Toibb v. Radloff
Encyclopedia
Toibb v. Radloff, 501 U.S. 157
(1991), was a case in which the United States Supreme Court
resolved that individual
s are eligible to file for relief under chapter 11 of the United States Bankruptcy Code (which is more typically used by businesses).
allows those who are unable to pay their debts to arrange for partial repayment under the supervision of a bankruptcy court, after which any remaining debt is discharge
d. Debtor
s are thus allowed a "fresh start." Bankruptcy is governed by Title 11 of the United States Code
, which was passed by Congress
pursuant to article I
, section 8
of the United States Constitution
.
The United States Code is organized into titles, under which there are smaller subdivisions known as chapters. Within Title 11 (the entirety of which is known as the Bankruptcy Code), there are a number of chapters that define different types of bankruptcy cases:
Because Title 11, chapter 11 of the U.S. Code governs "reorganization," it is popularly assumed to pertain to businesses only. However, nothing in the Bankruptcy Code explicitly says that chapter 11 pertains to businesses only, and for this reason, the Supreme Court in Toibb v. Radloff held that individuals can also file for protection under chapter 11.
, filed for Chapter 7 bankruptcy. Among his assets, Toibb held stock in a power company. After Toibb filed a petition under Chapter 7, the board of the power company offered to purchase the stock
for $25,000. Upon discovering the value, Toibb moved
to convert his Chapter 7
case into a Chapter 11
case to prevent his assets from being liquidated.
The Bankruptcy Court initially granted the motion, but later ordered Toibb "to show cause why his petition should not be dismissed because petitioner was not engaged in business and, therefore, did not qualify as a chapter 11 debtor." Toibb argued that he was engaged in a business, or in the alternative, that individuals who do not own businesses are also eligible for relief under Chapter 11. The bankruptcy court rejected these arguments and, based on Wamsganz v. Boatmen's Bank of De Soto, held that the petitioner "failed to qualify for relief under Chapter 11."
Toibb appealed to the United States District Court for the Eastern District of Missouri
, which affirmed the decision of the bankruptcy judge. On further appeal, the United States Court of Appeals for the Eighth Circuit
adhered to the precedent
that it had earlier set in Wamsganz and affirmed the decisions of the lower courts.
Toibb petitioned the United States Supreme Court
for a writ of certiorari
, which was granted because of a conflict of circuits
: the United States Court of Appeals for the Eighth Circuit
had held that only businesses and business owners can file for chapter 11, but in a different case, the United States Court of Appeals for the Eleventh Circuit
had held that individuals can file for Chapter 11 even if they do not own a business.
In interpreting a statute, courts "look first to the statutory language and then to the legislative history if the statutory language is unclear"; thus, "the plain language of . . . . Section 109" of the Bankruptcy Code governs who can or cannot file for protection under each chapter. Quoting from the Bankruptcy Code, Justice Blackmun wrote that "Section 109(d) provides: 'Only a person that may be a debtor under chapter 7 of this title, except a stockbroker or a commodity broker, and a railroad may be a debtor under chapter 11 of this title.' Section 109(b) states: 'A person may be a debtor under chapter 7 of this title only if such person is not - (1) a railroad; (2) a domestic insurance company, bank, . . .; or (3) a foreign insurance company, bank, . . . engaged in such business in the United States.'" Nothing in the text of the Code itself imposes a requirement that only businesses can file for protection under chapter 11, and given the great care with which Congress enumerated those who can and cannot receive protection under each of the various chapters the Court was "loath to infer the exclusion of certain classes of debtors from the protections of Chapter 11."
Turning to the legislative history of the then-current version of the Bankruptcy Code, the Court determined that a Senate report showed that Congress anticipated that only businesses would ever file for bankruptcy under chapter 11, but did not show that Congress intended that only businesses would be able to file under chapter 11. Likewise, the Court considered the ultimate purposes of the various chapters of the bankruptcy code, one of which is "maximizing the value of the bankruptcy estate"; because a chapter 11 reorganization plan must be approved by creditors or must provide that creditors "will receive not less than they would receive under a Chapter 7 liquidation," denying chapter 11 protection to individuals would not advance Congress' overall purpose.
