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.