Tuesday, June 14, 2016

Can an Involuntary Chapter 11 Ever Constitute Involuntary Servitude?

By Steve Stapleton

A doctor files a voluntary petition under Chapter 7 of the Bankruptcy Code.  He has secured debt of $23,544 and unsecured debt of $1,094,648. (**1)  He owes past and ongoing alimony and child support.  If he had filed chapter 11 he would have had disposable income of $34,487 a month with which to repay his debts.  Indeed, under a chapter 11 plan, he could repay all of his outstanding debts within three years.

Under these facts, the United States Trustee files a motion to convert the case to chapter 11.  The debtor objects, claiming in response that an involuntary conversion to chapter 11 is tantamount to involuntary servitude which is prohibited by the Thirteenth Amendment to the U.S. Constitution.  Constrained by a number of justiciability requirements imposed on courts to ensure the limited role of the judiciary, the bankruptcy court concludes the debtor’s constitutional challenge is not ripe and that he lacks standing to make it.  The district court sustains the bankruptcy court’s conclusions. (**2)

As this author is not constrained by issues of justiciability, the question is:  can an involuntary chapter 11 ever be involuntary servitude and thus a violation of the Thirteenth  Amendment?

The Thirteenth Amendment to the United States Constitution provides that “[n]either slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.”  The Thirteenth Amendment was passed by Congress on January 31, 1865 and ratified by the thirty-six states on December 6, 1865.  The Amendment formally abolished slavery in the United States.

When the Bankruptcy Code took its present form in 1978, the House Report noted that “[t]hough it has never been tested in the wage earner context, it has been suggested that a mandatory chapter 13 plan, by forcing an individual to work for creditors, would violate this prohibition [against involuntary servitude].”  H.R.Rep. 585, 95th Cong., 1st Sess. 120 (1977).  Thus, in order to overcome this concern, as drafted by Congress, a chapter 13 plan includes a debtor’s post-petition wages and income, but the imposition of chapter 13 is completely voluntary.  See 11 U.S.C. § 1307(b).

When the Bankruptcy Code was again amended in 2005, Congress reformed chapter 11 to operate for individual debtors, in a manner similar to that utilized under chapter 13.  In re Maharaj, 681 F.3d 558, 564 (4th Cir. 2012).  Thus, so the argument goes, the forcible inclusion of post-petition income and wages in an individual’s chapter 11 dovetails into the congressional concern expressed in 1977 that such allegedly mandatory servitude may violate the Constitution’s Thirteenth Amendment against involuntary servitude.

Courts have generally recognized that while the Thirteenth Amendment, from its earliest genesis, was designed to prohibit slavery, “the standard is not so rigorous as to prohibit all forms of labor that one person is compelled to perform for the benefit of another.”  Immediato v. Rye Neck School Dist., 73 F.3d 454 (2d Cir. 1996).  Thus, it is not involuntary servitude to require an attorney or a doctor to work pro bono or to require individuals to serve in the military.  Id.  “A showing of compulsion is … [thus] a prerequisite to proof of involuntary servitude.”  Brooks v. George Cnty., Miss., 84 F.3d 157, 162 (5th Cir. 1996).

Once a case is involuntarily filed and an order entered as a chapter 11 or involuntarily converted to chapter 11, the debtor has certain statutory obligations.  The debtor must file periodic operating reports; he must pay the U.S. Trustee’s fees imposed on him; he must file a plan within 120 days, which period can be extended up to 18 months; he must file a plan that provides for some payment to his creditors, seek solicitation of that plan and have that plan confirmed.  If the debtor complies with any of these obligations, he is doing so voluntarily; hence the prohibitions that the Thirteenth Amendment were designed to protect against never materialize.  

Conversely, if the debtor fails to comply with one or more of these obligations, a trustee may be appointed to carry out those obligations.  But what if the debtor again refuses to cooperate?  In that case, the Court has the discretion to convert the case back to chapter 7 and deny the debtor his discharge or the court could dismiss the case outright.  Denial of a discharge is not involuntary servitude as there is no constitutional right to a discharge of one’s debts.  U.S. v. Kras, 409 U.S. 434 (1973).  Indeed, denial of a discharge may effect a hardship, but that hardship simply puts the debtor back into a place of his own creation.  Denial of a discharge, in any event, does not force a debtor to work.

The involuntary debtor could also justifiably argue that he simply does not desire to work for the [bankruptcy] estate, and that neither a trustee nor the court can make him, based on the Thirteenth Amendment, and the court could do little but accede.  However, the court also could no longer leave the debtor in possession under such circumstances, and would likely have sufficient cause to mandate the appointment of a trustee.  That is simply an economic consequence flowing from the debtor’s decision, no more remarkable than suffering a judgment for breach of a contract for breaking an employment agreement …. The debtor always has the key to the shackles.  Economic necessity may discourage him from freeing himself, but is hardly the equivalent a law of force compelling performance or continuance of service in violation of the Constitution.

In re Herbermann, 122 B.R. 273, 285-86 (Bankr. W.D.Tex. 1990).

Even if a trustee is not appointed, the debtor can refuse to offer a payment plan to his creditors if he chooses and the Court can decide what action to take at that time.  Obviously, if “[t]here is no plan, [there is] no vote,” (**3)  and, hence, no court order in place that would compel the debtor to do anything.  Even if a plan is proposed on behalf of the debtor, and confirmed over his objection, if the debtor still refused to comply with the plan, the likely outcome of such a failure would, again, be dismissal of the case or conversion back to chapter 7 with a concomitant denial of discharge.

The ability to file bankruptcy and receive a discharge is sometimes perceived as a fundamental, if not a constitutional, entitlement.  Article I, Section 8, Clause 4 of the Constitution establishes, after all, “uniform Laws on the subject of Bankruptcies throughout the United States.”  However, the ability to file bankruptcy is not a right, but a privilege.  It may be limited by court order or abridged by statute.  Section 109 of the Bankruptcy Code, for example,  prohibits certain entities from being a debtor in bankruptcy under certain chapters.  Section 349(a) has been interpreted by some courts as authority for barring future bankruptcy filings.  Thus, a debtor’s right to file for bankruptcy protection, like a creditor’s right to file an involuntary bankruptcy proceeding against a debtor, (**4)  while protected, is not inviolate.

Neither does dismissal of a bankruptcy case affect a debtor’s right to be protected from involuntary servitude.  Dismissal simply denies the debtor the right to reorganize his debts in a way that benefits both the debtor and his creditors.  If a case is dismissed, the dismissal operates to simply put the debtor back in the same place he was in prior to his bankruptcy.  In that sense, it re-establishes the position he was previously in, allowing him to enjoy both the benefits and obligations attendant to a financial position of his own making, for good or ill.

While it is perhaps one step too many to say that an involuntary chapter 11 can never precipitate a legitimate claim of involuntary servitude such as would meet the standards enshrined in the Thirteenth Amendment, it seems highly unlikely that such an argument could succeed.
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  1. The unsecured debt exceeds the eligibility thresholds under chapter 13.  See 11 U.S.C. § 109(e).
  2. In re Parvin, C15-1648 (W.D.Wash., March 22, 2016).
  3. In re Gordon, 465 B.R. 683 (Bankr.N.D. Ga. 2012).
  4. SEC v. Byers, 609 F.3d 87 (2d Cir. 2010)

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