Toibb v. Radloff – Oral Argument – April 22, 1991

Media for Toibb v. Radloff

Audio Transcription for Opinion Announcement – June 13, 1991 in Toibb v. Radloff

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William H. Rehnquist:

We’ll hear argument now in No. 90-368, Sheldon Baruch Toibb v. Stuart Radloff.

Mr. Lieb, you may proceed whenever you are ready.

Peter M. Lieb:

Mr. Chief Justice, and may it please the Court:

The issue in this case is whether an individual who has no business is eligible for chapter 11 of the Bankruptcy Code.

The amicus in this case has urged this Court to adopt a business requirement for chapter 11, even though such a requirement is contrary to the plain language of the statute and would add a complexity to bankruptcy cases that was not intended by Congress.

Section 109(d) of the Bankruptcy Code by its terms provides that a person, except for a stockbroker or a commodities broker, who is eligible for chapter 7 is also eligible for chapter 11.

Section 101.37 of the code defines the word “person” to include an individual, partnership, or corporation.

The plain meaning of these words is that, except for a stockbroker or commodities broker, an individual, partnership, or corporation who is eligible for chapter 7 is also eligible for chapter 11.

And since there is no dispute in this case that an individual without a business is eligible for a chapter 7, the statute by its terms makes them eligible for chapter 11 as well.

Now, the use of the word 109(d) cannot be viewed as a legislative oversight or a carelessly chosen word.

In section 109 Congress focused exclusively on eligibility for the various chapters, and Congress demonstrated in section 109 that it knew how to limit eligibility for the various chapters, and that it even knew how to distinguish some persons from other persons.

Section 109(e), for example, limits the eligibility in chapter 13 to some individuals.

Congress also demonstrated in section 1304 that it knew how to distinguish individuals who were engaged in a business from individuals who were not engaged in a business.

And so we believe that the amicus’ concession in this case that there is no express business requirement in the code for chapter 11 is a clear indication that no such requirement was intended by Congress.

The amicus–

Sandra Day O’Connor:

Mr. Lieb, if you’re right, does this mean that consumer debtors can be placed into involuntary bankruptcy under chapter 11 by creditors?

Peter M. Lieb:

–It does mean that, although we think it’s unlikely that that will happen very often.

Sandra Day O’Connor:

Why is that?

Peter M. Lieb:

Because… because… for the same reasons that we think that consumers will not generally… well, it doesn’t generally make sense for a consumer to use chapter 11 because of the complexity and the length of a chapter 11 proceeding.

And for the same reasons creditors will not want to put consumer debtors into chapter 11 because of the added complexity and the length of the proceedings.

It may make sense in most cases to force them into chapter 7.

Sandra Day O’Connor:

Well, Congress certainly expressly rejected that under chapter 13, didn’t it?

Peter M. Lieb:

Congress did reject that in chapter 13, but there were peculiar reasons for rejecting that in chapter 13 which don’t apply in chapter 11.

Congress’ principal concern in chapter 13 was a concern with involuntary servitude, and that’s reflected in statements in the legislative history.

And that’s because in chapter 13 a plan must provide for the payment of future wages pursuant to the plan of reorganization.

There isn’t any such requirement in chapter 11 that future wages be used in the plan of reorganization.

In fact section 541(a)(6) expressly excludes future wages from property of the estate.

And so the concern about involuntary servitude that was expressed in the legislative history just doesn’t apply in chapter 11.

The amicus has suggested in its argument that the exclusive purpose of chapter 11 is to resuscitate failing businesses, and that making individuals eligible for chapter 11 without a business serves no purpose of the Bankruptcy Code, and we think that this is plainly wrong.

A fundamental purpose of the Bankruptcy Code is to maximize the value of the estate, and there are instances when a liquidation or reorganization in chapter 11 will maximize the value of the estate versus a liquidation in chapter 7.

Peter M. Lieb:

In chapter 7 a trustee is appointed and the trustee is under a duty presumed to section 704 to liquidate the assets to cash as expeditiously as possible.

And expeditiously is the word used in section 704.

In chapter 11, by contrast, in most cases no trustee is appointed, and chapter 11 offers individual debtors the flexibility to propose plans of reorganization which liquidate or reorganize over an extended period of time.

And there were certain types of assets which when sold in a chapter 11… chapter 7 setting, in the forced sale atmosphere that often accompanies sales by trustees, which will yield less in chapter 7 than if they are sold pursuant to a chapter 11 plan.

