Petitioners Brief — Toibb v. Radloff
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IN THE
Supreme Court of the United States
OCTOBER TERM, 1990
SHELDON BARUCH TOIbB,
Petitioner,
Vv.
STUART J. RADLOFF, TRUSTEE,
Respondent.
On Writ of Certiorari to the United States
Court of Appeals for the Eighth Circuit
BRIEF FOR PETITIONER
Of Counsel TIMOTHY B. Dyk
JONATHAN W. BELKSY (Counsel of Record)
7817 Forsyth Blvd. PETER M. LIEB
Suite 200 DOUGLAS B. LEVENE
Clayton, Missouri 63105 PATRICK J. POTTER
(314) 726-5068 JONES, DAY, REAVIS & POGUE
1450 G Street, N.W.
Washington, D.C. 20005
(202) 879-3939
Counsel for Petitioner
WILSON - Epes PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001
QUESTION PRESENTED
Whether individuals are barred under Section 109(d)
of the Bankruptcy Code from reorganizing under chapter
11 unless they are engaged in business.
(i)
TABLE OF CONTENTS
TABLE OF AUTHORITIES ......... iulstibadhibisdapetiehptenneten
STATEMENT OF FACTS 00000002000.
SUMMARY OF ARGUMENT
ARGUMENT ........00......... Pininieiniapiiitilngas euiabeibesebeneeibianes a
I.
II.
Ill.
IV.
THE PLAIN LANGUAGE OF THE BANK-
RUPTCY CODE MAKES PETITIONER ELI-
GIBLE FOR RELIEF UNDER CHAPTER 11.
CONGRESS DID NOT INTEND TO RE-
VERSE THE PRACTICE UNDER CHAPTER
XI OF THE BANKRUPTCY ACT OF PER-
MITTING NON-BUSINESS DEBTORS TO
I Aisdiniienciersnteninesshindoniesarecinsioninseareassssesese
THE LEGISLATIVE HISTORY EVINCES
CONGRESS'S INTENT TO MAKE ALL IN-
DIVIDUALS ELIGIBLE FOR CHAPTER 11 ..
PERMITTING NONBUSINESS INDIVIDUAL
DEBTORS TO SEEK CHAPTER 11 RELIEF
IS CONSISTENT WITH BOTH THE STRUC-
TURE OF THE BANKRUPTCY CODE AND
THE POLICY UNDERLYING CHAPTER 11.
A. Chapter 11 Relief for Nonbusiness Individ-
ual Debtors Is Consistent With the Structure
of the Bankruptcy Code _._.
B. No Policy Bars Nonbusiness Individual
Debtors From Seeking Relief Under Chapter
RE Re SCE eee ee ee ea
(iii)
10
10
13
17
20
27
29
iv
TABLF OF AUTHORITIES
CASES
Blum v. Stenson, 465 U.S. 886 (1984)...
Caminetti v. United States, 242 U.S. 470 (1917)..
Central Trust Co., Rochester, N.Y. v. Official
Creditors’ Committee of Geiger Enterprises, 454
U.S. 354 (1982) (per curiam) .........»»»_—
Consumer Prod. Safety Comm’n. v. GTE Syl-
vania, Inc., 447 U.S. 102 (1980) 0
In re LeMaire, 883 F.2d 1373 (8th Cir. 1989), reh’g
granted, vacated, 871 F.2d 650, on reh’g, 898
ey | = eesseiuiiteasenmnes
In re Moog, 774 F.2d 1073 (11th Cir. 1985) (per
ES RASA as. eS ee a, a
In re Ross, 95 Bankr. 509 (Bankr. S.D. Ohio
BREESE aS a ee et a a
In re Silva, 82 Bankr. 845 (Bankr. S.D. Ohio
1987)
11
21
INS v. Cardoza-Fonseca, 480 U.S. 421 (1987) ....10, 11, 20
Midlantice National Bank v. New Jersey Depart-
ment of Environmental Protection, 474 U.S. 484
i
Packard Motor Car Co. v. NLRB, 330 U.S. 485
SESE Ec MOSS» nae serie ee
Pennsylvania Dep't. of Public Welfare v. Daven-
port, 110 8. Ct. 2126 (1990) .....................0.000.......
Perry v. Commerce Loan Co., 383 U.S. 392
BREE EDA SES ce BES SS a EE a
SEC v. United States Realty & Improvement Com-
pany, 310 U.S. 434 (1940) 2.00.
Stolkin v. Nachman, 472 F.2d 222 (7th Cir.
EEE SN ae a
United Savings Ass’n of Texas v. Timbers of
Inwood Forest Associates, Ltd., 484 U.S. 365
FE a EST SS eae ee
United States v. Hartwell, 73 U.S. (6 Wall.) 385
SEES EERE SR ee
United States v. Ron Pair Enterprises, Inc., 489
EE ER Se
United States v. Turkett, 452 U.S. 576 (1981).
United States v. Whiting Pools, Inc., 462 U.S. 198
(1983)
ee ee eee eee eee ee ee ee eee ee eee eee ee ee et
13
11
13, 25
v
TABLE OF AUTHORITIES—Continued
Page
United States v. Wiltberger, 18 U.S. (5 Wheat.)
8) 11
Wamsganz v. Boatmen’s Bank of DeSoto, 804 F. 2d
508 (Sth Cir. 1986) ...........----------------eceee-eeeeeeeeeeees 6, 7,8
White v. Board of Trade of the City of Chicago,
492 F.2d 871 (7th Cir. 1974) .....................------- 16
FEDERAL STATUTES
United States Bankruptcy Code, as amended, 11
U.S.C. § 101 et seq. (1988) _.......--.--eeeeee ree ; -
0 a ee \
tr 7+ + ao ii,22 28
21 UGLA.C. 8 BOB ......------.-2---22---200-cnerene-aceneeosencnsenee 21
11 U.S.C. § 507 ................ sinned ahaa idea adi 4
| 8 Fe nn Dstt 4
BE UBC. § GBB —....--222-.--222--02--0-ecneeeeeeseeenesensaceore 4, 21
QING yy ———————————E 21
11 U.S.C. § 701 _.......... On eae ee ee 1,3
Ol) -) .. 19, 21
Ay ————————————EE 28
IR yy 3, 19, 21
11 U.S.C. § 726 _............ siaeiastiansaiainteonianinieianstadas 21
|. .) 21
11 U.S.C. § 1102 .......... ss aipeadmntsatisssatincaiiindeleniiiedal 23
Vo) -)) 18
a ne 23
LY 8 > ers RATES 18
Oe Be ID eccccccescnensvcoremees pees oo ceil 4, 24, 28
0 8 Es Papen eee 23
ON ..... = nsanesesnasanemesoosscamnesnnnmneeneren 23
0) (3 )))) 4, 23
EEE, 23
11 U.S.C. § 1129 .............--.. See ee ea 23, 24, 27
(lL eee ete er as 24
i 8 ee eae 26
IL = 12
8 es —_ >
UL) 4)” iia ee 22
BE UBC. § 2BBB ...........-2200----0-c0-nene-crenseeenscreonenreees 22
vi
TABLE OF AUTHORITIES—Continued
Page
i cenmibeioiene 22
EEE EE RO ira Re ae 22
ERG a 22
BANKRUPTCY ACT PROVISIONS
Bankruptcy Act §§ 101-276, 11 U.S.C. §§ 501-676
(1976) (repealed 1979) —........0- 13
Bankruptcy Act §§ 301-399, 11 U.S.C. §§ 701-799
(1976) (repealed 1979) —.....0 14
Bankruptcy Act §§ 401-526, 11 U.S.C. §§ 801-926
(1976) (repealed 1979) —....00 enn. 14
Bankruptcy Act §§ 106(3), (5), 11 U.S.C. §§ 506
(3), (5) (1976) (repealed 1979) 0. 14
Bankruptcy Act § 126, 11 U.S.C. § 526 (1976) (re-
I i a 14
Bankruptcy Act §§ 621, 622, 11 U.S.C. § 1021,
1022 (1976) (repealed 1979) — 0... 15
Bankruptcy Act § 606(3), 11 U.S.C. § 1006(3)
LE Ean en nen Ie 15
Bankruptcy Act § 608(8), 11 U.S.C. § 1006(8)
(repealed 1979) 2.........occcccccccceeee fa 15
Bankruptcy Act §379, 11 U.S.C. §779 (1976)
ST TTS STIS LNT =e 15
Bankruptcy Act § 1(32), 11 U.S.C. § 1(32) (1976)
I a siesiiabsbibtienien 15
BANKRUPTCY ACT RULES
I een 14
EE Ne ACR 14
STATE STATUTE
Mo. Rev. Stat. §§ 513.427, 513.430 (1989) _.......... 4,5
LEGISLATIVE HISTORY
S. Rep. No. 989, 95th Cong., 2d Sess. (1978), re-
printed in 1978 U.S. Code Cong. & Admin. News
I ihe thie a i 13, 18
H.R. Rep. No. 595, 95th Cong., Ist Sess. (1977),
reprinted in 1978 U.S. Code Cong. & Admin.