Finally, the Court considered the possibility that if chapter 11 were held to apply to individuals, somebody might be involuntarily forced to file for chapter 11 (thus resulting in "debt peonage," a form of involuntary servitude
); although chapter 13
bankruptcy petitions are always voluntary, chapter 11 contains no such provision. The Court held that if a debtor were to choose not to cooperate in a chapter 11 case, a bankruptcy court would simply be able to convert it to a chapter 7
case, and thus the danger of an involuntary chapter 11 filing would be minimal; furthermore, because only chapter 13 bankruptcy includes "future wages" in the "bankruptcy estate," there is no danger of forcing anybody into debt peonage.
In summary, the Court held that individuals, even if they are not the owner of a business, can file for chapter 11 bankruptcy because the plain language of Title 11 (which contains chapter 11) does not expressly prohibit them from doing so, because Congress did not specifically intend to deny them the ability to do so (even if it assumed that they would not), because allowing them to do so would not likely violate the rights of creditors, and because allowing them to do so would not result in anybody being forced to do so against their will.
wrote a dissent
stating that chapter 11 of the Bankruptcy Code in fact is intended to apply to businesses only.
In his dissent, he noted that chapter 11 is entitled "Reorganization," and noted that the various provisions of chapter 11 refer repeatedly to a "business." Thus, he argued, the plain language of the statute
strongly suggests that it applies to businesses. Additionally, 11 U.S.C. § 109(d) (1988), the section relied on by the majority to support the assertion that individuals are not excluded, says "only a person that may [be] a debtor under Chapter 7 … may be a debtor under Chapter 11.…" (emphasis added). It does not say that "all" who may be debtors under chapter 7 may be debtors under chapter 11.
Stevens noted that, to resolve this ambiguity, it is necessary to consider the legislative history
of this case. The Senate report quoted by the majority assumes that only businesses will ever file for chapter 11, but it does not exclude the possibility that individuals may make use of that chapter as well; rather, it notes that the cost of filing for chapter 11 would likely prevent individuals from using it. However, the House report "unambiguously states that a Chapter 7 liquidation is 'the only remedy' for 'consumer debtors [who] are unable to avail themselves of the relief provided under chapter 13.' H.R.Rep. No. 95-595, p. 125 (1977). See also 124 Cong.Rec.
, at 32392, 32405 (Chapter 11 is 'a consolidated approach to business rehabilitation' and a 'new commercial reorganization chapter') (statement of Rep. Edwards)."
Finally, the Bankruptcy Code specifically allows for involuntary chapter 7 and chapter 11 filings, and in Justice Stevens
' view (contrary to the majority opinion) there were not adequate protections to prevent this from actually happening. Thus, according to Stevens, chapter 11 of the bankruptcy law is intended to apply to businesses (and business owners) only, and he would have voted to affirm the decision of the Eighth Circuit.
Toibb has not been overruled by any subsequent decision of the Supreme Court, and although the Bankruptcy Code has since been amended, individuals remain eligible to file for bankruptcy under Chapter 11.
Case citation
Case citation is the system used in many countries to identify the decisions in past court cases, either in special series of books called reporters or law reports, or in a 'neutral' form which will identify a decision wherever it was reported...
(1991), was a case in which the United States Supreme Court
Supreme Court of the United States
The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...
resolved that individual
Individual
An individual is a person or any specific object or thing in a collection. Individuality is the state or quality of being an individual; a person separate from other persons and possessing his or her own needs, goals, and desires. Being self expressive...
s are eligible to file for relief under chapter 11 of the United States Bankruptcy Code (which is more typically used by businesses).