And I am thinking in particular of illiquid assets such as real estate or perhaps stock in a closely held corporation.

If sold pursuant to chapter 7 they may well yield less, and the estate may be diminished to the extent that they yield less.

In addition, an individual may be more familiar with his assets, and for this reason can add value to the estate.

In this case, for example, the principal… one of the principal assets was the debtor’s causes of action.

And the individual debtor’s participation in the lawsuits that he hopes to bring may be critical to their success.

And finally, whereas… and this could be in contrast with the trustee where a trustee may be unwilling to pursue a lengthy litigation, and even if the trustee is willing to pursue the lengthy litigation, that would, that may not be the most efficient way of pursuing litigation because of the added expenses and trustee’s fees that might accompany his involvement in the litigation.

There is one other instance where it may make sense–

Byron R. White:

Well, in your example about your property, why would the debtor… if it’s going to be sold in one proceeding or another, why would it, why would he want to sell it in chapter 11 rather than chapter 7?

Peter M. Lieb:

–Well, in a–

Byron R. White:

Just to help the creditor?

Peter M. Lieb:

–Well, the… if I take it your question is asked what is the individual debtor’s motive, the motive is to yield as much as possible to pay off his creditors in full and hopefully to regain some of the value that may exist in the asset.

Byron R. White:

I thought maybe his desire would be to retain the property for himself and maybe, maybe he’s got… he obviously doesn’t have a steady income or he’d be in 13, I suppose.

Peter M. Lieb:

Well–

Byron R. White:

But it may be he has potential to earn money–

Peter M. Lieb:

–Well, it’s–

Byron R. White:

–and pay off his creditors in full.

Peter M. Lieb:

–That’s another scenario where it might make sense, although in this case because of the individual debtor’s high level of debt he wouldn’t qualify for chapter 13.

So 13 is not available, given those limits.

Byron R. White:

But he can get in chapter 11.

Peter M. Lieb:

He can get into–

Byron R. White:

You think.

Peter M. Lieb:

–We submit that he can get into chapter 11.

There is another instance where it may make some sense for individuals without businesses to use chapter 11, and that’s the situation in which an individual has no business but wants to get back into business.

And he may want to use chapter 11 to pay off his creditors so that he can have dealings with them in the future and retain his, as good a credit rating as possible.

Byron R. White:

What does he have to show to get a plan approved under chapter 11?

Peter M. Lieb:

Well, what he has to do is provide a disclosure statement which is approved by the court.

Peter M. Lieb:

The plan then must be approved by at least one class of creditors, which approval is defined to include–

Byron R. White:

And he can scale down the unsecured, I suppose, if he can–

Peter M. Lieb:

–Well, he can’t scale down the unsecured creditors to such an extent that they would get less in chapter 11 than in chapter 7–

Byron R. White:

–Yes.

Peter M. Lieb:

–because of the best interest test.

Byron R. White:

Sure.

Peter M. Lieb:

But he… so his plan must at least provide the same amount that a hypothetical chapter 7 debtor would… creditor would receive.

Byron R. White:

Before the credit down operates.

Peter M. Lieb:

That’s correct.

He also has to get a sufficient vote from creditors in order to–

Byron R. White:

And he can’t scale down secured creditors?

He can postpone them?

Peter M. Lieb:

–He can postpone secured creditors, and secured creditors… I mean, if secured creditors feel like they are not getting as much as they are entitled to, they may, they can vote against the plan and prevent it from being confirmed.

So… but in any event–

Sandra Day O’Connor:

Can the creditors clearly prohibit the chapter 11 plan if they choose?

Peter M. Lieb:

–If a sufficient number or amount of creditors in one class votes against it, then they can prevent the plan from being confirmed.

Sandra Day O’Connor:

Well, what if all there is basically is some consumer debt and a home with a mortgage on it?

Peter M. Lieb:

Right.

Sandra Day O’Connor:

Can the holder of the mortgage prevent the chapter 11?

Peter M. Lieb:

It, I think it depends on whether the… on the given facts of the case and whether, for example, the consumer debt and the mortgage debt are lumped into one class.

If–

Sandra Day O’Connor:

Well, what is normally done in that regard?

Peter M. Lieb:

–I think in… that secured creditors are often considered in a different class.

And if the secured creditor is in a different class and votes against the plan, it… he can still prevent the plan from being confirmed if he can establish that he would receive less than he would in the chapter 7 liquidation.