SSR SSE eet 13, 14, 16, 18, 19, 27, 28
vii
TABLE OF AUTHORITIES—Continued
MISCELLANEOUS Page
2 L. King, Collier Bankruptcy Manual (3d ed.
1990) _....... OE LEAT ES RA 2TR SL SO a Dae 24, 28
3 L. King, Collier Bankruptcy Manual (3d ed.
ea aepememnenpans 22
9 J. Moore & L. King, Collier on Bankruptcy
ee SE, seceshenenenmsendanee 17
Herbert, Consumer Chapter 11 Proceedings, 91
Com. L.J. 234 (1986) _.... ed eS oo 15, 16, 18, 25
Note, Individual Consumer Debtors Are Eligible
For Chapter 11 Relief, 1988 Ill. L. Rev. 785........ 25
R. Jordan & W. Warren, Bankruptcy (2d ed.
IIs sicoilll leek cciaet ss eeasitdiahealiabieeetbensauneninenebene 15, 17, 22, 26
IN THE
Supreme Court of the United States
OCTOBER TERM, 1990
No. 90-368
SHELDON BARUCH TOIBB,
Petitioner,
Vv.
STUART J. RADLOFF, TRUSTEE,
Respondent.
On Writ of Certiorari to the United States
Court of Appeals for the Eighth Circuit
BRIEF FOR PETITIONER
STATEMENT OF FACTS
Petitioner is an individual who sought relief under
Title 11, chapter 11 of the United States Bankruptcy
Code' because he believed that a reorganization offered
him and his creditors more value than his only alterna-
tive, liquidation under chapter 7.° The courts below dis-
missed his petition, holding that, because petitioner had
111 U.S.C. § 1101 et seq. (1988). All chapter and section refer-
ences are to Title 11 of the United States Code (the “Bankruptcy
Code” or “Code’’) unless otherwise indicated. ,
211 U.S.C. § 701 et seq. (1988).
2
no business, he could not proceed under chapter 11. The
issue presented is whether chapter 11 is open to any
“person,” as provided in section 109(d) of the Bank-
ruptcy Code, or whether chapter 11 is closed to individ-
uals not engaged in business notwithstanding their abil-
ity to effectuate a plan of reorganization and reorganize
successfully.
Petitioner is a licensed attorney who had gained ex-
pertise as an energy lawyer from March 1980 until
September 1981 at the Federal Energy Regulatory Com-
mission (“FERC’’).’ Upon leaving FERC, he wrote a
business plan to create an independent hydroelectric gen-
eration company and successfully marketed the plan to
two independent investors. J.A. 128-132. In 1983, these
investors formed Independence Electric Corporation
(“TEC”), J.A. 96, 131-32. In exchange for his busi-
ness plan, petitioner received 24% of the stock of IEC.
Id. The two investors received the remaining 76% of
IEC’s stock. J.A. 96, 132. At the time, petitioner and
IEC also signed a consulting agreement. Petitioner ex-
pected his consultancy to IEC to continue indefinitely.
J.A. 132-38. Petitioner’s consultancy to IEC continued,
however, only until April 1985, when his agreement was
terminated. He retained counsel, claiming that his con-
sulting had been terminated in violation of the terms of
the agreement, and seeking to protect his stock interest.
J.A. 136-38.
In the summer of 1986, petitioner came to believe that
the two other IEC investors had abandoned the company
and thus that IEC’s stock was worthless. J.A. 141-42.
Accordingly, in November 1986, having debts which ex-
ceeded what he believed to be the value of his one sig-
nificant established asset, the IEC stock, petitioner filed
for protection under chapter 7 of the Bankruptcy Code
3 Joint Appendix (“J.A.”), at 128-29, 162. Citations to “Pet.
App.” are to the Appendix to Petition for Certiorari.
3
and a trustee was appointed to liquidate petitioner’s es-
tate. Chapter 7 of the Bankruptcy Code permits a debtor
to liquidate its assets for distribution to creditors. The
chapter does not contemplate the continued operation of
the debtor’s business for more than a limited period.°
In 1987, after filing his chapter 7 petition, petitioner’s
belief about the value of his bankruptcy estate changed.
Petitioner testified that in 1987 he learned that IEC’s
majority shareholders had not abandoned the company
and had successfully pursued applications to FERC for
licenses to construct and operate hydroelectric power
plants.° He also concluded that he had causes of action
against the majority IEC shareholders for “an improper
attempt to squeeze [petitioner] out [of IEC] and for
breach of fiduciary duty in connection with their activi-
ties after the formation of IEC.” J.A. 115; see also J.A.
110, 142-43.
In the summer of 1987, at or about the time FERC first
granted a license to IEC, the Board of Directors of IEC
offered to purchase petitioner’s stock for $25,000. The
trustee sought to accept the offer and notified creditors
that he would sell the stock absent a valid objection to
the sale. J.A. 13-14. Thereafter, on September 21, 1987,
petitioner filed a petition in the bankruptcy court to con-
vert his case to a case under chapter 11 of the Bank-
ruptcy Code, the chapter permitting debtors to avoid
liquidation by reorganizing under a plan confirmed by
the bankruptcy court. J.A. 15-16. Petitioner also ob-
jected to the sale of stock as the chapter 7 trustee had
proposed, arguing that the sale would be unfair and in-
equitable and urging that he should be permitted an op-
portunity to reorganize his affairs under chapter 11. J.A.
411 U.S.C. §§ 701-766 (1988) ; J.A. 141-42
5 See Section 721 of the Bankruptcy Code, 11 U.S.C. § 721 (1988).
6 Petitioner testified that FERC in fact issued one such license
effective August 1, 1987 and licenses for three additional sites effec-
tive December 1, 1987. J.A. 96-97, 142.
4
17-20. On October 2, 1987, the bankruptcy court granted
petitioner’s petition to convert his case to chapter 11;
discharged the trustee (including apparently any respon-
sibilities in connection with the proposed sale of petition-
er’s IEC shares); permitted the petitioner to manage his
own affairs as a so-called debtor-in-possession; and or-
dered the petitioner, among other things, to file a chapter
11 statement of financial affairs, a disclosure statement
and a plan of reorganization. J.A. 21-23."
On October 20, 1987, petitioner filed his statement of
financial affairs, including the required schedules of his
assets and liabilities. These schedules, as supplemented
by an amendment executed February 1, 1988, reflect that
petitioner had- debts totalling $141,819.97, of which
$137,619.34 consisted of unsecured claims without prior-
ity and $4200.63 consisted of a priority tax claim * which
petitioner listed as disputed. Pet. App. 23; J.A. 39, 64.
Petitioner also listed $1,170.00 in exempt property.’ J.A.
