A Gloucester man who fought all the way to the U.S. Supreme Court to convert his bankruptcy case to allow him to keep some assets lost his battle yesterday when the nation's highest court agreed with previous rulings that he acted in bad faith by not disclosing assets to creditors.
In a 5-4 decision, the Supreme Court ruled that Robert Marrama, former owner of RLM Flooring Inc., could not convert from Chapter 7 bankruptcy liquidation to Chapter 13, which allows a debtor to keep property and pay debts over time.
The reason, the court said, stemmed from Marrama's failure to disclose a York, Maine, vacation home placed in a trust. By doing so, he gave up an important right under the federal bankruptcy code because he failed to disclose all of his assets as the law requires. Marrama listed the value of his interest in the property as zero, according to court documents.
David Baker, Marrama's Boston attorney, declined comment on the decision yesterday, saying in an e-mail that he had just received the decision "and haven't had a chance to digest it or talk with Mr. Marrama about it."
Connecticut attorney Eric Brunstad, who represented a creditor in the case, Citizens Bank of Massachusetts, said the high court made the right ruling.
"It will prevent others from abusing the system and granting relief to those who act in bad faith," he said.
Once a bankruptcy is converted from Chapter 7, the trustee is ousted and in many instances "there really is no one to take action against a fraudulent debtor. The statutory safeguards in Chapter 13 are not always adequate to prevent abuse," Brunstad said.
The case was of great interest to the legal community because it posed the question of whether judges can determine what bad faith consists of and whether they have the right to make such ruling, according to corporate and commercial law professor Joseph Devlin of the Massachusetts School of Law in Andover.
He said the ruling will prompt other filers to carefully review options before declaring a chapter of bankruptcy and think twice about trying to cheat the system.
"People will now know that if you get caught doing something like the move to another (bankruptcy) chapter, that it is now not a viable option," he said.
The case dates to 2002, when Marrama requested a credit line increase to help him cope with a temporary cash flow problem. But in response, Citizens Bank refused the request and instead demanded immediate payment in full.
In a 5-4 decision, the Supreme Court ruled that Robert Marrama, former owner of RLM Flooring Inc., could not convert from Chapter 7 bankruptcy liquidation to Chapter 13, which allows a debtor to keep property and pay debts over time.
The reason, the court said, stemmed from Marrama's failure to disclose a York, Maine, vacation home placed in a trust. By doing so, he gave up an important right under the federal bankruptcy code because he failed to disclose all of his assets as the law requires. Marrama listed the value of his interest in the property as zero, according to court documents.
David Baker, Marrama's Boston attorney, declined comment on the decision yesterday, saying in an e-mail that he had just received the decision "and haven't had a chance to digest it or talk with Mr. Marrama about it."
Connecticut attorney Eric Brunstad, who represented a creditor in the case, Citizens Bank of Massachusetts, said the high court made the right ruling.
"It will prevent others from abusing the system and granting relief to those who act in bad faith," he said.
Once a bankruptcy is converted from Chapter 7, the trustee is ousted and in many instances "there really is no one to take action against a fraudulent debtor. The statutory safeguards in Chapter 13 are not always adequate to prevent abuse," Brunstad said.
The case was of great interest to the legal community because it posed the question of whether judges can determine what bad faith consists of and whether they have the right to make such ruling, according to corporate and commercial law professor Joseph Devlin of the Massachusetts School of Law in Andover.
He said the ruling will prompt other filers to carefully review options before declaring a chapter of bankruptcy and think twice about trying to cheat the system.
"People will now know that if you get caught doing something like the move to another (bankruptcy) chapter, that it is now not a viable option," he said.
The case dates to 2002, when Marrama requested a credit line increase to help him cope with a temporary cash flow problem. But in response, Citizens Bank refused the request and instead demanded immediate payment in full.
When payment was not forthcoming, the bank began litigation against Marrama in Suffolk Superior Court.
During the pretrial proceedings, Citizens Bank obtained the court's permission to take possession of Marrama's assets, including his company's accounts receivable, thereby shutting down the business. Marrama's lawyers said the ruling left him unemployed and not eligible to file under Chapter 13, as he did not have a regular income as required by law for the chapter.
Marrama instead sought Chapter 7 relief in order to gain "breathing room" and develop a source of income.
But later, the bankruptcy trustee found about his home in Maine that was in trust and said the property would be recovered for the benefit of Marrama's creditors.
According to court documents, Marrama, who had then found employment and was attempting to convert his case to Chapter 13, tried to block the bank's move.
His creditors objected to the chapter switch and a judge decided that Marrama had requested conversion from Chapter 7 to Chapter 13 in bad faith, according to court documents.
On appeal before the federal Bankruptcy Appellate Panel for the First Circuit and again in the U.S. First Circuit Court of Appeals, Marrama contended that the judge erred by exercising a discretion he did not have. Both courts disagreed and affirmed the bankruptcy court. Marrama's lawyers petitioned the U.S. Supreme Court to hear the case and it was accepted by the high court last June.
Writing for the majority, Justice John Paul Stevens said honest debtors possess an absolute right to convert their cases to Chapter 13, but that nothing in the law limits a court's right to take away that right for "fraudulent conduct."
In dissent, Justice Samuel Alito said the bankruptcy code "unambiguously provides" that a debtor has a "broad right" to convert to Chapter 13. Alito said Chapter 13 has a number of requirements that protect creditors from any bad faith by a debtor.
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