Sandra Day O’Connor:

Well, under chapter 11 I take it the debtor can propose and the court can approve a lower rate of interest on the mortgage, and can modify the maturity of the debt?

Peter M. Lieb:

A debtor could propose that, but if, for example, the secured, the mortgagee would not receive the same amount doing the arithmetic that he would receive in a chapter 7 liquidation and decided to object, the plan can’t be confirmed, pursuant to section 1129.

The amicus’… has… principal arguments come out of references in the code and the legislative history to the business uses of chapter 11.

And, to be sure, there are numerous references in the code and the legislative history to the business uses of chapter 11.

But we believe that those references demonstrate Congress’ expectation that chapter 11 would be used primarily by businesses.

We don’t think that they demonstrate an intent to limit chapter 11 to businesses.

Peter M. Lieb:

In fact these… both the Senate and the House reports state that chapter 11 is primarily designed for businesses, not exclusively.

And they also both indicate that consumers will not use chapter 11, not because they are ineligible for chapter 11, but because in most cases the procedures are just too complex.

The House report also states that the report distinguishes between business debtors and consumer debtors, but that it also plainly states that the bill itself makes no such distinction.

The amicus also urge this Court to be fearful of the fact that if individuals are eligible for chapter 11 this might open the floodgates to abusive or bad faith filings.

But there are numerous protections in the code to deal with situations if there are additional bad-faith filings brought upon by the result that we urge.

In particular, section 1112(b) of the code gives the bankruptcy court discretion to dismiss the case or convert it to chapter 11… to chapter 7, for cause.

And clearly cause would include the bad-faith situation that is suggested.

In fact a number of courts are using section 1112(b) to convert cases to chapter 7 in situations when the filing is found to be in bad faith.

And the court can do this, use section 1112(b) at any time during a case, immediately after the filing up until the time when the plan is being confirmed.

In addition, as I stated earlier, a chapter 11 case must be submitted to creditors for their vote, and if the case is brought in bad faith it is hard to imagine that a plan would be attractive enough to creditors that creditors would give it the necessary votes.

And finally, again at chapter 11, section 1129 of the code provides that a plan cannot be confirmed over the objection of any creditors unless those creditors would receive the same amount that they would receive in a hypothetical chapter 7 liquidation.

And so there are protections to deal with the situation of abusive filings which might be brought on by the courts.

We therefore submit that Congress plainly intended to make individuals without businesses eligible for chapter 11, and that forcing individuals who are not eligible for chapter 13 to use chapter 7 disserves the fundamental policy of the Bankruptcy Code of maximizing the value of the estate.

I’d like to reserve my remaining time, if there… unless there are any further questions at this time.

William H. Rehnquist:

Very well, Mr. Lieb.

Mr. Marzen.

Peter M. Lieb:

Thank you.

Stephen J. Marzen:

Thank you, Mr. Chief Justice, and may it please the Court:

It’s not at all unnatural to reorganize consumer debts in chapter 11.

If an individual proprietor who owns a mom and pop store has debts, he can, he or she can file under–

William H. Rehnquist:

What does the term Mr. Marzen, as you just used it?

Is it a word of art?

Stephen J. Marzen:

–It’s actually defined in the Bankruptcy Code itself under 1017.

William H. Rehnquist:

How is it defined?

Stephen J. Marzen:

It’s defined to mean debts contracted primarily for a personal, family, or household obligation.

That–

William H. Rehnquist:

So then a mom and pop store, its indebtedness would be a consumer debt?

Stephen J. Marzen:

–A mom and pop store could have business debts and consumer debts.

William H. Rehnquist:

But they would be distinct from one another?

Stephen J. Marzen:

Yes.

Stephen J. Marzen:

The code does provide a distinction.

I think raising that point has two very important indications.

First, since the code does define consumer debts, if Congress wanted to exclude individuals with purely consumer debtors from chapter 11 it would have been very easy to add a phrase to section 109(d).

Along with stockbrokers and commodity brokers who are excluded from chapter 11, Congress simply could have added the phrase individuals with only consumer debts, and that would have had the same effect as the Eighth Circuit’s judgment in this case.

The second point, and based on the definition of consumer debtor in the code, is that it is very wise for Congress not to include such a bar.

It’s a very difficult threshold inquiry for a bankruptcy court to decide the primary reason why debts were contracted.

