSTICE SOUTER: And the deconversion could

be done prior to the filing of the plan?

MR. BAKER: I suppose arguably it could. In

my view, the statutory provisions of section 1307 have to

be applied to the question of conversion. So I think --

CHIEF JUSTICE ROBERTS: Creditors -- under

Chapter 13 one of the prerequisites to approval of the

plan is that the creditors get at least as much as they

would have gotten under Chapter 7, right?

MR. BAKER: That's correct.

CHIEF JUSTICE ROBERTS: So presumably the

creditors might want to see what the Chapter 13 plan

looks like themselves.

MR. BAKER: Exactly. Exactly. Exactly.

And I think it's the Tenth Circuit Bankruptcy

Appellate Panel noted that sometimes a problem debtor

files a plan and gets it confirmed, pays creditors,

and everybody winds up better off.




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JUSTICE KENNEDY: Could the district

court -- pardon me. Could the bankruptcy court make

that same determination in deciding whether or not to

allow the Chapter 7 proceeding to be converted? He

could make this inquiry in a Chapter 7 proceeding? He

says: I don't think you should be able to convert

because there's a fraud, but I'll look at how the

creditors come out. Could he do that? And then you

don't have the specter that Justice Souter referred to

of this transfer back and then the transfer back, which

is a waste of time.

MR. BAKER: Well, again, the statute says

that the debtor may convert except in certain

circumstances. I think that the requirement of a motion

to convert a case gives the court the procedural

mechanism for looking at the case, seeing, making sure

that the debtor --

JUSTICE BREYER: But there is a difference,

and this is -- assume with me, which apparently you

don't agree, that everywhere in law there are implied

exceptions for unusual circumstances. I have never

found an instance where you couldn't think of some

exception that they didn't see. You could not bring a

thing if you were insane or dead or if a death would

ensue or a murder. Assume that, all right.

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Then the question would be, well, what about

this instance? And I think the strongest instance --

the strongest argument for saying there's is no

exception here is the argument that the trustee

discovers that this individual is behaving dishonestly,

that he's hidden assets. Maybe he has a safe deposit

box and he has a key and the key -- the key will allow

him to get diamonds out of the safe deposit box and hide

them. Under 7, the trustee has the key. As soon as you

convert it to 13 the key is given back to the debtor,

who has been shown dishonest.

Now, assuming you're going to have some

exceptions, why isn't that a very, very powerful one?

MR. BAKER: Because ultimately the Chapter

13 trustee has the same powers of the Chapter 7 trustee

with the exception, as Your Honor is pointing out, of

possession of the property in the bankruptcy estate.

But that's how Congress wrote the statute. We should

not ignore Congress's command about the process of

converting and look for exceptions before we proceed to

go back to the appellate court --

JUSTICE ALITO: If I could come back to a

prior question. Unless there is some different

procedure required when -- between the two situations of

denial of conversion from 7 to 13 and allowing

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conversion but with immediate reconversion back to 7,

unless there's some difference between that's required

by the code in those two situations, maybe it is because

you have to -- in the reconversion situation, you have

to wait until the plan is filed. Maybe it's because the

bad faith doesn't carry over.

But unless there's some difference, I don't see

what this case is about.

MR. BAKER: Well, ultimately the case is

about the language of the statute and whether the court

should apply it as written. And I think --

JUSTICE ALITO: You can't provide any reason

why there's a difference between those two?

MR. BAKER: I'm sorry?

JUSTICE ALITO: You deny -- do you dispute

the fact that the bankruptcy court could simultaneously

convert on the motion of the debtor from 7 to 13 and

during the 20-day period that's required by the rule,

the rules, reconvert? Do you dispute that, for bad

faith?

MR. BAKER: I dispute that the court could

do it sua sponte and without notice and an opportunity

for a hearing.

JUSTICE ALITO: If it gives notice and

an opportunity for a hearing during the 20 day period --

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you have to give 20 days notice before the conversion

takes place; is that correct, from 7 to 13?

MR. BAKER: I believe that's correct. When

you file a motion, a 20 day notice is required, yes.

JUSTICE ALITO: If it has the hearing during

that period, you don't dispute that the court could do

that, or do you?

MR. BAKER: Well, again we come to the

question of when the plan gets filed. The plan isn't

filed until after it's converted, according to the

rules.

JUSTICE GINSBURG: But here there was a

hearing on the motion to convert, right? There was a

hearing?

MR. BAKER: Yes, Your Honor.

JUSTICE GINSBURG: And as I understand it,

there was no objection to the character of that hearing?

There was no request for an evidentiary hearing? So

there was a hearing. Now, does that get wiped out too,

just the way, the determination that you couldn't

convert?

MR. BAKER: The procedure I would, I would

expect to see is that if the court saw an issue of fact

with respect to whether the case had been converted or

whether the debtor was eligible for it to be a debtor in

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the chapter to which he seeks conversion, then an

evidentiary hearing would be required.

If -- the fact that there was no evidentiary

hearing in the particular case here, I think, I think we

have to go back to recognize the fact that most issues

in bankruptcy court are decided summarily on motion

practice.

