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Supreme Court's Ruling Provides Other Benefits

Certainly the Supreme Court's decision in Marrama has the benefit of resolving the question of the limits on a debtor's right to convert in the face of bad faith conduct. However, the opinion also exposes the Supreme Court's views on bankruptcy in general, its purposes, and how lower courts may act in crafting rulings that meet the goals of bankruptcy.

The Court's ruling acknowledged once again that bankruptcy is for the "honest but unfortunate debtor." The Court also recognized the power of a bankruptcy court 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." Moreover, the Supreme Court condoned use of the bankruptcy court's general powers under section 105 of the Code to "take any action that is necessary or appropriate to prevent an abuse of process..." to reach the correct result in this case.

This language and the Court's sentiment will be helpful to practitioners struggling to interpret the complex and sometimes unclear language of the Code resulting from its amendment by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

For example, in the now frequent disputes over the amount a Chapter 13 debtor must pay to unsecured creditors, there is a clear split of authority over whether the amount is determined exclusively by the calculations made on the Official Form developed by the Rules Committee for use by Chapter 13 debtors, or whether a bankruptcy court may consider the debtor's actual financial circumstances.

The formulaic method has been criticized as rigid and artificial. The alternative approach that looks to a debtor's actual financial circumstances has been criticized as a product of impermissible judicial legislation and beyond the plain language of the Code's new regime.

Regardless of what approach a bankruptcy court uses to calculate a debtor's required plan payment, unsecured creditors may rely on Marrama in urging a court to effect the Code in accordance with its purposes and spirit.

Bankruptcy Report is produced by Becket & Lee LLP, Attorneys at Law, as a service to our clients. Copyright 2007 by Becket & Lee LLP, except as otherwise noted. Reproduction of this newsletter is strictly prohibited without written permission from the publisher.

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