7 Section 521(1) of the Bankruptcy Code requires a debtor to
“file a list of creditors, and unless the court orders otherwise, a
schedule of assets and liabilities, a schedule of current income and
current expenditures, and a statement of the debtor’s financial af-
fairs.” 11 U.S.C. §521(1) (1988). See also Section 1112(e) of the
Bankruptcy Code, 11 U.S.C. § 1112(e) (1988) (requiring chapter 11
debtors to file the information required by 11 U.S.C. § 521(1)).
Section 1121 of the Bankruptcy Code permits the debtor to file a
plan of reorganization. 11 U.S.C. § 1121 (1988). Section 1125(b)
requires court approval, after notice and a hearing, of a written dis-
closure statement before acceptance or rejection of a plan may be
solicited. 11 U.S.C. §1125(b) (1988).
8 The order in which claims will be paid from the estate is found
in section 507. Certain tax claims are paid pursuant to section 507
(a) (7). 11 U.S.C. § 507 (1988).
®In connection with his chapter 7, petitioner had claimed this
property to be exempt from the estate pursuant to section 522(b)
(2) (A) of the Bankruptcy Code and Section 513.430 of the Missouri
Statutes. Section 522(b)(2)(A) permits an individual to exempt
from property of the bankruptcy estate “any property that is ex-
empt under . . . state or local law that is applicable on the date of
ae
5
12, 54, 97-98. H> also listed “[c]ontingent and unliqui-
dated claims” agzinst the two IEC business associates
and his 400-share “interest” in IEC as assets having
an unknown dollar value. J.A. 55, 65. His assets thus
consisted principally o: his 400 shares of IEC stock and
the potential causes of action against the two remaining
IEC shareholders. J.A. i52-54.
On February 1, 1988, petitioner also filed a Plan of
Reorganization (the “Plan’”’) rd a Disclosure Statement
pursuant to Sections 1121 and 1125(b) of the Bank-
ruptey Code. The Plan and Disclosure Statement indi-
cated that petitioner had obtained a commitment for an
unsecured loan of $25,000, which would be used to fund
the Plan. J.A. 75-76, 94.” Specifically, petitioner would
pay in full all administrative expenses of the bankruptcy
case and the priority tax claim—-estimated to be in the
aggregate amount of approximately $10,000. J.A. 75-76,
91-93. Petitioner would pay the remaining $15,000 on a
pro rata basis to general unsecured creditors. J.A. 92-93.
Petitioner would also pay general unsecured creditors
pro rata, until the principal amount of their claims had
been paid in full, out of a fund composed of 50% of any
dividends petitioner received on his IEC shares for a six-
year period, 50% of the proceeds of the sale of his IEC
stock should he decide voluntarily to sell the stock within
that six-year period, and 100% of any amount he re-
ceives as a judgment or in settlement of any claim peti-
the filing of the petition at the place in which the debtor’s domicile
has been located... .” At the time he filed his bankruptcy petition,
petitioner was domiciled in Missouri. Pursuant to Missouri Re-
vised Statutes § 513.427, Missouri has “opted out” of the federal
exemption scheme, and has made available to Missouri debtors only
the Missouri exemption list. Petitioner had claimed as exempt prop-
erty which is included in the Missouri list.
10 The $25,000 loan was proposed to be repaid from petitioner’s
personal income that he earned subsequent to confirmation of the
Plan, including any dividends he received on his IEC shares. J.A. 94.
6
tioner files against the two remaining IEC shareholders
and others. J.A. 75-76, 93-94, 114-15.
The Plan of Reorganization thus offered the possibility
of paying unsecured creditors an amount greater than
petitioner’s creditors would have received in a liquidation
under chapter 7."' Because petitioner could not receive
any litigation or settlement proceeds until his creditors
were paid 100% of the principal amount of their claims,
the Plan was apparently designed to give petitioner an in-
centive to prosecute the lawsuit vigorously and to obtain
a judgment notice or settlement that would pay in full
his unsecured creditors and allow additional recovery to
him personally.
On March 8, 1988, without passing on the adequacy of
the Disclosure Statement * or providing the creditors an
opportunity to vote for or against a proposed plan of re-
organization, the bankruptcy court sua sponte entered an
order to show cause why petitioner’s chapter 11 case
should not be dismissed for petitioner’s failure tu qualify
as a chapter 11 debtor. J.A. 121. The order to show
cause was apparently based on the court’s concern that
petitioner’s filing was inconsistent with the Eighth Cir-
cuit’s decision in Wamsganz v. Boatmen’s Bank of DeSoto,
11Qn March 3, 1988, the bankruptcy court received a letter from
one of the two remaining IEC shareholders, offering to pay $50,000
for petitioner’s stock and a release of liability from all claims by the
petitioner against himself, the second remaining shareholder and
other officers, employees, and agents of IEC. J.A. 109-12, 100-
02. As the letter required acceptance of the offer within 30 days
from its receipt, J.A. 102, the court had no assurance that the
$50,000 would be available if the court required conversion of peti-
tioner’s case to chapter 7.
12 The bankruptcy court questioned whether any amendments to
the Disclosure Statement were required by the letter referenced in
footnote 11 that had been received after the Disclosure Statement
was filed. J.A. 118,
7
804 F.2d 503 (8th Cir. 1980), permitting individuals to
reorganize under chapter 11 only if they have businesses.
At the hearing on the court’s order to show cause, peti-
tioner attempted to show that he had a business to re-
organize. His counsel also argued that cases in other cir-
cuits have held, contrary to the Eighth Circuit’s decision
in Wamsganz, that chapter 11 is available to individuals
not engaged in business. J.A. 151. No creditor appeared
at the hearing or filed a pleading with the court in sup-
port of a dismissal of petitioner’s chapter 11 case. J.A.
4, 122, 124.
On August 1, 1988, the bankruptcy court ruled that
petitioner was not eligible for chapter 11 and ordered the
dismissal of petitioner’s case if he did not reconvert the
case to one under chapter 7. The court rejected petition-
er’s contention that he had a business that could be reor-
ganized pursuant to chapter 11. Pet. App. 27-28. The
court also held that the Eighth Circuit’s rule in Wams-
ganz required it to dismiss the chapter 11 cases of indi-
viduals who did not have businesses, stating:
Chapter 11 was designed to affect business rehabili-
tation and therefore “persons not engaged in busi-
ness may not seek relief under chapter 11 of the
Bankruptcy Cede.” This court must apply the posi-
tion of the Wameganz Court with respect to chapter
11 eligibility.
Pet. App. 24.
The United States District Court for the Eastern Dis-
trict of Missouri affirmed without specifically discussing
petitioner’s argument that chapter 11 is available to in-
18In the bankruptcy court, petitioner testified that he was at-
tempting to reorganize his business as an energy consultant and that
he also had earned money in a separate business as a private char-
itable fundraiser. J.A. 143-145. The bankruptcy court found these
activities did not constitute “businesses” permitting reorganization
under chapter 11 of the Bankruptcy Code. Pet. App. 24-25. Peti-
tioner does not challenge the sufficiency of that finding in this Court.
8
dividual debtors who are not engaged in business. Pet.
App. 9-16. The Eighth Circuit also affirmed, concluding
in a brief opinion that:
the Bankruptcy Court did have authority to dismiss
the proceeding sua sponte, and that the Bankruptcy
Court was controlled by Wamsganz, 804 F.2d 503.
We can also find no error in the Bankruptcy Court’s
finding that Mr. Toibb did not qualify as a business
entitled to chapter 11 protection.
Pet. App. 5."
In view of a conflict in the circuits,"* this Court granted
the petition for certiorari on January 18, 1991.
SUMMARY OF ARGUMENT
I. Section 109(d) of the Bankruptcy Code states that
any “person” eligible to be a debtor under chapter 7, with
certain inapplicable exceptions, is eligible for chapter 11.