Background
BankruptcyBankruptcy in the United States
Bankruptcy in the United States is governed under the United States Constitution which authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States." Congress has exercised this authority several times since 1801, most recently by adopting the Bankruptcy...
allows those who are unable to pay their debts to arrange for partial repayment under the supervision of a bankruptcy court, after which any remaining debt is discharge
Bankruptcy discharge
A discharge in United States bankruptcy law, when referring to a debtor's discharge, is a statutory injunction against the commencement or continuation of an action to collect, recover or offset a debt as a personal liability of the debtor...
d. Debtor
Debtor
A debtor is an entity that owes a debt to someone else. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor...
s are thus allowed a "fresh start." Bankruptcy is governed by Title 11 of the United States Code
United States Code
The Code of Laws of the United States of America is a compilation and codification of the general and permanent federal laws of the United States...
, which was passed by Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
pursuant to article I
Article One of the United States Constitution
Article One of the United States Constitution describes the powers of Congress, the legislative branch of the federal government. The Article establishes the powers of and limitations on the Congress, consisting of a House of Representatives composed of Representatives, with each state gaining or...
, section 8
Enumerated powers
The enumerated powers are a list of items found in Article I, section 8 of the US Constitution that set forth the authoritative capacity of the United States Congress. In summary, Congress may exercise the powers that the Constitution grants it, subject to explicit restrictions in the Bill of...
of the United States Constitution
United States Constitution
The Constitution of the United States is the supreme law of the United States of America. It is the framework for the organization of the United States government and for the relationship of the federal government with the states, citizens, and all people within the United States.The first three...
.
The United States Code is organized into titles, under which there are smaller subdivisions known as chapters. Within Title 11 (the entirety of which is known as the Bankruptcy Code), there are a number of chapters that define different types of bankruptcy cases:
- Chapter 7Chapter 7, Title 11, United States CodeChapter 7 of the Title 11 of the United States Code governs the process of liquidation under the bankruptcy laws of the United States...
provides debtorDebtorA debtor is an entity that owes a debt to someone else. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor...
s the ability to liquidate, or sell off, their assets and have them distributed to creditorCreditorA creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...
s; - Chapter 9Chapter 9, Title 11, United States CodeChapter 9, Title 11 of the United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities and assists them in the restructuring of debts...
allows municipal governments to declare bankruptcy; - Chapter 11Chapter 11, Title 11, United States CodeChapter 11 is a chapter of the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to every business, whether organized as a corporation or sole proprietorship, and to individuals, although it is most...
provides for the reorganization of a business under court supervision; - Chapter 12Chapter 12, Title 11, United States CodeChapter 12 of Title 11 of the United States Code, or simply chapter 12, is a chapter of the Bankruptcy Code. It is similar to Chapter 13 in structure, but it offers additional benefits to farmers and fishermen in certain circumstances, beyond those available to ordinary wage earners...
provides a method for farmerFarmerA farmer is a person engaged in agriculture, who raises living organisms for food or raw materials, generally including livestock husbandry and growing crops, such as produce and grain...
s and fisherFishermanA fisherman or fisher is someone who captures fish and other animals from a body of water, or gathers shellfish. Worldwide, there are about 38 million commercial and subsistence fishermen and fish farmers. The term can also be applied to recreational fishermen and may be used to describe both men...
s to repay their debts; - Chapter 13Chapter 13, Title 11, United States CodeChapter 13 of the United States Bankruptcy Code, codified under Title 11 of the United States Code, governs a form of bankruptcy in the United States that allows individuals to undergo a financial reorganization supervised by a federal bankruptcy court. The goal of Chapter 13 is to enable...
provides a method for wage-earners or others with regular incomeIncomeIncome is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
to repay their debts; and - Chapter 15Chapter 15, Title 11, United States CodeChapter 15, Title 11, United States Code is a section of the United States bankruptcy code that deals with jurisdiction. Under Chapter 15 a representative of a corporate bankruptcy proceeding outside the U.S. can obtain access to the United States courts...
pertains to international bankruptcy cases.
Because Title 11, chapter 11 of the U.S. Code governs "reorganization," it is popularly assumed to pertain to businesses only. However, nothing in the Bankruptcy Code explicitly says that chapter 11 pertains to businesses only, and for this reason, the Supreme Court in Toibb v. Radloff held that individuals can also file for protection under chapter 11.