And it is my feeling that, the

jurisprudence of rule 56 has to apply. If a court

sees that there are disputed issues of fact, the court

must schedule an evidentiary hearing. It cannot, it

cannot simply grant summary judgment without furtherance

issue of fact. So this is why I say that,

that on these two -- the two particular points -- and

obviously, the question of whether it has been

previously converted is very easy to determine. But as

previously discussed, the issue of eligibility, whether

the claims and the debt is within the statutory

limitation, is an issue of fact that ultimately might

require an evidentiary hearing.

JUSTICE SOUTER: But your case as I

understand it, your case does not turn on the question

whether there was or was not, should or should not have

been a hearing in this case, an evidentiary hearing in

this case; is that correct?

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MR. BAKER: That's correct. That's correct,

because in our view the schedules -- excuse me -- in our

view the schedules in this case clearly indicate that it

-- that he was within the statutory limitations, at

least as far as the schedules go.

JUSTICE SCALIA: Mr. -- Mr. Baker, I have -- I

have a question on a matter that really upsets me

and causes me to wonder how, you know, how much we can

rely upon your description here. You claimed in the

petition that the reason your client filed under Chapter

7 rather than 13 was that he was unemployed at the time.

And that he decided to go to 13 after he became

employed.

Yet, on -- as shown in the supplemental

appendix, when he filed under Chapter 7, under penalty

of perjury, he said that he was employed, and at

the meeting of the creditors, he confirmed under oath

that he was employed.

What was it? Was he employed or not

employed?

MR. BAKER: On the petition date itself, he

was not. And if you look at schedule I, which is at

page 30 of the supplemental joint appendix, at the

bottom line, bottom of the -- and it indicates that he

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rental property and that he was beginning a job at about

the time the petition --

JUSTICE SCALIA: It says employment,

occupation, name of employer: Capital Carpet and

Flooring. How long employed, five months. Address of

employment: Woburn, Massachusetts. It also says the

same thing on page 18 of the supplemental appendix. And

also with the meeting of creditors. If you look at the

joint appendix at 64a, he says the same thing that he

was employed. Was he employed or not employed?

MR. BAKER: Right.

JUSTICE SCALIA: Does he go around swearing

he was when he wasn't?

MR. BAKER: No, he was -- he was not employed

at the time. If you look at his page 18, as you

point out, it says at the bottom the income given is

estimated based on a new job which is about to start.

He had -- he had been the principal of a company called RLM

Flooring, which had been closed by Citizens Bank. So he

was, in fact, unemployed because Citizens Bank had taken

all of the assets of the corporation and shut it down.

And this put him of course behind on his mortgage so he

was very concerned about finding employment so he could

in fact, keep -- get his mortgage current and then

retain his home.

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JUSTICE SCALIA: Look on page 64a of the

appendix, the meeting of creditors. Trustee says okay,

and you now work for another entity, Capital Carpet and

Flooring, sir? And Mark Marrama says yes.

MR. BAKER: Right. And between the -- between

the time of petition at the meeting of creditors which

was approximately six -- six weeks later, he became

employed.

As I say, he had a mortgage. He had children

to whom he has to pay child support. At the time he had

a wife he owed a lot of money to. He was concerned about

having employment so he could in fact meet those

obligations.

JUSTICE STEVENS: May I ask, I may have

missed some of the colloquy here -- is it correct that

he would not be eligible to file a-- to have a,

institute a Chapter 13 proceeding if he had unsecured

debts of over a certain amount?

MR. BAKER: Yes, Your Honor.

JUSTICE STEVENS: And what if at the time he

makes the motion to convert, which you say he has an

absolute right to make, what if the record then

disclosed that he had debts exceeding that amount? What

should the bankruptcy judge do in that case?

MR. BAKER: The bankruptcy judge should




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examine the claims that have been filed, if any, do

the arithmetic, offer the debtor an opportunity --

JUSTICE STEVENS: He concludes they're

over the amount? So it is clear under the record. What

should he do then?

MR. BAKER: He should deny conversion.JUSTICE STEVENS: He should what?MR. BAKER: He should deny conversion. If in

fact --

JUSTICE STEVENS: So he does not have an

absolute right in all cases to convert, then.

MR. BAKER: It's absolute except in the

two circumstances stated in the statute.

One of which, is as Your Honor is pointing out, the

eligibility, the other is that if it has been previously

converted he does not have that right.

If the Court has no further questions, I'll

reserve my remaining time.

CHIEF JUSTICE ROBERTS: Thank you,

Mr. Baker.

MR. BAKER: Thank you.

CHIEF JUSTICE ROBERTS: Mr. Brunstad.

ORAL ARGUMENT OF G. ERIC BRUNSTAD,

ON BEHALF OF THE RESPONDENTS

MR. BRUNSTAD: Mr. Chief Justice, and may it




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please the Court:

The bankruptcy court need not sit idly by

and grant a motion which is part of an abusive scheme.

The power of the court is there to deny such a motion.

It is there by statute under section 105; it is there

because the courts have always had power.

CHIEF JUSTICE ROBERTS: Under -- you think

105 is an affirmative grant of power?