So if you adopted an ongoing business requirement or a consumer debt limitation as part of a chapter 11 threshold inquiry, the bankruptcy court would have to figure out why primarily debts were contracted.

Looking at petitioner’s debts in this case indicates how difficult that can be.

The entire schedule of debts is basically credit card debts, utility debts, many of which were contracted for a business purpose as part of this petitioner’s consulting business or as part of his business to get… to solicit charitable contributions, both of which were businesses.

So it’s very, it’s a very inappropriate and difficult inquiry to have at the start of a bankruptcy litigation.

If a mom and pop store does file under chapter 11, the store can adjust and reorganize both the business debts and the consumer debts as defined in the code.

In fact in 1990 according to statistics from the administrative office of U.S. courts, more than 2,500, or 12 percent of chapter 11 cases were filed by individuals primarily with consumer debts.

So it’s not at all unnatural for bankruptcy courts to reorganize cases when the primary debts to reorganize are consumer debts.

Given that that’s the case, there’s no reason in the Bankruptcy Code or in bankruptcy policy to prevent mom and pop from going in and reorganizing just their consumer debts, and not bring in the store as well.

Three points very briefly this afternoon.

First, reorganization serves a useful purpose.

Second, it won’t be subject to abuse.

And third, it’s dictated by the code regardless of whether we think it’s a good idea.

Chapter 11 serves a useful purpose for reorganizing consumer debts for two reasons.

One is that some assets are worth more in chapter 11 than they are in chapter 11.

And that’s because some assets have no ready market because there is no pool of competing buyers.

A possible example here is petitioner’s stock.

The corporation’s only assets are licensed to… licenses to build low-head hydroelectric power plants on some rivers.

The only offers we have are from corporate insiders, and the number of licenses and the amount of money at stake probably is not sufficient to get disinterested buyers or at least the large number of disinterested buyers assumed by the efficient market hypothesis, to bid on these assets and get a fair return in a liquidation sale.

In these kinds of situations it may well be better to reorganize rather than liquidate.

The second and more typical example of when it makes sense to reorganize under chapter 7 rather than… reorganize under chapter 11, excuse me, rather than liquidate, is when there’s an asset that the debtor for whatever reason wants to have, be it a family homestead or, in this case, stock that the petitioner really deeply concerns about.

As petitioner pointed out, there is no requirement and it’s not possible under chapter 11 to force the debtor to give up his future wage income.

Under chapter 11, however, the petitioner or debtor can, if he or she wants, pledge future wage income in order to redeem an asset that would otherwise be liquidated under chapter 7.

In that case the debtor can give a better deal to the creditors in return for getting them to return an otherwise non-exempt asset, in this case petitioner’s stock.

That sort of deal may propose benefits for the creditors and the debtors.

Stephen J. Marzen:

Second, individuals with purely consumer debts will not be able to abuse chapter 11.

Petitioner has already described the authority under section 1112(b) which allows a court to dismiss a chapter 11 case for cause.

And the statute describes 10 non-exclusive factors for what may constitute cause, and the cases that amicus cites on page 10 of his brief indicate that courts use this policing power with fair degree of regularity.

The only point I would like to add here is the role of the United States trustee, which is my client in this case.

The U.S. trustee, under 28 U.S.C. 586 has a role in supervising every chapter 11 case.

Under section 1112(b) the U.S. trustee is specifically authorized to come in and file a motion so that if this, if there is an abusive chapter 11 filing, if there is no possibility of effectuating plan, if there is no money or income to fund a plan, the U.S. trustee’s duty and obligation is to come in and file the motion and take care of the case.

And that is in fact what the U.S. trustee does right now in the Eleventh Circuit, where the rule under the Moog case is that consumers can file chapter 11 petitions.

My final point is that the Bankruptcy Code makes consumer debtors eligible for relief under chapter 11.

The plain language of the code has been described, and in response to Chief Justice Rehnquist’s question I have already described how unadministerable it would be to have any other limit.

With that, I have nothing further.

William H. Rehnquist:

Thank you, Mr. Marzen.

Mr. Hamilton, we’ll hear now from you.

James Hamilton:

Mr. Chief Justice, and may it please the Court:

May I begin by thanking you for the honor of appearing before you as amicus curiae to defend the judgment below.

Petitioner and the Solicitor General would have this Court conclude that this is a simple case.

They would have this Court conclude that, to use basketball parlance, this is a slam-dunk for the petitioner because of the plain language of the statute.

