Steve Jakobowski of the Bankruptcy Litigation Blog weighs in with an interesting observation about the scope of the bankruptcy court's equitable powers post-Marrama.
Read the whole thing if you are interested in Marrama, but here's Steve's conclusion:
In my view, the majority's willingness to read a 12 word qualifier out of § 105(a) is the hidden nugget of Marrama. Following the majority's reasoning means that clear rights and directives contained in the Bankruptcy Code can be cast aside where "necessary or appropriate 'to prevent an abuse of process' described in § 105(a) of the Code" by a "bad faith" debtor.
How and when this expanded reading of § 105(a) will manifest itself is unclear, but it is a potent weapon indeed to use against the debtor (or possibly any party in interest) that engages in "atypical" and "extraordinary" "bad faith" behavior (even where the "bad faith" is not directly related to the specific "abuse of process" at issue). (See Op. at 9 n.11 and Oral Argument Tr. at 44:19-23, where Chief Justice Roberts stated that Marrama is not about "a right to convert in bad faith." "No one is arguing for that," he said. Rather, he noted, Marrama is about the "right to convert despite the allegation of bad faith.").
In effect, Marrama may well stand for the proposition that any time a debtor engages in "atypical" and "extraordinary" "bad faith," then seemingly absolute rights granted it under the Code may be abridged should the court find that granting such right "merely postpones the allowance of equivalent relief and may provide a debtor with an opportunity to take action prejudicial to creditors." Op. at 10. In the chapter 11 context, one can envision challenges to the right of a "bad faith" debtor (who under § 1121(a) "may file a plan of reorganization ... at any time") to propose or file any plan of reorganization. Other creative examples abound.
Happy hunting!
Bankruptcy professionals generally are quite comfortable with the idea that some residuum of equitable powers lies in the background and interstices of the Bankruptcy Code. To some extent this is what creates some of the clashes between textualism and the Bankruptcy Code, because these equitable powers have long been taken for granted, albeit ill-defined. In one way, that is part of the dispute that underlies Marrama--to the extent that the Code takes these equitable powers for granted as part of the context of the precise language of the Code (which is undoubtedly the case, at least to some extent), they may not be clearly specified in the precise text of the Code.
As Steve notes, key questions about "How much?" "Where?" and "When?" those powers reside have long been unsettled. But if this is the case, then it is important to keep in mind that these questions are distinct from the question of whether there is any such equitable power at all. I'm not sure I read the Court's opinion quite so expansively, but I think he is right that the Court's opinion merits some parsing to consider what exactly the Court's opinion in this narrow case may say about the power of bankruptcy judges more generally to use their equitable powers.
The problem with that argument here, as noted by Justice Souter, and conceded by Marrama's attorney at oral argument, is that the case wasn't about whether Marrama was deprived of due process and a right to a hearing. See Oral Arg. Tr. at 15:14-16:10, 22:19-24. Marrama may have had a better chance had that issue been preserved for review, but it wasn't. See also Respondent's Reply Brief at 35 n.15.
I wish they would have just said that "We're the Supreme Court and we don't like the debtor, so we are ignoring the statute." At least that would confine the damage to this single case. But instead, the Court has suggested that it is appropriate to ignore statutory language in applying equitable principles.
One of the things that this appeals points up to me is the highly uneven quality of the bankruptcy bench and of bankruptcy trustees. I practiced bankruptcy law in Chicago, where the bench was very good, as were most of the trustees. In other jurisdictions I have been distinctly less impressed.
Here, since the same result could have been easily achieved using a plainly allowable statutory procedure (through re-conversion) I have to assume that either: (1) the judge didn't know the code well enough to realize this; or (2) the judge decided to avoid all of the annoying trivia involved with following the law and/or to avoid imposing delay or attorney fees he felt were unnecessary. In other words, either incompetent or disturbingly autocratic.
Its been my observation that taking shortcuts in judicial proceedings is almost never a good idea. The fact that in a particular case I can't identify what the likely problem is going to end up being means just that I haven't thought about it enough.
At least the case breathes some life back into 105(a), which had become so boring that judges (and opposing counsel) would simply roll their eyes when one tried to justify anything based on that section alone. I take away from this case that bankruptcy courts are now permitted under 105(a) to prevent "abuses of process" at the expense of Code-protected rights where the noble and practical ends (i.e., costs minimized and delays averted) justify the draconian means (i.e., statutory rights eliminated). It should provide for some interesting future developments in the trenches, whether we agree with the majority or not.
I agree, the results are likely to be interesting for practitioners. Problem is, clients (particularly bankrupt consumers) can't afford that much intellectual fun.