A case is percolating through the federal courts in Washington state to test whether Congress violated the Thirteenth Amendment when it modified chapter 11 in 2005 to include an individual’s post-petition income in property of the estate.
A doctor filed a chapter 7 petition owing child support and about $1 million to unsecured creditors. He had less than $25,000 in secured debt.
The U.S. Trustee filed a motion for conversion to chapter 11 under Section 706(b), contending that the doctor could pay his creditors in full in chapter 11 within three years. In chapter 7, creditors would recover less than 20%, according to the U.S. Trustee.
The doctor opposed conversion, arguing that an involuntary chapter 11 would violate the Thirteenth Amendment’s prohibition of slavery and involuntary servitude by forcing him to pay creditors with post-petition income.
The doctor relied on the House Report accompanying the Bankruptcy Reform Act of 1978, which said that chapter 13 was made voluntary because making it mandatory might violate the Thirteenth Amendment “by forcing a debtor to work for creditors.”
In 1991, the Supreme Court had no concern about involuntary servitude arising from an involuntary chapter 11 petition against an individual because post-petition wages at the time were not property of a chapter 11 estate. The Supreme Court’s observation was made in Toibb v. Radloff, which allowed individuals to file chapter 11 petitions even if they do not conduct business. In the 2005 amendments, Congress created symmetry between chapters 13 and 11 by providing in Section 1115(a)(2) that an individual’s post-petition wages become property of a chapter 11 estate.
The bankruptcy court granted the conversion motion but did not reach the constitutional question, saying the doctor lacked standing and the issue was not ripe.
District Judge Thomas S. Zilly of Seattle agreed in a March 22 opinion.
Judge Zilly quickly concluded that the bankruptcy court did not abuse its discretion by converting the case to chapter 11. He then confronted the constitutional issues.
The doctor lacked standing on the Thirteenth Amendment claim because mere conversion to chapter 11 “did not constitute injury in fact.” Many steps must occur in chapter 11, the judge said, before the doctor could be compelled to devote post-petition income to payment of creditors’ claims.
Similarly, the constitutional question was not ripe because injury was contingent on future events that might not occur as anticipated.
Although Judge Zilly did not reach the merits, he expressed “considerable doubt” about the doctor’s constitutional argument. He cited cases for the proposition that there is no violation of the Thirteenth Amendment when someone can choose not to work, even if the choice is painful.