MR. BRUNSTAD: I think the second sentence

of 105(a) supports the traditional powers that courts

have had to grant relief, to prevent or to deny relief

to prevent abuse or to remedy bad faith conduct. The

fact that the debtor has the authorization under section 706

to convert a case cannot be construed to prevent the

court from sua sponte taking action to prevent abuse --

CHIEF JUSTICE ROBERTS: 105(a) is much more

limited than that. It is only if you take the second

clause of that out of context and quote it, as has been

done, that it looks like an affirmative grant. It says:

"No provision of this title providing for the raising of

an issue by a party in interest shall be construed to

preclude the court from taking sua sponte other action."

That's a much more limited, narrow provision telling you

not to imply a negative pregnant from a requirement

that a particular party raise an issue. I -- as a

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source of sweeping powers to, to basically act as a

roving commission in equity, I think that's a

mis-citation.

MR. BRUNSTAD: Well, Chief Justice Roberts,

I think that in order to understand 106(a), the second

sentence, completely, I think it is important to

understand it was added to 105 in 1986 in response to a

number of decisions that were holding that the courts

did not have the -- the bankruptcy courts did not have

the authority to sua sponte take action to prevent abuse,

to monitor their own calendars, to make sure that

inappropriate things weren't happening, and that Senator

Hatch when he introduced this legislation which was

ultimately enacted, the goal was to overturn cases like

the Second Circuit's decision in Grissom to provide

expressly and perhaps not as clearly as perhaps they

intended, to give the courts this power. But I --

JUSTICE SCALIA: Was that Second Circuit's

decision a decision that said the court didn't have the

power because it had not been moved to take that action

by the party who had the responsibility for raising the

issue? Was that the basis for the Second Circuit's

decision?

MR. BRUNSTAD: In part, yes. The court also




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JUSTICE SCALIA: Then -- then you haven't

contradicted what the Chief Justice suggested.

MR. BRUNSTAD: Well, I think -- I think

105(a), the second sentence is worded the way that it

is. It doesn't say exactly that the courts may take any

action of sua sponte. It says shall not be construed;

the fact that a party has the right to make an action shall

not be construed to deny the court the right sua sponte to

take an action. But I think that the implication of the

statute is clear. There is this background principle which

applies not only in bankruptcy cases but in trial court

cases in the district courts everywhere, that this Court

recognized in Chambers, that it has specific application

in this Court's jurisprudence in bankruptcy in Pepper

versus Litton and other cases, that the bankruptcy

courts may take action to prevent abuse. And in fact,

they must do so. Because by granting a motion, by

sitting back and allowing the court to grant relief that

furthers an abusive scheme in essence makes the court

complicit in the fraud or misdealing. We can't have that.

CHIEF JUSTICE ROBERTS: What do you do about

the different structures, wording between 706(a) and

706(b)? I mean, this provision says debtor may. The

other provisions say that a debtor may ask a court to

order, and it suggests a difference in who has the

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primary responsibility, whether it is a motion of the

Court or whether it is an independent action.

MR. BRUNSTAD: Mr. Chief Justice, I think

that the drafting conventions between the two subsections

is key. 706(a) says the debtor may convert. Whereas

other sections of the code, like 1307(b), other

provisions, provide that upon request of the debtor,

the court shall take some particular action. Here the

use of the "May" -- I think the word "may" properly

signals discretion in the court.

CHIEF JUSTICE ROBERTS: So you think under

those other provisions the court doesn't have this

inherent power or the implicit power from 105(a) that

you're arguing for here?

MR. BRUNSTAD: Well, if you look at section

1307(b), upon request of the debtor the court shall

dismiss the case, that is an absolute right. And for a

clear reason. Nobody can force a debtor to continue in

Chapter 13 against the debtor's will because Chapter 13

requires the debtor to work to pay off creditors. That

would violate the 13th Amendment. So there would be no

circumstance where someone could block a debtor from

getting out from Chapter 13, for constitutional reasons.

That's a special case. That is why Congress drafted

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Contrast that with section 706 where the

court said the debtor may convert. Now, there are,

there are requirements that the debtor has to comply in

order to convert, statutory, but there is also, a debtor

cannot have an absolute right to convert if it would be

part of an abusive scheme. I think the direct analogy is

this Court's decision in Pepper versus Litton. There a

fraudulent party wanted the Court to allow a claim as

part of a fraudulent scheme, and this Court unanimously

said no we're not going to allow that, even though there

was a subsequent remedy further on in the process.

CHIEF JUSTICE ROBERTS: If you, if given

that the court has express statutory authority to

reconvert from 13 back to 7, why should we take the leap

of conferring inherent equitable authority to do

something, when the statute addresses it in a much more

specific way?

MR. BRUNSTAD: Two primary reasons, Your

Honor. The first reason is that it would be just

pointless wheel spinning.

CHIEF JUSTICE ROBERTS: Well, maybe, maybe

not. I mean, they convert. He comes up with a plan

under 13 that looks better to creditors. I mean, just

because there's fraud that offends the court and prompts

it to take action prior to conversion doesn't mean that




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that's going to be the same situation after conversion.

MR. BRUNSTAD: But the debtor could argue in

the context of the motion to convert, well, I would like

to propose a Chapter 13 plan, perhaps the misconduct

wasn't that severe, and the court can take that into

consideration allowing the debtor to proceed. But where

as here you have a clear case of abuse, the court should

be entitled to nip it in the bud at that particular

point in time. Allowing the court to senselessly say,

"Oh, go ahead and convert -- "

CHIEF JUSTICE ROBERTS: Even if it might

injure the creditors.