They say that sections 109(b) and (d) do not exclude consumer debtors who do not operate businesses from the broad group that may be debtors under chapter 11, and thus such consumer debtors may proceed under that chapter even though it is designed and intended for business debts.

May I respectfully suggest that the issue is not that simple.

May I submit that just because, as I concede, consumer debtors are not excluded by section 10… by the section 109 threshold definition, as the Solicitor General refers to it, this does not mean that consumer debtors may proceed to obtain relief under chapter 11, for section 109 is not the only gatekeeper to relief under chapter 11.

Now section 109(b) and (d) in essence provide that persons may be debtors under chapter 7 and 11 only if they are not certain entities.

Now, while the plain language of 109 does not exclude consumer debtors from chapter 11, section 109 must be read in the context of the code as a whole.

This principle, of course, is a commonplace of statutory interpretation.

It is a principle repeated by this Court in many, many cases, including those interpreting the code.

Indeed recently this Court said in reference to the code in Timbers of Inwood Forest that statutory construction is a holistic endeavor.

Now, it is evident from several other provisions of the code that certain persons who are not excluded as chapter 7 debtors by the language of section 109(b) may not proceed to relief under that chapter, and let me give you one example.

As petitioner concedes, an individual consumer debtor who is able to pay his debts cannot proceed to relief under chapter 7.

Rather, the case will be dismissed pursuant to section 707(b), because allowing such debtors to proceed would be, in the language of the statute, a substantial abuse of the provisions of this chapter.

Now there are also various cases establishing that while chapter 11, chapter 11 is available to individuals who operate businesses, that chapter is not available to individual consumers, and these cases are cited at page 10 of our brief.

Some courts have concluded that a consumer, nonbusiness debtor who attempts to use chapter 11 does not act in good faith, and thus is subject to dismissal under section 1112(b) of that chapter which allows dismissal for cause.

These courts, exercising the broad discretion and the flexibility that is given them by section 1112(b), have concluded that for an attempt to reorganize or to rehabilitate to be in good faith there must be something, that is there must be a business to reorganize or rehabilitate, and if there is not dismissal for cause is appropriate.

James Hamilton:

Indeed the statute itself says that dismissal is proper in the absence of a reasonable likelihood of rehabilitation.

These cases under section 1112(b) are consistent with section 1129(a)(3), which requires that reorganization plans be proposed in good faith.

Now, it is apparent that section 1112(B) as interpreted by these cases stands as a further qualification to the eligibility requirements in section 109.

It is, in other words, another gatekeeper to relief under chapter 11.

Now, it may be remarked that section 1112(b) does not specifically require dismissal of a chapter 11 case because where there is no business to reorganize, and this of course is true.

But it is also true that section 707(b) does not specifically require dismissal of a chapter 7 case for substantial abuse where the debtor has the ability to repay his creditors.

But courts nonetheless have had no trouble reaching this result by reviewing Congress’ intent as evidenced in the statute and in the statute’s legislative history.

Let me turn then to those portions of the code and its legislative history that demonstrate that consumer debtors should not be allowed to proceed to obtain relief under chapter 11 even though they meet the threshold test for chapter 11 that is set forth in section 109.

I believe it is difficult to dispute that chapter 11 was designed and intended to provide reorganization relief for corporate and individual business debtors, and not for individual consumer debtors.

The fundamental provisions of chapter 11 focus on the plight of the business debtor.

For example, sections 1107 and 1108 authorize the debtor in possession or the trustee to operate the debtor’s business.

Section 1103 authorizes an equity security holders committee to investigate the operation of the debtor’s business and the desirability of the continuation of that business.

Section 1106 authorizes a similar investigation into the debtor’s business by the trustee.

And the list goes on.

Other examples are collected at pages 9 and 10 of our brief.

Now these provisions and many others show that chapter 11 was essentially structured for the business debtor and not for the consumer debtor.

William H. Rehnquist:

Mr. Hamilton, what is your response to a point made by Mr. Marzen that if we accepted your contention we would be establishing kind of a very difficult jurisdictional test?

How do we define when someone is a business debtor and when not?

James Hamilton:

Well, this is obviously, Mr. Chief Justice, a factual question.

In this particular case it was easy for the court to decide that Mr. Toibb’s debts were consumer debts, that he was not operating a business, and therefore he was a consumer debtor and not a business debtor.

I believe in any situation you will have a factual question.