There is no question that petitioner is eligible for chapter
7. Section 109(b) states that any “‘person,” with certain
inapplicable exceptions, is eligible for chapter 7. A “per-
son” under section 101(37) is defined as an “individual,
partnership or corporation,” other than certain govern- -
mental entities. The plain meaning of these words is that,
with certain inapplicable exceptions, all individuals are
eligible for chapter 7, and ergo chapter 11 relief. When
the language of an act is clear, as it is in this case, such
language is to be given effect, without the necessity of
further inquiry.
4 The Eighth Circuit denied petitioner’s petition for rehearing
en banc in which he asked the court to reexamine its decision in
Wamsganz in light of the decisions in other circuits “that non-
business individual debtors are eligible for chapter 11.” J.A. 177-78.
15 The Eleventh Circuit held in Jn re Moog, 774 F.2d 1073 (1985)
(per curiam), that consumer debtors could seek relief under chap-
ter 11. Moog relied on the absence from the eligibility section for
chapter 11 of any requirement that the debtor be engaged in an
ongoing business, 774 F.2d at 1075, and on the legislative history to
the Bankruptcy Code. 774 F.2d at 1074.
II. Chapter 11 represents a consolidation of chapter
XI of the Bankruptcy Act and two other chapters. Non-
business individuals were eligible for relief under former
chapter XI. Because Congress was aware of the prac-
tice and did not expressly, or even impliedly, indicate an
intent to reverse this practice by preventing nonbusiness
individuals from seeking chapter 11 relief, a business re-
quirement should not be read into section 109(d). Con-
gress knew how to limit eligibility for different forms of
bankruptcy relief, and failed to do so here.
III. Furthermore, the legislative history to the Bank-
ruptey Code reveals that Congress expressly intended to
make chapter 11 available to nonbusiness individuals.
The Senate Report specifically stated that chapter 11
“permits individuals to use this chapter,” and the House
Report plainly contemplates that consumers would be
eligible to use chapter 11.
IV. Petitioner’s eligibility for chapter 11 relief is also
consistent with the scheme of the Bankruptcy Code and
with the policy underlying chapter 11. The Code’s struc-
ture generally permits debtors to select between two or
more chapters under which to file. Each chapter pro-
vides different advantages and disadvantages to a debtor.
Congress left it to each debtor to analyze his situation
and select the chapter which best suits his needs. Finally,
permitting individual nonbusiness debtors to reorganize
under «h.voter 11 fulfills the underlying policy of encour-
aging reorganizations over liquidations.
10
ARGUMENT
Petitioner is eligible for relief under chapter 11 for
four reasons. First, the plain language of the Bankruptcy
Code makes all persons, including individuals, eligible to
be debtors under chapter 11. Second, chapter 11 repre-
sents the consolidation of three prior reorganization pro-
visions, one of which was available to individual debtors
not engaged in business, and there is no indication that
Congress intended to change that element of the prior
chapter. Accordingly, it should be presumed that Con-
gress intended to maintain such eligibility in the new
chapter 11. Third, the legislative history indicates that
Congress intended that nonbusiness individuals would
continue to be eligible for reorganization under chapter
11. Finally, permitting individual debtors without busi-
nesses to seek chapter 11 relief is consistent both with
the structure of the Bankruptcy Code and the policy
underlying chapter 11.
I. THE PLAIN LANGUAGE OF THE BANKRUPTCY
CODE MAKES PETITIONER ELIGIBLE FOR RE-
LIEF UNDER CHAPTER 11
It is well settled that unambiguous statutory language
must be accepted as conclusive “in the absence of a
‘clearly expressed legislative intent to the contrary.’” ™
Here, the Court should reverse because the statutory
language unambiguously gives all individuals the right
to proceed under chapter 11 and, as we discuss below, far
from evincing a contrary intent, the legislative history
supports the proposition that any individual, whether or
16 United States v. Turkett, 452 U.S. 576, 580 (1981). Accord
Consumer Prod. Safety Comm’n v. GTE Sylvania, Inc., 447 U.S.
102, 108 (1980); Blum v. Stenson, 465 U.S. 886, 896 (1984);
INS v. Cardoza-Fonseca, 480 U.S. 421, 432 n.12 (1987); United
Savings Ass'n of Texas v. Timbers of Inwood Forest Associates,
Ltd., 484 U.S. 365, 379-80 (1988).
11
not engaged in business, is eligible for relief under chap-
ter 11."
The relevant statutory language is contained in sec-
tion 109(d), which states that any “person” eligible to
be a debtor under chapter 7, with certain exceptions not
relevant here, is qualified to be a debtor under chapter
11."° There is no question that petitioner is eligible for
chapter 7. Indeed, the Bankruptcy Court sought to force
petitioner to utilize chapter 7, and it is quite clear that
he qualifies for that chapter. Section 109(b) provides
that any “person” may be a debtor under chapter 7,
again with certain exceptions not pertinent here.*® The
17 This Court has also held in a long line of cases that when
the language of am act is clear, as here, that language must be
given effect without regard to extraneous evidence of legislative
intent. E.g., United States v. Wiltberger, 18 U.S. (5 Wheat.) 76,
95-96 (1820); United States v. Hartwell, 73 U.S. (6 Wall.) 385,
395-396 (1868); Caminetti v. United States, 242 U.S. 470, 489-490
(1917); Packard Motor Car Co. v. NLRB, 330 U.S. 485, 492
(1947); Central Trust Co., Rochester, N.Y. v. Official Creditors’
Committee of Geiger Enterprises, 454 U.S. 354, 359-560 (1982)
(per curiam); see INS v. Cardoza-Fonseca, 480 U.S. 421, 452-453
(1987) (Sealia, J., concurring). An exception to this general rule
is where the literal application of the statute would yield an “ab-
surdity,” United States v. Hartwell, 73 U.S. (6 Wall.) at 396, or
a result “plainly at variance with the policy of the legislation as
a whole.” Perry v. Commerce Loan Co., 383 U.S. 392, 400 (1966)
(citation omitted); accord United States v. Ron Pair Enterprises,
Inc., 489 U.S. 235, 242-243. This exception does not apply here.
See Point IV infra.
1®11 U.S.C. §109(d) (1988) (providing that stockbrokers and
commodity brokers may not be, and railroads may be, chapter 11
debtors) .
111 U.S.C. §109(b) (1988). The “persons” who may not be
chapter 7 debtors are railroads, insurance companies, banks, sav-
ings banks, savings and loan associations, building and ‘oan asso-
ciations, homestead associations and credit unions, whether such
entities are domestic or foreign and doing business in the United
States; and domestic “industrial bank[{s] or similar institution[s]
which [fare] insured bank[s| as defined in Section 3(b) of the
Federal Deposit Insurance Act ....” Id.
12
word “person” is defined in section 101(37) to mean an
“individual, partnership or corporation,” other than cer-
tain governmental entities.*” The plain meaning of these
words is that, with a few exceptions not relevant here, an
individual who is eligible to be a debtor under chapter 7,
such as petitioner, is also eligible to be a debtor under
chapter 11.
Congress knew well how to limit eligibility under the
Bankruptcy Code when it chose to do so. Chapter 13 is
expressly limited to certain “individuals”;* chapter 9
is only available to municipalities;** and only farmers
are eligible for relief under chapter 12.** Even chapter
11 itself expressly excludes certain classes of persons,
such as stockbrokers and commodity brokers (and ex-
pressly includes railroads, which are ineligible under
chapter 7).** Congress also knew how to distinguish
individuals engaged in business from consumers when
necessary, as in section 1304 which specifically defines
what constitutes being engaged in business for the pur-
pose of defining the rights and duties of the debtor and
the trustee in a chapter 13 proceeding.” What is striking
here is the absence from the language of section 109(d),
which determines eligibility for chapter 11, of even a
hint of an intent to bar individual debtors not engaged in
business, despite Congress’s carefully crafted limitations
on eligibility for other debtors.
“611 U.S.C. §101(37) (1988) as amended by Pub.L. No. 101-647
(November 25, 1990).