MR. BRUNSTAD: Well, the court can take that

into account. The court is not -- is not shackled under

section 706 to deny conversion, it can consider various

factors. If all the creditors were to come up and say:

"We know the debtor has been abusing the bankruptcy

system, but we think you should allow the conversion to

a Chapter 13 case because perhaps that will work for the

particular circumstances." But whereas here there was

no such thing, the creditors were saying don't allow

conversion, this is part of an abusive scheme. The

trustee was saying don't allow conversion, this is part

of an abusive scheme, the bankruptcy court -- if the

court had signed the order, then that affects the

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integrity of the court.

Is the court itself now not participating by

allowing it to happen, this sort of fraudulent scheme?

The court should be able to nip it in the bud. Debtors

who are --

CHIEF JUSTICE ROBERTS: What limitations

would you recognize on this inherent authority to take

action? Where do they come from?

MR. BRUNSTAD: Well I think that --

Mr. Chief Justice, I think that they're the same sorts

of limitations that require the district court, when it

is considering invocation of its inherent powers,

whether to exercise them or not, we have always sort of

recognized a special situation for bad faith conduct and

clearly abusive schemes. Where those occur as in this

case, the bankruptcy court looks at the circumstances,

holds a hearing as was held this case, considers the

views of the parties who are involved, and then decides.

Now it is a relatively high bar. You know,

bad faith -- it is a continuum. Where you have the

honest but unfortunate debtor, abides by all the rules,

clearly no bad faith implication would apply. At

the other end of the spectrum where you have a debtor

who conceals assets, doesn't disclose, it's found out in

bankruptcy and then as soon as the trustee finds out and

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is hot on the debtor's trail, then seeks to convert to

get out from bankruptcy, well, there you have a

clear-cut case of abuse that can't be tolerated.

Now I think that --

JUSTICE SCALIA: Mr. Brunstad, are you going

to address the mootness point? Do you think the case is

moot?

MR. BRUNSTAD: Yes, Justice Scalia. I think

candidly, the case is not moot. There is a good reason

why we do not allow in our system two separate

bankruptcy cases to be pending at the same time. Once a

first bankruptcy case has started, the court

jurisdiction attaches its exclusive jurisdiction, and I

think the second bankruptcy case that was filed while

the first bankruptcy case was still pending was filed

without jurisdiction and there was actually no

jurisdiction, because of the prior existing case.

Additionally, I think we have to recognize

that there were different debt levels at different

times. I don't know exactly what they were, but for the

first case there was debt level A. About three years

later, there was debt level B, which may well have been

higher. On remand if the debtor were to succeed, which

I hope the Court does not allow the debtor to proceed,

or succeed here, but on remand if it were determined

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that with the first case the debt levels were properly

below the limits under 109(e), then the debtor would be

eligible to convert as far as that criteria is

concerned. We do not know absolutely that that would

not be able to be satisfied in the existing case.

JUSTICE SCALIA: Did you make the

jurisdictional objection before the second bankruptcy

court?

MR. BRUNSTAD: We did not participate in the

second case and make that objection, Your Honor.

JUSTICE SCALIA: How so?

MR. BRUNSTAD: I think that it was

primarily, it was, the debtor was litigating and we did

not make the jurisdictional argument.

JUSTICE SCALIA: I find that extraordinary.

JUSTICE GINSBURG: So it wouldn't be

before the First Circuit.

MR. BRUNSTAD: That particular issue, I

think the appeal of the second case is pending before

the district court. I think that the bankruptcy judge

disposed of the case pretty summarily and decided that

while this particular debtor, just looking at the

schedules, does not have the eligibility requirements

for the second case, and therefore dismissed it.

That does not necessarily preclude a finding

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upon the facts in the first case which is still pending,

that it could be converted. I think candidly, I need to

say that.

JUSTICE GINSBURG: It's hardly a summary

disposition. The opinion goes on for pages and pages.

MR. BRUNSTAD: Well, this particular

bankruptcy judge obviously had a lot of experience with

this particular debtor, having presided over the first

case as well, Justice Ginsburg. So I think the

bankruptcy court was very fully apprised of the facts

and circumstances surrounding the case, with the record

and having written several opinions already in the first

bankruptcy case which was still pending.

JUSTICE SCALIA: This case, your case?

MR. BRUNSTAD: The current case today, yes,

Justice Scalia.

JUSTICE STEVENS: May I ask this question.

If the remedy of not allowing them to convert to Chapter

13 is denied, are there other remedies that the

bankruptcy court can impose against the debtor who

engages in misconduct of this kind?

MR. BRUNSTAD: Yes, Justice Stevens, but

they're not tailored to this particular problem or

abuse. They are remedies, for example, the denial of

the discharge for concealing assets under section 727.

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But that won't --

JUSTICE STEVENS: Are there any criminal

sanctions?

MR. BRUNSTAD: There might be criminal

sanctions for willful -- basically, in essence, it's

sort of an idea of theft, you know, by not disclosing

assets, but it's a relatively high bar for criminality.

But that won't protect the creditors in the Chapter 7

case.

JUSTICE STEVENS: Then how are the creditors

hurt by this series of events?