But in many of the situations that are dealt with in the cases that we have cited, the court had no difficulty making this determination.

William H. Rehnquist:

The difficulty with having it such a heavily factual question is, of course, that the bankruptcy court might rule one way and a district court or court of appeals reviewing the judgment another way, and you might just have a lot of wheel spinning.

James Hamilton:

You may have factual questions.

I will concede that.

But as I said, courts heretofore have had no trouble in making this determination.

William H. Rehnquist:

Courts that have followed the Eighth Circuit rule in this case?

James Hamilton:

That’s correct, yes.

Now, there is after all another chapter, chapter 13, that is designed and intended for consumer debtors.

And I would suggest that its very existence raises questions about the propriety of consumer debtors using chapter 11.

James Hamilton:

And it’s also important to look at the legislative history relating to chapter 11, which shows yet again that it was intended solely for business reorganizations.

For example, the Senate report at page 9 says that chapter 11 deals with the reorganization of a financially distressed business enterprise.

The House report on chapter 11 reorganizations does not even mention consumer debtors.

But the clearest indication that chapter 11 does not apply to consumer debtors is found in the House report section on liquidation.

The House report plainly says that if consumer debtors cannot use chapter 13, then chapter 7 is the… or straight bankruptcy… is the only remedy available to them.

With the Court’s indulgence, I would like to read this brief passage which says, some consumer debtors are unable to avail themselves of the relief provided under chapter 13.

Byron R. White:

Would that be provided they don’t have regular income?

James Hamilton:

That would be one reason, yes.

Either no regular income or debts exceeding certain limits.

For these debtors straight bankruptcy is the only remedy that will enable them to get out from under the debilitating effects of too much debt.

I submit to the Court that this passage could not be clearer.

And although we referenced it several times in our brief, the petitioner in his reply brief has elided any mention of it.

I will concede to the Court that there is some ambiguity in certain other passages in both the House and the Senate report as to whether chapter 11 is available to individual consumer debtors.

But this ambiguity, I submit, should not mitigate the force of this precise, this unqualified statement that I have just referred to.

Moreover, the principal ambiguous passages which are cited at pages 13 and 14 of our brief can best be interpreted to mean that individual business debtors can use chapter 11, but individual consumer debtors cannot.

To read these passages to say that any individual can proceed under chapter 11, as petitioner and the Solicitor General do, is to ignore the definitive passage from the House report that I have just quoted.

Now, other code provisions, principally those in chapter 13, demonstrate that chapter 11 is not intended for consumer nonbusiness debtors.

Chapter 13 of course is the chapter that allows certain consumer debtors to devise debt repayment plans, that allows them to retain their assets and to pay their creditors out of future disposable income over a 3 to 5-year period.

Chapter 13 allows only voluntary plans.

In other words, creditors may not force debtors into chapter 13 debt repayment plans.

There is good reason for this.

Congress wisely recognized that a debt restructuring plan, in the words of the Senate report, only works where there is a willing debtor who wants to repay his creditors.

Now whether creditors should be able to force consumers into chapter 13 plans was a hotly disputed issue when the code was passed.

The credit industry lost in its attempt to enact legislation that would do just that.

But under chapter 11 creditors can force debtors into involuntary bankruptcy plans.

Consequently, if consumer debtors are eligible for chapter 11 they could be forced into such involuntary plans.

But such plans seemingly would be inherently infeasible if consumer debtors with no businesses were unwilling to cooperate with plans to restructure their lives and plans that would force them to find money to repay their debts.

For example, the rather unique plan proposed here would have no chance of being effected unless Mr. Toibb was willing, because the Court could not force Mr. Toibb to go out and obtain an unsecured loan to pay off his creditors.

More importantly, it is oifficult to conclude that Congress would expressly refrain from forcing consumer debtors into chapter 13 plans, and then turn around and decide that consumer debtors could be forced into chapter 11 involuntary plans without clearly stating the congressional intent that this be so.

I also must observe that Congress decided that consumer debtors like Mr. Toibb, with unsecured debts over $100,000 and no regular income, could not use chapter 13.

James Hamilton:

It is difficult to conclude, therefore, that Congress would decide that such debtors could nonetheless use chapter 11 without being much more specific about it.

And to the contrary, the House report section that I have cited to you makes it very clear that consumer debtors can only use chapter 13 and chapter 7.

And finally there are additional policy considerations that counsel against allowing consumer debtors to use chapter 11.