2111 U.S.C. §109(e) (1988). See text at note 64 supra for a
description of these limitations.
22 11 U.S.C. § 109(c) (1988).
23 11 U.S.C. § 109(f) (1988).
2411 U.S.C. § 109(d) (1988).
25.11 U.S.C. § 1304 (1988); see also 11 U.S.C. § 1302(c) (1988).
13
II. CONGRESS DID NOT INTEND TO REVERSE THE
PRACTICE UNDER CHAPTER XI OF THE BANK-
RUPTCY ACT OF PERMITTING NONBUSINESS
DEBTORS TO REORGANIZE
This Court has held that “the normal rule of statutory
construction is that if Congress intends for legislation to
change the interpretation of a judicially created concept,
it makes that intent specific.” ** This rule applies with
“particular care in construing the scope of bankruptcy
codifications.” ** Here, the practice under the predecessor
provisions to chapter 11 was to permit nonbusiness indi-
vidual debtors to reorganize. In the absence of any “con-
gressional intent to depart from [prior judicial] prac-
tice,” ** it should be presumed that Congress intended to
continue that practice in the codification of chapter 11
and that Congress intended that chapter 11 ‘Se made
available to nonbusiness individual debtors.
Chapter 11 represents the consolidation of three re-
organization provisions of the prior Bankruptcy Act.*
Those provisions were, respectively, forme: chapter X,*°
26 Midlantic National Bank v. New Jersey Department of En-
vironmental Protection, 474 U.S. 494, 501 (1986) (restrictions on
judicially-created abandonment power held included in subsequent
codification of that power). Accord Pennsylvania Dep't of Public
Welfare v. Davenport, 110 S. Ct. 2126, 2133 (1990) (“We will not
read the Bankruptcy Code to erode past bankruptcy practice absent
a clear indication that Congress intended such a departure.” ).
27 Midlantic National Bank, 474 U.S. at 501.
28 United States v. Whiting Pools, Inc., 462 U.S. 198, 208 (1983).
2° See S. Rep. No. 989, 95th Cong., 2d Sess. 9 (1978) [herein-
after cited as S. Rep.|, reprinted in 1978 U.S. Code Cong. & Admin.
News 5897, 5795; H.R. Rep. No. 595, 95th Cong., Ist Sess. 223
(1977) [hereinafter cited as H.R. Rep.|, reprinted in 1978 US.
Code Cong. & Admin. News 5963, 6182.
*® Bankruptey Act §§ 101-276, 11 U.S.C. §$§ 501-676 (1976) (re-
pealed 1979). Former chapter X was designed for the reorganiza-
tion of large companies, with widely dispersed ownership, a sig-
14
which provided for the reorganization of public com-
panies, former chapter XI," which provided for the
reorganization of corporations, partnerships, and indi-
viduals, and former chapter XII,** which provided for
the reorganization of certain noncorporate real estate
entities.** Former chapter X was the only one of these
pre-Code provisions that clearly excluded individuals.”
While it may have been unusual for individuals not en-
gaged in business to seek protection under former chap-
ter XI, such relief was expressly contemplated by the
Rules governing bankruptcy procedure under the Bank-
ruptey Act and was an accepted and noncontroversial
practice.
The relationship between the Rules in effect under the
Bankruptcy Act and former chapters XI and XIII pro-
vides the clearest evidence that individuals not engaged
in business were eligible for relief under chapter XI.
Those Rules contemplated that chapter XI was available
to debtors who had filed under chapter XIII, and chapter
XIII was only available to wage earners. Rule 11-3 thus
provided that “(t]he petition under chapter XI may be
an original petition or it may be filed in a bankruptcy,
chapter XII, or chapter XIII case.”** Because a peti-
nificant level of publicly held securities, and a need to modify
secured debts. See SEC v. United States Realty & Improvement
Company, 310 U.S. 434 (1940).
31 Bankruptcy Act §§ 301-399, 11 U.S.C. §§ 701-799 (1976)
(repealed 1979).
82 Bankruptcy Act §§ 401-526, 11 U.S.C. §§ 801-926 (1976)
(repealed 1979).
88 See generally H.R. Rep., supra note 29, at 220-223, reprinted
in 1978 U.S. Code Cong. & Admin. News at 6179-183.
%* Bankruptcy Act §§ 106(3), (5) and 126, 11 U.S.C. §§ 506(3),
(5) and 526 (1976) (repealed 1979).
*5 Chapter XI Rule 11-3. See also chapter XI Rule 11-7, which
stated in pertinent part:
15
tion for relief under chapter XIII could be filed only by a
“debtor,” ** which chapter XIII defined as a “wage earner
who filed a petition under this chapter,” *’ and chapter
XIII defined a “wage earner” as “an individual whose
principal income is derived from wages, salary or com-
missions.” “ Individuals with businesses were not eligible
for relief under chapter XIII." In permitting debtors
already engaged in a chapter XIII proceeding to com-
mence a chapter XI case, the chapter XI Rules contem-
plated that chapter XI would be available to individuals
without businesses.
Further evidence that the Bankruptcy Act contemplated
chapter XI filings by individual nonbusiness debtors is
found in the provision which prohibits filing an involun-
tary chapter XI against certain wage earners.” “Wage
earner” for this purpose was defined as “an individual
who works for wages, salary or hire, at a rate of com-
pensation not exceeding $1,500 per year.” * It is highly
unlikely that any debtors who qualified as wage earners
under this section would have also been engaged in busi-
If a bankruptcy case or a case under chapter XII or XIII is
pending by or against the debtor, any petition under chapter
XI shail be filed therein and may be filed before or after
adjudication.
“6 Bankruptey Act §§ 621, 622, 11 U.S.C. §§ 1021, 1022 (1976)
(repealed 1979).
** Bankruptcy Act §606(3), 11 U.S.C. §1006(3) (1976) (re-
pealed 1979).
38 Bankruptcy Act § 606(8), 11 U.S.C. §1006(8) (1976) (re-
pealed 1979). Corporations and partnerships were not eligible for
chapter XIII relief.
**R. Jordan & W. Warren, Bankruptcy 661 (2d ed. 1989).
*° Bankruptcy Act § 379, 11 U.S.C. § 779 (1976) (repealed 1979).
*' Bankruptey Act § 1(32), 11 U.S.C. §1(32) (1976) (repealed
1979).
*? See Herbert, Consumer Chapter 11 Proceedings, 91 Com. L.J.
234, 241 (1986).
16
ness.*? Non-affluent wage earners who were not engaged
in business would not have needed protection against
involuntary chapter XI proceedings unless it were the
case that they were otherwise eligible for chapter XI.**
The courts also assumed in pre-Code cases that the
former Bankruptcy Act permitted individuals without
businesses to file under chapter XI.** Finally, contem-
porary commentators assumed that chapter XI would be
43 The legislative history of the Bankruptcy Code also reflects
Congress’s understanding that nonbusiness individuals were eligible
to recognize under the former chapter XI. In explaining why
eligibility for chapter 13 should be expanded to include small, self-
employed businessmen, the House Report recognized that individ-
uals, whether in business or not, were then eligible for former
chapter XI. The report states:
Even individuals whose primary income is from investments,
pensions, social security, or welfare may use chapter 13 if
their income is sufficiently stable and regular. The expansion
of eligibility will enable many to work out arrangements with
their creditors rather than seeking straight bankruptcy liqui-
dation. Under current law [the Bankruptcy Act], they are
constrained to use Chapter XI, Arrangements, which is too
cumbersome a procedure for the small, self-employed business-
man.
H.R. Rep., supra note 29, at 119, reprinted in 1978 U.S. Code Cong.
& Admin. News, at 6080 (emphasis added) (footnotes omitted).
One of the purposes of chapter 13 was thus to give wage earners
an alternative to reorganization under the former chapter XI and
its successor, chapter 11.