MR. BRUNSTAD: Well, the creditors are hurt

because in the chapter 7 case, once the bankruptcy case

is filed, the trustee takes possession of all the

debtor's property, which becomes property of the estate.

The trustee's role is to liquidate the property and

distribute the proceeds to creditors. When the case is

converted to Chapter 13, under 1306, the property

revests in the debtor, including any concealed property.

At that point, under section 348, upon conversion, the

Chapter 7 trustee is disenfranchised. His services

terminate. What debtors in bankruptcy who are

perpetuating this kind of concealment scheme want you to

do is say oh no, you can go ahead and convert, and then

maybe we'll deal with it later, because maybe later on

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in the proceedings something will happen. The Chapter

13 trustee might not be apprised of it.

The case might go to a different bankruptcy

judge. In some jurisdictions, the Chapter 13 docket is

heard by an entirely separate bankruptcy judge. They

would like to get the benefit of delay in conversion,

because perhaps they can get away with it in the

subsequent Chapter 13 case. Or alternatively in the

Chapter 13 case, if the debtor doesn't file a plan, then

the Chapter 13 trustee, who may have hundreds and

hundreds of Chapter 13 cases he or she is responsible

for, on a check list might simply check off no plan

filed, case dismissed, in which case the creditors don't

get the benefit of the liquidation, they don't get the

benefit of the assets being recovered, they don't get

equality of distribution under the Chapter 7 scheme, and

the debtor's fraud is in essence gotten away with. So

that is why, when a motion to convert comes up and the

bankruptcy court sees --

JUSTICE STEVENS: Wouldn't a Chapter 7 case

be refiled immediately?

MR. BRUNSTAD: Not necessarily, Your Honor.

Not necessarily. The debtor could move to another

jurisdiction.

JUSTICE STEVENS: But the creditors aren't

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going to let him just run away with the assets, are

they?

MR. BRUNSTAD: Well, Justice Stevens, in

many many Chapter 7 cases, in many many bankruptcy

cases, you have creditors, most of the creditors may

hold claims of $500, $1,000, $3,000. This case is

unique because there happened to be a creditor, Citizens

Bank, who was owed hundreds of thousands of dollars who

had an interest in pursuing the case. In many other

cases -- that's why -- one of the reasons why we have a

Chapter 7 trustee, to represent the interest of myriad small

claimants who collectively have no individual incentive

to really incur all the costs to monitor the system.

By converting the case from 7 to 13,

disenfranchising that representative of all the

creditors, the debtor who wants to play the game of

concealing the assets, and catch me if you can, can in

essence get away with it. This bankruptcy judge

understood this. This bankruptcy judge denied the

conversion so we would keep the case in Chapter 7, the

Chapter 7 trustee could do his job, collect the assets

JUSTICE GINSBURG: Could the Chapter 7

trustee be appointed the trustee in the Chapter 13, the

same trustee who has now been -- he's terminated because

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the Chapter 7 has been converted. Could the court in

the Chapter 13 format appoint the same trustee?

MR. BRUNSTAD: No, Justice Ginsburg. There

is a standing Chapter 13 trustee in Chapter 13 cases

that handles all the Chapter 13 cases, unless for some

reason that Chapter 13 trustee must recuse him or

herself. Under section 348, once the case is converted

from 7 to 13, the Chapter 7 trustee services are

terminated.

JUSTICE SCALIA: What does the trustee do?

He's not really a trustee under 13, is he?

MR. BRUNSTAD: The Chapter 13 trustee --

JUSTICE SCALIA: I mean, the property

doesn't vest in him, you've told it. It remains in the

ownership of the debtor?

MR. BRUNSTAD: Yes, Justice Scalia. The

Chapter 13 trustee is probably characterized mostly an

administrative person, who supervises to see that the

Chapter 13 procedures are complied with, has the debtor

filed the Chapter 13 plan. If not --

JUSTICE SCALIA: He's called a trustee,

though?

MR. BRUNSTAD: Correct, Justice Scalia.

JUSTICE SCALIA: Well that's really not his

capacity.

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MR. BRUNSTAD: In practical reality, that's

correct, Justice Scalia. What the Chapter 13 trustee

does is, if a plan is not filed, moves to dismiss the case.

If a plan is filed, may look at the plan. If the

plan is confirmed, acts as the disbursing agent. The

debtor typically makes payments under the plan to the

Chapter 13 trustee. The Chapter 13 trustee then makes

distributions to creditors. And on Chapter 13 day in

many jurisdictions, one day a week or every other week,

the Chapter 13 trustee will come to court with hundreds

and hundreds and hundreds of files.

JUSTICE SCALIA: It's called Chapter 13 day?

MR. BRUNSTAD: In many places it is, Your

Honor, and they have a Chapter 13 bankruptcy judge.

Often it's assigned to the most junior bankruptcy judge

sitting in the particular jurisdiction. With hundreds

and hundreds of cases, the Chapter 13 trustee has

neither the incentive nor the resources to do the things

that a Chapter 7 trustee does every single day. And not

only that, the Chapter 13 trustee does not have the

power to go after collecting all of the property and

liquidating it. It's denied that power under the

statutory scheme.

