updated 2/21/2007 11:39:08 AM ET 2007-02-21T16:39:08

The Supreme Court ruled Wednesday that a financially troubled small businessman gave up an important right under the federal bankruptcy code because he failed to disclose all of his assets as the law requires.

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In a 5-4 decision, the court said Robert Marrama of Gloucester, Mass., could not convert his bankruptcy case from one chapter of the code to another, as the law ordinarily allows.

The reason, the court said, stemmed from his failure to disclose a Maine vacation home placed in a trust. Marrama, who operated a flooring company, listed the value of his interest in the property as zero, according to papers in the case.

After finding out about the home, the bankruptcy trustee said he would recover the real estate for the benefit of Marrama’s creditors. Marrama had attempted to convert his case from a Chapter 7 liquidation to Chapter 13, which allows a debtor to keep property and pay debts over time.

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 contains a number of requirements that protect creditors from any bad faith by a debtor.

In Marrama’s case, a bankruptcy judge denied the conversion to Chapter 13 and a bankruptcy appellate panel agreed.

Attorney Eric Brunstad, who represented a creditor in the case, Citizens Bank of Massachusetts, said that 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,” said Brunstad.

The case is Marrama v. Citizens Bank, 05-996.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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