The stated congressional purpose of chapter 11 is to return businesses to viable states, to protect jobs, to protect investors, and to use the assets of the business to repay the debtor’s debts.

And none of these laudatory goals is served by allowing consumer debtors to reorganize under chapter 11.

And I should say in response to Mr. Lieb that there is no indication in the legislative history that consumer debtors should be allowed to use chapter 11 in order to maximize their assets in liquidation.

Moreover, to allow consumer debtors to use chapter 11 would give them a benefit that was apparently unintended by Congress.

And if I may I would like to explain this.

Chapter 13 protects the assets of the debtor, but it requires use of disposable income to repay a debtor’s creditors.

Chapter 7, on the other hand, protects post-petition income earned by personal services, but not assets, which must be liquidated to pay a creditor.

Chapter 11 protects both assets and post-petition income earned by the debtor for personal services.

Thus a punitive chapter 11 consumer debtor might protect both his assets and his disposable income.

For example, to allow Mr. Toibb to reorganize under chapter 11 would allow him to protect his stock and would allow him to protect any post-petition income he might earn by personal services, even if that income amounted to $100,000 or $200,000 a year.

Byron R. White:

But that’s only if some feasible plan to pay off these debts over a period of time.

James Hamilton:

Well, I… assuming that the plan that he has suggested would be approved by the court, then he would protect his asset, his stock, he would protect any post-petition income he might make, regardless of the amount.

Byron R. White:

But the creditors would get more than they would get in chapter 7?

James Hamilton:

They would get the same thing under his plan, because… they would get $25,000, basically, minus some expenses.

Byron R. White:

But they wouldn’t lose anything?

James Hamilton:

They wouldn’t lose anything in the circumstances.

Byron R. White:

Except the time when they would get it.

James Hamilton:

The time might be different, yes, depending on how long it took the plan to be worked out.

But there is no indication, Justice White, that Congress intended such a result as I have just described.

Sandra Day O’Connor:

To what extent can the creditors prevent the chapter 11 proceeding?

James Hamilton:

Well, the creditors of course, classes of creditors can object by a vote.

And if they vote against it, there is no plan unless the cram down provisions work.

And in that situation they would get at least what they would get in a chapter 7 liquidation.

Sandra Day O’Connor:

If that’s so, then what’s the harm in it?

James Hamilton:

What is the harm?

In this particular circumstance there may be, it might be no harm to Mr. Toibb’s creditors.

But I think the question, Justice O’Connor, is a question of congressional intent.

James Hamilton:

Did Congress intend that a chapter 7… I’m sorry, a chapter 11 consumer debtor would have, a punitive chapter 11 consumer debtor would have the right to protect both his stock, in this case, and his post-petition income.

William H. Rehnquist:

Well, I suppose one way of trying to ascertain Congress’ intent once we start speculating about it is to ask the question Justice O’Connor asked.

What harm would come from consumer debtors utilizing chapter 11?

They must have asked themselves that question, don’t you think?

James Hamilton:

They may well have asked that question.

I know of no discussion in the legislative history about that particular question.

What I do know about, Mr. Chief Justice, is the statement that I have quoted to you that says the only provisions, the only chapters available to consumer debtors are 13 and 7.

I would suggest that the very fact that post-petition income is excluded from the chapter 11 estate is in itself strong evidence that Congress did not intend that this chapter be used for consumer reorganizations, because such income is normally needed to pay off the debts of a bankrupt consumer.

And finally, without some clear expression of congressional intent, I submit that the bankruptcy and other courts should not be saddled with the chore of ruling on a flood of consumer debtor chapter 11 plans that may be filed if this Court clears the way.

It think it is not fanciful to expect that many of these consumer plans will be jerry-built, will be infeasible, and will be a burden on the court.

I suspect that the bankruptcy courts have enough to do in ruling on proposed chapter 11 business reorganization plans, almost 90 percent of which fail.

If it please the Court I will rely on our briefs for our remaining contentions.

I will be most happy to respond to any questions that the Court may have.

William H. Rehnquist:

Thank you, Mr. Hamilton.

We appreciate your appearing amicus in this case.

Mr. Lieb, do you have anything further?

You have 5 minutes remaining.

Peter M. Lieb:

Mr. Chief Justice, I have nothing further to add unless there are any questions that the court has.

William H. Rehnquist:

Very well.

The case is submitted.

The honorable court is now adjourned until tomorrow at ten o’clock.