So it makes no sense. It's pointless to say

we must -- the bankruptcy judge must idly sit by, grant

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a motion that's part of this abusive scheme, allow the

case to be converted to Chapter 13, hold another

hearing, have a second set of papers perhaps, only to

send the case back to Chapter 7.

CHIEF JUSTICE ROBERTS: The sense it makes

is that that's what the statute provides, and rather

than relying on this alleged inherent power that

apparently is not boundless, and that the bounds of

which will have to be articulated in case after case

after case, the statute provides a very clear mechanism

to address the issue of fraud which allows him to

reconvert it back to Chapter 7 promptly.

MR. BRUNSTAD: Well, I think, Mr. Chief

Justice, in the Link case, the Court rejected that

argument in construing section 41(b), where the Court

said, quote, "neither the permissive language of the

rule, which merely authorizes a motion by the defendant,

nor its policy requires us to conclude that it was the

purpose of the rule to be abrogate the power of courts

acting on their own initiative to clear their calendars

of cases that have remained dormant because of the

inaction or dilatoriness of the parties seeking relief."

Likewise in Chambers, I think the same principle

applied. The Court said, we don't need to wait and deal

with these subsequently occurring procedures to remedy

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the problem. We should do it now.

And that is the -- that is the clear import

of this Court's unanimous decision in Pepper versus

Litton. There was a remedy of equitable subordination

for the fraudulent claim that could have been invoked

far later in the proceeding. And this Court unanimously

said no, you don't have to wait for that proceeding

later. Where it's clear that there has been fraud, the

creditor's scheme has been fraudulent, a fraudulent

claim, the court can act at the time of allowance of the

claim and simply deny the claim. The reason for it, I

think, is the reason articulated in Chambers. The

integrity of the court itself is implicated if it has to

sit back idly by and watch the abusive process unfold.

CHIEF JUSTICE ROBERTS: Well, I still

haven't gotten an answer, I think, on what the prejudice

is. Who is prejudiced by the procedure set forth in

the statute? The conversion takes place. The judge

then says, because of this fraud, I'm going to reconvert

it to Chapter 7. Who suffers under that? You say sit

idly by, but I don't see the long passage of time.

MR. BRUNSTAD: Well, the creditors suffer,

Mr. Chief Justice. And they suffer because there are

additional administrative costs that are incurred that

compete with their distributions. We're already talking

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about dividing up an inadequate pie to satisfy all

claims in full. Having a second set of procedures

prejudices the creditors. It prejudices the court.

Bankruptcy judges can have thousands and thousands of

cases on their dockets. To have to have a second set

of procedures, a second hearing, it burdens the court

unnecessarily. And again, it also implicates, again,

and I think this is fundamental, the integrity of the

process.

JUSTICE BREYER: Is it true or not what I

said, because I don't know the area, that if in fact you

had a dishonest debtor, the present -- the proceeding is

dismissed on 7. He gets the papers back. The papers

permit him access to a hidden source of resources, and

he steals them basically. Is that possible or is that

fanciful?

MR. BRUNSTAD: Justice Breyer, that is

certainly possible, and I think that is why Congress has

said you don't have an absolute right as a debtor under

section 707 to dismiss your Chapter 7 case.

CHIEF JUSTICE ROBERTS: Thank you, counsel.

MR. BRUNSTAD: Thank you.

CHIEF JUSTICE ROBERTS: We'll hear from

Ms. Blatt first.

Mr. BAKER: I beg your pardon.

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CHIEF JUSTICE ROBERTS: Ms. Blatt.

ORAL ARGUMENT OF LISA S. BLATT

ON BEHALF OF THE UNITED STATES, AS AMICUS CURIAE

SUPPORTING RESPONDENTS

MS. BLATT: Thank you, Mr. Chief Justice,

and may it please the Court:

A bankruptcy court has the inherent

authority to sanction a debtor who has acted in bad

faith by denying his request to convert a Chapter 7 case

to Chapter 13. Courts have the inherent authority to

take appropriate action to prevent an abuse of process.

Nothing in the Bankruptcy Code or section 706 purports

to impair or limit the bankruptcy court's power to

police the integrity of its own proceedings.

JUSTICE ALITO: Why isn't the power to

reconvert sufficient?

MS. BLATT: The power to reconvert under

section 1307(c) is in this case, where the court is

already confronted with an adjudicated bad faith

litigator, it's indirect, it's inefficient, and it's

inadequate to protect the bankruptcy process. The

potential for abuse is very significant if the case

languishes in Chapter 13 for any period of time because

the bad faith debtor gets control over the very asset he

fraudulently sought to conceal.

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CHIEF JUSTICE ROBERTS: Well, what are the

odds that that's going to happen if you have a judge

who's exercised enough by the fraud to exercise inherent

authority to deny relief? He's not going to let it

languish under Chapter 13.

MS. BLATT: Well, he may or may not.

Bankruptcy courts have thousands of cases, and if there

is an absolute automatic right to convert, a court with

thousands of cases may put off that Chapter 13

reconversion to another day. Moreover, there may be

individual creditors without a sufficient stake to raise

the issue, and the Chapter 7 trustee who typically will

uncover the fraud cannot oppose conversion if there's a

right to convert in bad faith, and the Chapter 13

trustee or the United States --

CHIEF JUSTICE ROBERTS: Well, why wouldn't

that trustee recommend to the bankruptcy judge that he

reconvert it to Chapter 7?

