In In re Derrick Dewayne Gordon, Ch. 11 Case No. 11-62509, 2012 Bankr. LEXIS 2012 (Bankr. N.D. Ga. January 23, 2012)(Judge Wendy Hagenau) (click here for .pdf of 32 page opinion), the issues before the Court were: 1) Could a creditor of an individual Chapter 7 Debtor, with non-consumer debt, move to convert the case to Chapter 11 pursuant to 11 U.S.C. § 706(b), and 2) Does forcing the individual Debtor into a Chapter 11 case violate the involuntary servitude and slavery provisions of the 13th Amendment of the U.S. Constitution or the Anti-Peonage Act, 42 U.S.C. § 1994.
The Debtor, an operational consultant with an MBA in Finance, was formerly an employee of Proudfoot Consulting Company. After Debtor left Proudfoot and went to work for Highland Consulting Group, Proudfoot filed suit against Debtor for violating the restrictive covenants in his employment agreement. Proudfoot ultimately obtained injunctive relief and a monetary judgment for $1,659,000 and an additional $335,050.00 for Proudfoot’s fees and expenses. The judgment was appealed, but the judgment for attorneys fees was not stayed and Proudfoot initiated garnishment proceedings against Debtor. The Debtor responded by filing a Chapter 7 petition.
Motions to Dismiss the Chapter 7 case were filed by the Chapter 7 Trustee and Proudfoot, and the Debtor opposed both motions. Proudfoot then filed a Motion to Convert the case to a Chapter 11 based upon Debtor’s substantial income and ability to repay a portion of his debts in a Chapter 11 plan. Debtor opposed conversion, arguing that § 706(b) does not apply to individual debtors and, even if it did, forcing him into Chapter 11 would constitute unlawful involuntary servitude prohibited by the Thirteenth Amendment, and would be unlawful peonage pursuant to the Anti-Peonage Act, 42 U.S.C. § 1994.
A hearing was held, after which Judge Hagenau ruled that 1) § 706(b) did apply to individual debtors, 2) conversion was appropriate based upon Debtor’s income and ability to fund a plan, and 3) Debtor’s arguments with respect to the Thirteenth Amendment and Anti-Peonage Act were without merit.
- Conversion to Chapter 11 was Appropriate Pursuant to 11 U.S.C. § 706(b).
The actual amount of Debtor’s monthly and disposable income was disputed, but the Court concluded for purposes of the motion that Debtor had disposable income of at least $3,400 per month and as much as $10,000 per month, based on total annual income of at least $250,000. With approximately $450,000 in unsecured debt, Debtor had the ability to pay 45-100% of claims in a five year plan.
The Court found that Debtor’s argument that § 706(b)did not apply to individual debtors with non-consumer debt was without merit.
Section 706(b) of the Bankruptcy Code clearly, on its face, applies to all debtors in Chapter 7. There are no limitations on conversion from Chapter 7 to Chapter 11 other than being eligible to be a debtor in the chapter. There is no dispute but that individuals are entitled to be debtors under Chapter 11 of the Bankruptcy Code. See 11 U.S.C. § 109(d) and 11 U.S.C. § 101(41). The Debtor urges the Court to read Section 706 to exclude individuals with primarily non-consumer debts because of certain legislative history surrounding Chapter 13. In 1977, Congress expressed concern as to whether a mandatory or involuntary Chapter 13 would constitute in-voluntary servitude under the Thirteenth Amendment. The legislative history states further that "[o]n policy grounds, it would be unwise to allow creditors to force a debtor into a repayment plan." HR REP. NO. 95-595, at 120 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6081. However, this legislative history is not directly related to Section 706(b), nor is it related to Chapter 11, and does not reflect anything about the "policy grounds" of Section 706(b)...Where the language is not unclear, there is no need to refer to a statute’s legislative history. In this case, the statute is eminently clear that it is not limited to corporate debtors and the Court therefore does not need to look at the legislative history of Chapter 13 in construing the statute.
The Court next addressed the Debtor’s Constitutional and Anti-Peonage arguments (after the jump).
2. Conversion to Chapter 11 Did Not Violate the Thirteenth Amendment Prohibition Against Involuntary Servitude.
Having concluded that conversion was appropriate, the Court had to address Debtor’s claims that involuntary conversion would constitute involuntary servitude and violate the Thirteenth Amendment of the United States Constitution. The issue was briefed by the United States Attorney (click here and here for the briefs) and the Debtor (click here).
