First, the disclaimer. I am not an attorney, nothing posted here should be construed as legal advice. It is simply my ruminations on how case law develops from statute, how activist judges come in every political flavor, and on the general state of the economy of the South Sound and a little whining about having to work too many hours for the past six months. That disclaimer duly acknowledged, herewith:

I am pretty much throwing every thing aside these days to work on bankruptcy filings. My contract with bankruptcy work has pretty much been my bread and butter work now for several years. It's surprising to me that I enjoy it as much as I do. I have heard the same thing from other paralegals who took a job doing BK legal work thinking it would pay the bills until real work came along and were surprised to find bk legal work to be interesting and an area of law that has attractions (few pre-trial or summary judgment weekends among other attactions).

The work is cyclical though. It has certainly been a thin couple of years since the new bankruptcy law was enacted in 2005. That change in the law made the work of filing bankruptcy harder. It raised costs for citizens who are already swamped by financial demands and it thinned the ranks of firms doing bankruptcy work because the due diligence standards are pretty high under the new statute.

I had gotten used to some chronic underemployment and that is what I like. I would rather have time than money in my life. But starting maybe back as far as August or September 2007, the number of folks in South Sound (see it! there is my hyperlocal link! Whoo hooo!) considering filing bankruptcy has been climbing and there has been no slowdown, so I am working more than I would choose.

It's been an interesting time from a cerebral point of view. The new statute has been in effect without the buffer of case law interpretation. I hope that legislators mean to write clear statutes, but in law, the issue of where a comma shows up can become a matter of legal debate that goes right to the Supreme Court for a decision. Second amendment afficionados will be familiar with the 3 or 4 comma controversy in interpretation regarding the right to bear arms, but this is not a gun thread, I simply refer to a well-known area of statutory construction controvery for reference purposes.

So the past few years have been interesting as case law has developed for handling financial disaster in the federal courts. For example, In Re Ransom is, for the moment at least in the 9th Circuit, the final word on determining what Congress meant when it talked about ownership costs of vehicles for parties in bankruptcy. Might be wrong, but for the moment, Ransom is controlling.

So, I ran into a new one last month. A case which will come to be known as Marrama, decided by the Roberts Supreme Court in February 2008 barred a debtor from converting a Chapter 7 bankruptcy to a Chapter 13 bankruptcy.

The basic idea is that a debtor can file for Chapter 7 bankruptcy - declare themselves to be insolvent and discharge debt through a pretty quick process, roughly 100 days. Or a debtor can for Chapter 13 bankruptcy, declare themselves to be in need of financial reorganization and handle their affairs under the Federal Court's scrutiny for 3 to 5 years.

Let's see, 100 days or 5 years in bankrupty proceeding? Guess what? most folks prefer the 100 day proceeding.

Prior to Marrama, a debtor who filed Ch 7 and got in trouble could say, well forget about the Chapter 7 filing, we will switch to Chapter 13 bankruptcy and negotiate our way out of trouble through a 3 to 5 year payment plan.

This right proceeded from plain reading of Section 706 of the code:

(a) The debtor may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at any time, if the case has not been converted under section 1112, 1208, or 1307 of this title. Any waiver of the right to convert a case under this subsection is unenforceable.

(d) Notwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter.

The newest Justice - Alito - dissented in Marrama and took a pretty strict constructionist view of the Court's responsibility. Alito read the statutes above and said, essentially, a debtor has a right to convert Ch 7 to Ch 11, 12 or 13. That is clearly what the statute says. Alito was joined in dissent by three other justices. So Marrama went 5 to 4 against Marrama and Alito.

I think it's a bad decision. Not up there with Dred Scott, but a bad decision nonetheless because it is harsh and Ch 13 proceedings are no cakewalk.

Justice Stevens wrote the majority opinion and went the other way on the basis that bankruptcy judges have equitable power to prevent fraudulent filings and abuse of the protection that a bankruptcy filing can offer. Stevens was joined by four other justices, so we end up with a 5 to 4 decision in Marrama. I think we are going to see a lot of controversial 5 to 4 decisions under the Roberts court and that's ok.

One thing I find notable in Marrama is that the Roberts Court by 5 to 4 in this case took an activist judge position. The decision can be overturned by Congress coming back and spelling out conversion rights more clearly, especially as conversion relates to an allegation of fraudulent filing or bad faith action by the debtor. I personally see the possibility of addressing bad faith in a Chapter 7 bankruptcy as part and parcel of converting to Chapter 13. That's the first step, the second step is to develop the Chapter 13 payment plan that is fair to the debtor and to the creditors with the debtor starting in a very weak position due to the question of bad faith filing.

I have been working on a case where Marrama is an issue and I am watching to see if justice can develop locked into a Chapter 7 filing. I think it's going to be a real challenge and it is likely that a client in this situation is going to take it on the chin, a real knockout type punch, where it might have been possible to allow a debtor to instead take a 3 to 5 year financial pounding through Chapter 13.

I tend to have a routine spiel that I tell bankruptcy clients, one way you get in trouble in bankruptcy is trying to hide anything. Bankruptcy is about disclosure.

It's a peculiar thing, this idea of justice in the form of three strikes, or torture to develop evidence for prosecution, or in Marrama, the decision to bar conversion for bad faith and make a debtor really pay for their mistakes at the same time that we find it necessary to put up $30 billion tax dollars to bailout Bear Stearns corporate stupidity and wrongdoing.

It seems like the US is getting tough on individuals and employing compassion with corporations. Somebody last week said "tax breaks for corporations and tough breaks for families."

Next time somebody wants to argue that activist judges are always pushing a liberal agenda, tell them, read Marrama, buddy.