MS. BLATT: Well, the Chapter 7 trustee is,

he's terminated on conversion. It doesn't raise Chapter

13 issues. The much more likely scenario is the Chapter

7 trustee will tell the United States trustee or the

Chapter 13 trustee, but they may or may not learn about

it until after the case converts. In jurisdictions

where there is --

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JUSTICE KENNEDY: Why can't they just have an

order to the bankrupt -- to disclose the asset in the

Chapter 13 proceeding?

MS. BLATT: An order to disclose the asset?

JUSTICE KENNEDY: In the Chapter 13

proceeding.

MS. BLATT: Well, we're talking about a case

the court may or may not know about the fraud, and

the trustee may or may not tell someone in time. If

there's --

JUSTICE KENNEDY: Well, in this case they

knew about it, didn't they?

MS. BLATT: Yes, and there was a basis to

oppose conversion. In jurisdictions where there's an

absolute right, and bad faith is not a grounds for the

conversion --

JUSTICE STEVENS: Whenever he denies the

motion, he must know about it. He must have a reason to

deny.

MS. BLATT: We're by hypothesis talking

about an absolute right to convert, and what I'm trying

to say, in jurisdictions where there is an absolute

right, the practice of bankruptcy courts is not to

simultaneously convert. It does happen on occasion, but

the more likely scenario is that a significant period of




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time passes. But the other point is that if there's a

simultaneous conversion it's a completely pointless and

burdensome process, and here's why: A conversion and

simultaneous conversion causes the termination and

reappointment of the Chapter 7 trustee, the appointment

and the immediate termination of the Chapter 13 trustee,

and to the extent there's already pending Chapter 7

proceedings for dismissal or denial of discharge, the

conversion would appear to us to moot those proceedings

and require their reinstatement. And this is a completely

unnecessary waste of everyone's time and energy.

JUSTICE STEVENS: May I just clear up one

detail that's confusing to me. The -- are there two

judges? Does the same judge rule on both the motion to

convert and the motion to reconvert?

MS. BLATT: Yes, in the majority of

jurisdictions. There are one or two jurisdictions where

there are different judges, but the vast majority it's

before the same judge. But a -- if a -- if there's a --

if there's a right to convert in bad faith, all you have

is a notice of conversion and, assuming the eligibility

is met and it hasn't previously converted, a court may

say, well --

CHIEF JUSTICE ROBERTS: I wouldn't call it a

right to convert in bad faith. If it's a right, it's a




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right to convert despite the allegation of bad faith.

It's not a right to convert in bad faith. No one is

arguing for that.

MS. BLATT: Well, I think that our point is

that the absence of bad faith is implicit in the statute

because there is this background rule. When a litigant

comes to a court that's already abused the court's

process or seeks relief of bad faith, it is a core

element of a court's inherent authority to simply deny

relief. You can toss out an entire complaint when a

litigant seeks it in bad faith. If there was an

apparent benefit to this, go to 13 first or deny it, the

United States trustee wouldn't be here. We see no

benefit to the debtor to require the court to convert

and then reconvert. All it is is an unnecessary waste

of everyone's time, and this is a core element of an

inherit authority.

CHIEF JUSTICE ROBERTS: What about the idea

that the debtor can come in and say under 13, look,

whether the facts bear this out in this case or not,

I've got a job now. I can pay off my debtors -- my

creditors according to this plan, and, as the statute

requires, the creditors get more under 13 than under

under 7. That's a benefit to everybody.

MS. BLATT: Here's why. I don't think

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there's any dispute under --

CHIEF JUSTICE ROBERTS: And he says, I'm

sorry about that bad faith business.

MS. BLATT: Sure. Right. And there's

nothing to stop a debtor who truly converts and has

found religion and wants to come clean for arguing: Let

me convert, it's in the interest of everybody if I do

convert. This is a discretionary right to deny relief.

The court is free to allow conversion.

But under the plain terms of section

1370(c), the court has the power to dismiss or reconvert

a case to Chapter 7 without waiting for a plan to be

filed. There's no requirement that the court has to sit

there for 15 days and see if there's a plan. A Chapter

7 -- excuse me --

CHIEF JUSTICE ROBERTS: If the statute

didn't provide that a Chapter 13 plan could be

reconverted to a Chapter 7, would the court have the

inherent equitable authority to do that?

MS. BLATT: To reconvert to Chapter 7?

CHIEF JUSTICE ROBERTS: Sure.

MS. BLATT: I don't know if that would be an

appropriate remedy. It might be because you can have an

involuntary Chapter 7 case. But on this point about a

court sitting in Chapter 13, if on day one a Chapter 13

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debtor files a plan in bad faith, the debtor can say:

Please wait, I've got a plan, I'm working on it, give me

a couple extra weeks, and the court can say: No, I have

the authority to throw it out. And what's particularly

odd about this proposal is that in 2005 a court is

categorically prohibited from allowing a Chapter 13

debtor to proceed under Chapter 13 if the petition is

filed in bad faith. The court can't confirm a plan.