44In White v. Board of Trade of the City of Chicago, 492 F.2d
871 (7th Cir. 1974), the debtor was permitted to reorganize even
though he apparently had no business to reorganize. Having sur-
rendered his membership in the Board of Trade prior to the com-
mencement of the chapter XI case, he no longer had this member-
ship to claim as a business. In Stolkin v. Nachman, 472 F.2d 222
(7th Cir. 1973), the debtor was not regularly employed, although
he had accumulated substantial assets as an investor. Neither
debtor owned or operated a “business” in the sense of an ongoing
enterprise with assets and liabilities (although the debtor in White,
like the petitioner here, may have had a business before bank-
ruptcy). See also Herbert, supra note 42, at 241.
17
available to nonbusiness debtors. In the last pre-Code
edition of Collier on Bankruptcy, the authors wrote: A
wage earner... may also file a petition for relief under
chapter XI, as clearly recognized in section 379 [of the
Act], even though other debtor relief chapters under the
Act are available to him.” *
Against this backdrop, Congress consolidated the three
reorganization provisions of the Bankruptcy Act, includ-
ing former chapter XI, into chapter 11 of the Bank-
ruptey Code. Neither the Bankruptcy Code nor the leg-
islative history contains any indication that Congress
sought to change the practice under the Bankruptcy Act
permitting individuals not engaged in business to re-
organize under former chapter XI. Absent a clear in-
dication of congressional intent to the contrary, it must
be presumed that when Congress created chapter 11 out
of chapters X, XI and XII it did not intend to make
any change in the accepted interpretation that individual
nonbusiness debtors were eligible for reorganization
under chapter XI.**
Ill. THE LEGISLATIVE HISTORY EVINCES CON-
GRESS’S INTENT TO MAKE ALL INDIVIDUALS
ELIGIBLE FOR CHAPTER ll
The legislative history confirms that, in continuing
the practice of permitting individuals without businesses
to reorganize under former chapter XI, Congress did so
49 J. Moore & L. King, Collier on Bankruptcy § 10.15 at 589
(14th ed. 1978) (footnote omitted).
46 The fact that former chapter X was not available to individ-
uals without businesses is hardly significant. Indeed, former chap-
ter X was a chapter that proved unsatisfactory and was rarely
utilized. E.g., R. Jordan and W. Warren, supra note 29, at 723 (de-
scribing chapter X as “virtually a dead letter” by the eve of the
passage of the new Bankruptcy Code). And, as discussed below,
there is no indication in the legislative history that Congress
sought to do away with what had been available to such individ-
uals in former chapter XI.
18
advertently and intended to make chapter 11 of the new
Bankruptcy Code available to all individuals.*
The Senate Report expressly states that individuals
are permitted to seek relief under chapter 11:
Chapter 11, Reorganization, is primarily designed
for businesses, but permits individuals to use the
chapter. The procedures of chapter 11, however, are
sufficiently complex that they will be used only in a
business case and not in the consumer context.**
The House Report contains language to the same ef-
fect. In short, although Congress assumed that con-
sumers would not_avail themselves of the opportunity
to reorganize under chapter 11 in light of the complexity
and expense entailed in such proceedings, it expressly
acknowledged that chapter 11 would be available to
individuals. .
Nor is there any evidence that Congress sought to
distinguish between individuals engaged in business and
consumers. On the contrary, the House Report states
that “‘{t]hough this report is divided between consumer
debtors and business debtors, the bill itself makes no
distinction.” *° The fact that the legislative history ad-
dresses in much greater detail the problems of reorganiz-
ing businesses *' merely reflects the fact that Congress
anticipated that few consumers would use chapter 11.”
47 See Herbert, supra note 42, 238.
48S. Rep., supra note 29, at 3, reprinted in 1978 U.S. Code
Cong. & Admin. News, at 5789.
49 H.R. Rep., supra note 29, at 6, reprinted in 1978 U.S. Code
Cong. & Admin. News, at 5792.
5° Td.
51 See, e.g., S. Rep., supra note 29, at 9, reprinted in 1978
U.S. Code Cong. & Admin. News, at 5795.
52 The numerous references in chapter 11 to actions to be taken
with respect to a debtor’s business, e.g., 11 U.S.C. §§ 1103(c) (2),
1106(a) (3) (1988), reflect merely the fact that most chapter 11
nee
19
The House Report also expressly contemplated the
availability of chapter 11 to “wage earners,” who are
defined as persons “whose principal income is derived
from wages, salary or commissions.” In describing a
change from the predecessor to chapter 13, the report
states:
Under current law [the predecessor to chapter 13],
only a “wage earner” ... may file a chapter XIII
case. This limitation unnecessarily excludes small
businessmen from the cheap and expeditious remedy
of a wage earner plan. The distinction between a
barber, grocer and worm digger who is self-em-
ployed from one who is an employee is slight. H.R.
8200 eliminates the distinction in order to offer small
sole proprietors as well as wage earners an alterna-
tive to Chapter 11.°4
In recognizing that the House bill gave “wage earners
an alternative to chapter 11,” the report necessarily also
acknowledged that chapter’s availability to persons with-
out a business.
To sum up, the legislative history demonstrates in
several places Congress’s understanding that chapter 11
would continue to be available to all individuals, including
those not engaged in business. Even if the legislative
history can somehow be viewed as less than conclusive,
it can hardly be said to evidence a clear legislative intent
to bar individuals not engaged in business from seeking
relief under chapter 11. Accordingly, there is no basis for
this Court to “question the strong presumption that Con-
proceedings involve businesses. Similarly, chapter 7, which is un-
deniably available to nonbusiness debtors, also contains numerous
references to actions to be taken with respect to a debtor’s busi-
ness. E.g., 11 U.S.C. §§ 704(8), 721 (1988).
53 H.R. Rep., supra note 29, at 118-19, reprinted in 1978 U.S.
Code Cong. & Admin. News, at 6079.
54 Jd. (emphasis added) (footnotes omitted).
20
gress expresses its intent through the language it
chooses.” ®
IV. PERMITTING NONBUSINESS INDIVIDUAL
DEBTORS TO SEEK CHAPTER 11 RELIEF IS CON-
SISTENT WITH BOTH THE STRUCTURE OF THE
BANKRUPTCY CODE AND THE POLICY UNDER-
LYING CHAPTER ll
Chapter 11 relief for individual nonbusiness debtors
is consistent with both the structure of the Bankruptcy
Code and its underlying policies. The Code provides sev-
eral avenues of relief, each of which presents certain ad-
vantages and disadvantages, and leaves it to the debtor
to pick the course most advantageous to him. Moreover,
depriving nonbusiness debtors of the opportunity to seek
chapter 11 relief would frustrate a key policy of the
Bankruptcy Code, namely, to permit debtors to reorganize
where they are worth more on a going-concern than a
liquidation basis.
A. Chapter 11 Relief for Nonbusiness Individual Debt-
ors Is Consistent With the Structure of the Bank-
ruptcy Code
Permitting nonbusiness individual debtors to seek relief
under chapter 11 is entirely consistent with the structure
of the Bankruptcy Code. Structurally, the Code consists
of several chapters that provide different advantages and
disadvantages." Where a debtor is eligible for relief
under more than one chapter, Congress left it to the
debtor to weigh the economics involved and to select the
55 INS v. Cardoza-F onseca, 480 U.S. at 432 n.12.
56 The fundamental difference between a liquidation under chap-
ter 7 and a reorganization under chapter 11 or chapter 13 is that
in a liquidation, the debtor’s non-encumbered, non-exempt assets,
are reduced to cash and distributed to creditors, see text at note
58, infra, while in a reorganization the debtor retains all or
some of his assets and pays his debts, which may be extended or
reduced, primarily out of future cash flow, see text at notes 66
and 71 infra. ,
a ee es Od a EE! I
21
remedy that best fits the debtor’s particular facts.*’ The
fact that chapter 11 may provide certain advantages that
chapters 7 and 13 do not is simply part of the calculus
that must be performed by the debtor.
