Monday, March 26, 2007

Marrama

A recent Supreme Court case, Marrama v. Citizens Bank of Massachusetts et al., is a cautionary tale for debtors who try to play fast and loose with their bankruptcy filing.

Mr. Marrama had initially filed a Chapter 7 case, in which he made a number of statements about his principal asset, a house in Maine, that were misleading or inaccurate. While he disclosed that he was the sole beneficiary of the trust that owned the property, he listed its value as zero. He also denied that he had transferred any property other than in the ordinary course of business during the year preceding the filing of his petition. In fact, the home had substantial value and Marrama had transferred it into the newly created trust for no consideration seven months prior to filing his petition.

After his 341 meeting, when the trustee told Marrama’s counsel that he intended to recover the property as an asset of the state, Marrama made a motion to convert his case to Chapter 13. The Trustee, however, objected to the conversion and the Court held that neither section 706 nor section 1307(c) of the Bankruptcy Code limits a Court’s authority to take appropriate action in response to fraudulent conduct by the atypical litigant who has demonstrated that he is not entitled to the relief available to the typical debtor. The Court’s authority was based on Section 105 of the Bankruptcy Code, which gives bankruptcy judges broad authority to take the necessary actions to prevent an abuse of process.

What do we learn as attorneys or clients from this Supreme Court decision? Bankruptcy Court is a court of equity and in order to obtain a discharge, one must follow the Bankruptcy Code, the Bankruptcy Rules and the Local Rules of the Bankruptcy Court and give full and fair disclosure to all creditors. When a debtor does not play by the rules, the Court will deny the debtor a right of conversion to in effect punish them for their failure to play fair with the Court. Any persons having questions about Marrama or bankruptcy should contact Jim Shenwick.