So Congress had no interest in protecting

bad faith debtors after 2005 and they didn't before

2005. There's no policy preference in the code for bad

faith debtors or allowing a debtor either proceeding in

Chapter 13 or moving from Chapter 7 to Chapter 13, and we

think this is a modest exercise of a court's inherent

authority simply to deny relief when the court is already

confronted with a clear case of abuse while the case is

in Chapter 7 or the debtor has otherwise abused the

bankruptcy process.

The last thing I'd like to say is --

CHIEF JUSTICE ROBERTS: Well, what about the

difference in language under 706(a) and the other

provisions? 706(a) says the debtor may. The other

provisions call for action by the court, which suggests

at least that the authority to convert is greater under

706(a).




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MS. BLATT: I think section 706(a) is fairly

read as granting a statutory right to convert absent the

two statutory exceptions or the court's proper exercise

of inherent authority. But the 706(b) and (c) just

explain that the court may do something or the court may

not, or the court shall do something. So we think our

position -- section 706(a) isn't even addressed to the

court at all. It just gives the debtor the right to

convert, and it doesn't purport to limit or speak to the

situation when the debtor seeks that relief in bad faith

or has otherwise abused the bankruptcy process. And I'd

just like to end by saying that a debtor's bad faith

concealment of assets or misrepresentation of financial

affairs is really the most serious abuse you can have in

a chapter 7 case. It threatens the very structural

foundation of the code and its integrity.

JUSTICE SCALIA: Does the government have

any position on the mootness question here?

MS. BLATT: Well, our position is that it's

not moot because it's on appeal. If that decision is

affirmed, it would in a sense practically be moot

because there would be an alternative grounds and the

debtor wouldn't be eligible under Chapter 13 in any

event. But we didn't see that as necessarily an Article

III mootness problem.

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CHIEF JUSTICE ROBERTS: I guess I've been

assuming -- but the eligibility under Chapter 13 even

under the present case is a present day question, right?

In other words, we don't go back and see if he was

eligible for Chapter 13 when the conversion was denied?

The question would be whether he's eligible now?

MS. BLATT: We have not compared the two,

the two chapters -- well, there was never a Chapter 13

petition. We have not compared the Chapter 7 petition

with the -- after this case, this Court granted

certiorari, then the Chapter 13. But it is on appeal

to the district court, so it's not presently moot.

We would ask for those reasons that the

First Circuit's decision be affirmed.


Ms. Blatt.

Now, Mr. Baker.

REBUTTAL ARGUMENT OF DAVID G. BAKER

ON BEHALF OF THE PETITIONER

MR. BAKER: Thank you, Your Honor and

Mr. Chief Justice.

CHIEF JUSTICE ROBERTS: I'm sorry. You have

two minutes remaining.

MR. BAKER: Thank you, Your Honor.

The first thing I would like to say is that,

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having been counsel to a Chapter 13 trustee many years

ago, I can assure the Court the Chapter 13 trustees

exercise all of the powers and authority that a Chapter

7 trustee does, with the exception, as was said, of

possession of property of the estate. The property of

the estate remains vested, however, in the Chapter 13

trustee throughout the length of the case. It does not

revest in the debtor until the case is either dismissed,

a discharge is issued, and the case is closed. So the

concerns about leaving a debtor to do anything it wants

to with property of the bankruptcy estate simply is not

a reality, and I think it does a disservice to the many

fine Chapter 13 trustees that there are around the

country.

JUSTICE SCALIA: I'm not sure I understood

what you just said. You said until the plan is filed

and approved the property remains in the possession of

the Chapter 13 trustee.

MR. BAKER: No, it does not remain in her

possession. The Chapter 13 trustee technically never

has possession. The title remains vested in the Chapter

13 trustee.

JUSTICE BREYER: So is it possible if it's

in 13 that then the debtor, let's say a dishonest

debtor, could get back pieces of paper which would admit

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that debtor to the possession of certain property which

he could then take and hide in a way that that couldn't

happen in 7? Is that possible or not possible?

MR. BAKER: It's certainly possible. But

then again, there are statutory and rule-based remedies

for that sort of activity. And our position is that those

rules and those statutes are what should control in the

case.

Thank you very much, Your Honor.


Mr. Baker.

The case is submitted.

(Whereupon, at 11:04 a.m., the case in the

above-entitled matter was submitted.)




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6:16 7:10,107:12 8:5,129:12,21,22,2510:11,12,16,2210:25 11:4,1111:12,14,17,2112:7,9 22:1826:1 39:6 44:2

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converted 3:138:19 15:916:23 18:421:10,24 22:1626:16 36:237:18 40:1,742:2 48:22

converting 16:17 19:20

39:14converts 46:24

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24:21correct 12:23

17:17 21:2,3

22:25 23:1,125:15 40:2341:2

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counted 9:4country 14:12

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criminality 37:7 50:5 51:1,1,7 denying 45:9 39:15criteria 35:3 54:8

election 16:1051:12,17,22 Department dishonest 19:11

curiae 1:22 2:11 52:8,10,23 1:21 44:12 54:2416:16

element 49:9,1645:3 54:8,10,24,25 deposit 19:6,8 dishonestly 19:5

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days 21:1 50:1422:6 23:12 determining dispute 20:15,19

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Official

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706(a) 3:1029:22 30:551:21,22,2552:1,7

706(b) 29:2352:4

707 44:20727 36:25

US Supreme Court: 05-996

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