As we noted above, chapter 7 is broadly available to
both individuals and entities. In a chapter 7 liquidation, a
trustee is appointed to liquidate the assets ** of the debtor
and to distribute the proceeds to creditors in the priority
specified by the Code. At the conclusion of a liquidation
under chapter 7, the debtor is given a discharge of all
pre-filing debts,” except for certain non-dischargeable
debts." A debtor cannot obtain a discharge under chap-
ter 7 if he has previously received a discharge in a case
commenced within six years of the filing of the petition.”
If his creditors meet certain statutory prerequisites, they
can force the debtor into an involuntary liquidation
under chapter 7.
Chapter 13 provides for the reorganization of certain
individuals with limited debts. Specifically, only individ-
"7 In re Silva, 82 Bankr. 845, 846-847 (Bankr. S.D. Ohio 1987) ;
In re Ross, 95 Bankr. 509, 510 (Bankr. S.D. Ohio 1988).
58 Under section 522 of the Bankruptcy Code, certain property
owned by the debtor is “exempt.” Exempt property cannot be
liquidated and sold for the benefit of unsecured creditors. 11 U.S.C.
§ 522 (1988).
59 11 U.S.C. §$§ 704, 726 (1988).
6911 U.S.C. § 727(a) (1988).
*1 11 U.S.C. §523 (1988). A variety of debts are not discharge-
able under chapter 7, including certain tax obligations; debts for
money obtained by false pretenses; alimony obligations; liabilities
for fraud, embezzlement or larceny; liabilities for intentional torts;
and fines or penalties owed to the government. 11 U.S.C. § 523(a)
(1988).
6211 U.S.C. § 727(a) (9) (1988).
*3 11 U.S.C. § 303 (1988).
22
uals (and not corporations or partnerships) who have
regular income and who have liquidated, unsecured debts
of less than $100,000 and liquidated, secured debts of
less than $350,000, may become debtors under chapter
13.% With limited exceptions, debts that are nondis-
chargeable under chapter 7 are dischargeable under
chapter 13.° In a chapter 13 proceeding, the debtor re-
tains his assets and pays his debts out of future earnings
pursuant to a plan that must be confirmed by the court.”
Creditor approval is not required for confirmation of a
chapter 13 plan, but the unsecured creditors’ recovery
must be at least equal to any alternative recovery under
a chapter 7 liquidation.” A standing trustee oversees all
of the chapter 13 cases in a particular district, and per-
forms many of the same functions as a chapter 7 trus-
tee.” Unlike a chapter 7 trustee, however, the standing
trustee does not take possession of the debtor’s property
or business.”
—
411 U.S.C. § 109(e) (1988).
*511 U.S.C. § 1328 (1988), as amended by Pub. L. No. 101-508
(November 5, 1990) and Pub. L. No. 101-647 (November 29,
1990). As in chapter 7, alimony obligations are not dischargeable
in chapter 13. 11 U.S.C. § 1328(a) (2) (1988).
*6 See generally R. Jordan & W. Warren, supra note 39 at 671.
The chapter 13 plan cannot exceed five years in length. 11 U.S.C.
§ 1322(c) (1988).
®7 U.S.C. § 1325(a)(4) (1988). Moreover, the court can approve a
chapter 13 plan over the objection of an unsecured creditor when
the unsecured creditor is to receive under the plan full payment of
its claim, 11 U.S.C. § 1325(b)(1) (A), or all of the debtor’s dis-
posable income, 11 U.S.C. § 1325(b)(1)(B). An objecting secured
creditor is entitled either to retain the lien securing its claim or
to obtain possession of the collateral securing its claim. 11 U.S.C.
§ 1325(a) (5) (1988).
*8 See 3 L. King, Collier Bankruptcy Manual, © 1302.03, at 1302-4
(3d ed. 1990); 28 U.S.C. § 586 (1988), as amended by Pub. L.
No. 101-509 (November 5, 1990).
* 11 U.S.C. §§ 1304, 1306(b) (1988).
23
Chapter 11 is available to any “person” who is eligible
for liquidation under chapter 7, except for a stockbroker
or commodity broker, plus any railroad.” In a chapter
11 proceeding, the debtor usually retains possession of
his assets, although a trustee can be appointed.”' More-
over, an unsecured creditors’ committee must be ap-
pointed as soon as practical after the petition is filed.”
The debtor has the exclusive right for 120 days to pro-
pose a reorganization plan.”* After due disclosure is
made,” creditors whose claims or interests would be im-
paired” by the plan have the right to vote by class on
the plan.” The plan can be confirmed if approved by the
requisite number of claimants possessing the requisite
amount of claims within each class." If a class dissents,
7911 U.S.C. § 109(d) (1988).
1 See 11 U.S.C. §1104(a). Trustees are seldom appointed in
chapter 11, because there is a basic presumption that the debtor-
in-possession knows its affairs better than anyone. If a trustee is
appointed, its job will be to run the debtor’s affairs and presump-
tively not to liquidate the debtor’s assets.
7211 U.S.C. § 1102(a) (1988).
™ See 11 U.S.C. § 1121(b) (1988).
7 Pursuant to 11 U.S.C. §1125 the debtor-in-possession must
file a disclosure statement.
75 A class of claims or interests is “impaired” when the legal,
equitable or contractual rights of the members of the class are
altered. 11 U.S.C. § 1124 (1988).
76 An impaired class of claims accepts the plan if at least two-
thirds in amount and more than one-half in number of the allowed
claims in the class that are actually voted are cast in favor of
the plan. An impaired class of interests accepts the plan if at
least two-thirds in amount of the allowed interests in the class
that are actually voted are cast for the plan. See 11 U.S.C. § 1126
(c)-(d) (1988). A class that is not impaired under a plan is con-
clusively presumed to have accepted the plan. 11 U.S.C. § 1126(f)
(1988).
711 U.S.C. §§ 1126(c) and 1129(a) (8) (1988).
24
the court may nonetheless approve the plan if the “cram-
down” provisions of section 1129 are met. An important
requirement to cramming down a plan is that each dis-
senting creditor must receive at least as much as it
would in a chapter 7 liquidation.” Another important
cram-down requirement is the “absolute priority” rule,
which requires that before any junior claim is paid at all,
claims that are senior to it must be paid in full.” Con-
firmation of a chapter 11 plan results in most cases in a
discharge of the same types of debts that are discharge-
able in a chapter 7 liquidation.*
A court may reject a chapter 11 plan submitted in
bad faith*' and for cause may dismiss or convert the
proceeding to a chapter 7 liquidation.** Cause includes
any determination by the court that there is a continuing
loss to the estate and an absence of a reasonable likeli-
hood of rehabilitation or that the debtor is unable to
effectuate a plan of reorganization.
To summarize, chapter 7 offers to debtors the advan-
tages of speed and minimal cost, although it results in
the loss of nonexempt assets; chapter 13 offers debtors
the broadest discharge of debts ** and the ability of the
711 U.S.C. §1129(a)(7) (1988); see generally 2 L. King,
Collier Bankruptcy Manual, { 1100.01, at 1100-20 to 1100-23 (3d ed.
1990).
79 See 11 U.S.C. § 1129(b) (2) (B) (1988).
8° Chapter 11 debtors are subject to the nondischargeability
provisions of sections 523 and 727(a) of the Bankruptcy Code.
11 U.S.C. $§ 1141(d) (2) & (3) (1988).
S111 U.S.C. §1129(a)(3) (1988); see 2 L. King, supra note
78, | 1112.04, at 1112-29 to 1112-36.
8211 U.S.C. §1112(b) (1988); see 2 L. King, supra note 78,
1112.04, at 1112-17 to 1112-22.