Since the Debtor challenges the application of Section 706(b) as being in violation of the Thirteenth Amendment’s prohibition on involuntary servitude, the Court must examine the scope of involuntary servitude under the Thirteenth Amendment. The Supreme Court has recognized from its earliest decisions that the genesis of the Thirteenth Amendment was to prohibit slavery… However, "courts have consistently found the involuntary servitude standard is not so rigorous as to prohibit all forms of labor that one person is compelled to perform for the benefit of another. The Thirteenth Amendment does not bar labor that an individual may, at least in some sense, choose not to perform, even when the consequences of that choice are ‘exceedingly bad’." …
The Debtor argues that converting his case from Chapter 7 to one under Chapter 11 is involuntary servitude because there is the potential for a number of provisions in Chapter 11 to be invoked. The Debtor points to the following specific possible ramifications of conversion:
(i) The debtor’s post-petition earnings become property of the estate and must be used as necessary for execution of a confirmed plan. 11 U.S.C. §§ 1115, 1123(a)(8).
(ii) Under 11 U.S.C. § 1129(a)(15), if an unsecured creditor objects to a proposed plan, the debtor must show that the amount of his projected disposal income for at least five years is being paid under the plan.
(iii) The debtor has no absolute right to dismiss or convert his case pursuant to 11 U.S.C. § 1112 since the Chapter 11 case was not voluntarily selected by the debtor.
(iv) A creditor can propose a plan under 11 U.S.C. § 1121(c).
(v) The absolute priority rule may require the debtor to surrender his house and other personal possessions.
(vi) The court may find the debtor in contempt for failure to comply with any confirmed plan and such contempt may be punishable by fine or jail.
First, the Court notes that, with one possible exception, none of the items the Debtor sets out in the parade of horribles occurring from a conversion happen automatically from the conversion of the case. The only effect of converting the case under Section 706(b) is that the Debtor’s post-petition earnings become property of the estate, which means that, if he wishes to use those post-petition earnings for non-typical purposes, a request for approval to spend the money must be filed with the Bankruptcy Court and the use must be approved...The other possible consequences of a Chapter 11 case raised by the Debtor are not ripe for consideration…
None of the foregoing "horribles" have occurred, and none will occur without other decisions by the Court. Following the Supreme Court justiciability doctrines, the Court concludes the constitutionality of these other sections of Chapter 11 as applied to an individual non-consumer debtor are not ripe for review since none are at issue at this time. Even if the matters are constitutionally ripe, they are not prudentially ripe since determining the issues would require the Court to assume many facts not in evidence and not even in existence at this time. There is no hardship to the Debtor in requiring he wait to litigate these issues only if and when they are presented. If and when a plan is presented that is not accepted by creditors and any of these issues arise, the Court can address them...
As discussed above, the Debtor has not suffered an actual injury, nor is injury imminent based merely on a conversion of the case to Chapter 11. Any potential injury to the Debtor would occur only as a result of subsequent actions taken by this Court in ruling on the various issues that may arise if and when a plan is proposed that is not accepted by the creditors. Therefore, the Debtor does not have standing at this time to challenge the constitutionality of sections of the Bankruptcy Code which are not now in issue and no creditor has sought to apply. Even if the Debtor has Article III standing, prudential concerns preclude the Debtor’s standing to challenge the applicability of code sections not now in issue. The only question before the Court is whether conversion to Chapter 11 alone violates the Thirteenth Amendment. The Court concludes the mere conversion of the case from Chapter 7 to Chapter 11 is not a type of physical or legal coercion constituting involuntary servitude... Conversion simply places the Debtor in another chapter within the Bankruptcy Code, the protection of which the Debtor invoked by voluntarily filing his own petition to facilitate his discharge.
3. Involuntary Conversion Does not Violate the Anti-Peonage Act.
Debtor next argued that the involuntary conversion of his case to Chapter 11 would violate the Anti-Peonage Act, 42 U.S.C. § 1994. Based upon a similar reasoning as the Constitutional issue, the Court held that the mere conversion of the case did not violate the statute.
As in the discussion regarding the constitutionality of Section 706(b), the Court finds the only matter ripe for decision is the effect of mere conversion of the case from Chapter 7 to Chapter 11, and not whether any of the "horribles" described by the Debtor might, under certain circumstances, violate the Anti-Peonage Act. Since, again, the mere conversion of the case from one under Chapter 7 to one under Chapter 11 does not require the Debtor to work for a particular employer, or at a particular job, or to work at all nor to pay anyone, the conversion itself does not violate the Anti-Peonage Act.
The Court also found it relevant that the Debtor’s attorneys fees were being paid by Highland Consultant, his current employer, and thus Debtor suffered no damages by the conversion. The Court also noted that Debtor had opposed the motions to dismiss. "Thus, the Debtor is not opposed to bankruptcy protection, just opposed to making payment on his debts"
Based upon the above, the Court converted the case to a case under Chapter 7. On February 7, 2012, the Debtor filed a Notice of Appeal with the District Court. Presumably, the Chapter 11 case will proceed in the Bankruptcy Court until the District Court rules on the appeal.