8311 U.S.C. §1112(b) (1988).
*4 For example, a chapter 13 debtor who successfully completes
a plan can receive a discharge of obligations arising out of fraud,
25
debtor to retain possession of his property without a
creditors’ committee overseeing the reorganization, al-
though it is only available for some individuals with lim-
ited debts and requires payment of all disposable income
into the debtor’s plan; and chapter 11 offers debtors both
the ability to maintain possession of the bankruptcy
estate and greater flexibility in structuring a plan of re-
organization, although it entails some additional delay
and expense in connection with disclosure to creditors
and administration of the creditors’ committee and, ex-
cept in the case of a “cram-down” plan, requires creditor
approval for confirmation of a plan.*
Only in limited circumstances will it be more advan-
tageous for an individual debtor without an ongoing
business to pursue a chapter 11 reorganization. Most
individual debtors will seek relief under chapters 7 or 13
due to the additional cost and complexity of chapter 11."
Still, some individual debtors, like petitioner, will prefer
chapter 11. While it is difficult to generalize, chapter 11
may be in the best interests of an individual nonbusiness
debtor and his creditors where the debtor is willing and
able to inject fresh cash into the plan, or is not eligible
for chapter 13," or has some asset such as petitioner’s
see Pennsylvania Dep't. of Public Welfare v. Davenport, 110 S.Ct.
2126, 2134 (1990), or intentional torts, see In re LeMaire, 883
F.2d 1373, (8th Cir. 1989) reh’g granted, vacated 891 F.2d 650, on
reh’g, 898 F.2d 1346, 1348 (1990). See 11 U.S.C. § 1828(a) (1988).
In chapters 7 and 11 obligations arising from fraud and intentional
torts are not dischargeable. 11 U.S.C. § 523(a)(6) (1988).
85 See Herbert, supra note 42, at 240. For a more detailed dis-
cussion of the differences between chapters 7, 11 and 13, see gen-
erally Note, Individual Consumer Debtors Are Eligible For Chap-
ter 11 Relief, 1988 Ill. L. Rev. 785, 786-790.
86 See, e.g., Herbert, supra note 42, at 238-239; Note, supra
note 85, at 788.
** Even if chapter 13 is available, chapter 11 offers considerably
more flexibility in formulating a plan, and depending on the facts
and circumstances, the debtor and his creditors may conclude that
such flexibility is needed to achieve the greatest possible recovery.
26
causes of action which may yield a substantial future
recovery but cannot be expeditiously liquidated by a
chapter 7 trustee for its present value.
The fact that chapter 11 is “primarily designed for
businesses” ** and the perhaps limited role that chapter 11
may have for individual debtors who are not engaged in
an ongoing business in no way implies that it has no
role to play. To the contrary, to bar nonbusiness individ-
ual debtors from chapter 11 would leave a lacunae in
the Code that makes no sense. If individuals with sub-
stantial debts who are not engaged in business are barred
from chapter 11, then their only remedy will be liquida-
tion under chapter 7 which may well, as in this case, yield
less value for creditors than reorganization.
Nor can the dollar limits on eligibility in chapter 13 be
said to reflect some desire on Congress’s part to provide
an exclusive reorganization remedy for consumer debtors.
Individuals with substantial debts were made ineligible
for relief under chapter 13 in order “to make chapter 13
available to most consumer debtors and many small busi-
ness debtors, leaving to chapter 11 cases involving larger
amounts of debt.” ** The only reason that Congress be-
lieved that large debtors should not be permitted to pro-
ceed under chapter 13 was because of the weakened pro-
tections for creditors under chapter 13° compared to
those available under chapter 11.*' Thus, the fact that
88S. Rep., supra note 29, at 3, reprinted in 1978 U.S. Code Cong.
& Admin. News, at 5789.
*° R. Jordan & W. Warren, supra note 39, at 671.
” For example, chapter 13, unlike chapter 11, neither requires
the debtor to file a comprehensive disclosure statement nor pro-
vides for an unsecured creditor’s committee to oversee the case.
11 U.S.C. § 1301 et seg. (1988).
" As stated in the House Report:
The bill places dollar limitations on the amount of debts of
the proprietor who may use chapter 13, in order to prevent
a
27
individuals with substantial debts, such as petitioner, are
ineligible for chapter 13 reflects not an intent to force
such individuals into liquidation but rather Congress’s
belief that any reorganization of such debtors should
proceed under chapter 11.
B. No Policy Bars Nonbusiness Individual Debtors
From Seeking Relief Under Chapter 11
The basic premise of chapter 11 is that a debtor may
be worth more on a going forward basis than in liquida-
tion.”* In the business context, this may be because “as-
sets that are used for production in the industry for
which they were designed are more valuable than those
same assets sold for scrap.” * However, it is equally true
that in the nonbusiness context, certain assets (such as
the causes of action and shares owned by petitioner)
may yield more value for creditors if managed or vigor-
ously pursued by a debtor-in-possession in a reorganiza-
tion case than if liquidated by a trustee in a fire sale.
In either the business or nonbusiness context, the result
in a successful reorganization is that creditors (and
potentially the equity interests) will receive more value
than they would otherwise receive in a liquidation." In-
sole proprietors with large businesses from abusing creditors
by avoiding chapter 11.
H.R. Rep., supra note 29, at 119, reprinted in 1978 U.S. Code
Cong. & Admin. News, at 6080.
%2 See generally H.R. Rep., supra note 29, at 220, reprinted in
1978 U.S. Code Cong. & Admin. News, at 6179.
% Jd. A successful reorganization of a business will also preserve
jobs. Id.
** One of the prerequisites for confirmation of a reorganization
plan under chapter 11 is that all impaired holders must either
accept the plan or receive not less than the amount they would
receive under a chapter 7 liquidation. 11 U.S.C. § 1129(a) (7)
(1988). In practice, holders cannot be expected to vote in favor
of a plan unless they believe that their recovery will be at least
as favorable as in a liquidation.
28
deed, the benefits of reorganization are so great that
Congress has even made it impossible to waive the right
to convert a chapter 7 liquidation proceeding to a reor-
ganization under chapters 11, 12 or 13.” It is consistent
with both the letter and spirit of the Code that nonbusi-
ness individual debtors who are able to satisfy the de-
manding requirements of chapter 11 be permitted to do
so. To hold otherwise would fly in the face of “the con-
gressional goal of encouraging reorganizations.” *°
Finally, permitting individual debtors not engaged in
business to seek relief under chapter 11 will not open
the floodgates to abusive filings. The courts retain ample
power to control any abusive filings that are made. A
chapter 11 petition can be dismissed if the court deter-
mines, among other things, that it was brought in bad
faith, that there is no reasonable likelihood of rehabili-
tation or that the debtor will be unable to effectuate a
plan of reorganization that complies with the Code.”
Other provisions of the Code ensure that creditors’ inter-
ests will be protected.”
11 U.S.C. § 706(a) (1988). See also H.R. Rep., supra note 29,
at 380, reprinted in 1978 U.S. Code Cong. & Admin. News, at 6336
(“The policy of [Section 706] is that the debtor should always
be given the opportunity to repay his debts.”).
% United States v. Whiting Pools, Inc., 462 U.S. 198, 204 (1983).
*7 11 U.S.C. §§ 1112(b), 1129(a) (3) (1988); see 2 L. King, supra
note 78, © 1112.04 at 1112-17 to 1112-22 and 1112-29 to 1112-36.
* No chapter 11 plan can be confirmed over the objection of
creditors unless those creditors receive at least the amount they
would receive in a liquidation under chapter 7. See supra note 94.
29
CONCLUSION
For the foregoing reasons, the judgment of th
of appeals should be reversed. tS eet
Respectfully submitted,
Of Counsel TIMOTHY B. Dyk
JONATHAN W. BELKSY (Counsel of Record)
7817 Forsyth Blvd. PETER M. LIEB .
Suite 200 DOUGLAS B. LEVENE
Clayton, Missouri 63105 PATRICK J. PoTTER
(314) 726-5068 JONES, DAY, REAVIS & POGUE
1450 G Street, N.W.
Washington, D.C. 20005
(202) 879-3939
March 4, 1991 Counsel for Petitioner
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