Facts and procedural history
Toibb, the petitionerPetitioner
A petitioner is a person who pleads with governmental institution for a legal remedy or a redress of grievances, through use of a petition.-In the courts:The petitioner may seek a legal remedy if the state or another private person has acted unlawfully...
, filed for Chapter 7 bankruptcy. Among his assets, Toibb held stock in a power company. After Toibb filed a petition under Chapter 7, the board of the power company offered to purchase the stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
for $25,000. Upon discovering the value, Toibb moved
Motion (legal)
In law, a motion is a procedural device to bring a limited, contested issue before a court for decision. A motion may be thought of as a request to the judge to make a decision about the case. Motions may be made at any point in administrative, criminal or civil proceedings, although that right is...
to convert his Chapter 7
Chapter 7, Title 11, United States Code
Chapter 7 of the Title 11 of the United States Code governs the process of liquidation under the bankruptcy laws of the United States...
case into a Chapter 11
Chapter 11, Title 11, United States Code
Chapter 11 is a chapter of the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to every business, whether organized as a corporation or sole proprietorship, and to individuals, although it is most...
case to prevent his assets from being liquidated.
The Bankruptcy Court initially granted the motion, but later ordered Toibb "to show cause why his petition should not be dismissed because petitioner was not engaged in business and, therefore, did not qualify as a chapter 11 debtor." Toibb argued that he was engaged in a business, or in the alternative, that individuals who do not own businesses are also eligible for relief under Chapter 11. The bankruptcy court rejected these arguments and, based on Wamsganz v. Boatmen's Bank of De Soto, held that the petitioner "failed to qualify for relief under Chapter 11."
Toibb appealed to the United States District Court for the Eastern District of Missouri
United States District Court for the Eastern District of Missouri
The United States District Court for the Eastern District of Missouri is a trial level federal district court based in St. Louis, Missouri, with jurisdiction over fifty counties in the eastern half of Missouri. The court is one of ninety-four district-level courts which make up the first tier of...
, which affirmed the decision of the bankruptcy judge. On further appeal, the United States Court of Appeals for the Eighth Circuit
United States Court of Appeals for the Eighth Circuit
The United States Court of Appeals for the Eighth Circuit is a federal court with appellate jurisdiction over the district courts in the following districts:* Eastern District of Arkansas* Western District of Arkansas...
adhered to the precedent
Precedent
In common law legal systems, a precedent or authority is a principle or rule established in a legal case that a court or other judicial body may apply when deciding subsequent cases with similar issues or facts...
that it had earlier set in Wamsganz and affirmed the decisions of the lower courts.
Toibb petitioned the United States Supreme Court
Supreme Court of the United States
The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...
for a writ of certiorari
Certiorari
Certiorari is a type of writ seeking judicial review, recognized in U.S., Roman, English, Philippine, and other law. Certiorari is the present passive infinitive of the Latin certiorare...
, which was granted because of a conflict of circuits
Circuit split
In the context of United States federal courts, a circuit split exists when two or more circuits in the United States court of appeals system have different interpretations of federal law....
: the United States Court of Appeals for the Eighth Circuit
United States Court of Appeals for the Eighth Circuit
The United States Court of Appeals for the Eighth Circuit is a federal court with appellate jurisdiction over the district courts in the following districts:* Eastern District of Arkansas* Western District of Arkansas...
had held that only businesses and business owners can file for chapter 11, but in a different case, the United States Court of Appeals for the Eleventh Circuit
United States Court of Appeals for the Eleventh Circuit
The United States Court of Appeals for the Eleventh Circuit is a federal court with appellate jurisdiction over the district courts in the following districts:* Middle District of Alabama...
had held that individuals can file for Chapter 11 even if they do not own a business.
The opinion of the Court
Justice Blackmun, writing for an 8-1 majority, held that nothing in the Bankruptcy Code prevents individuals from filing for Chapter 11 Bankruptcy.In interpreting a statute, courts "look first to the statutory language and then to the legislative history if the statutory language is unclear"; thus, "the plain language of . . . . Section 109" of the Bankruptcy Code governs who can or cannot file for protection under each chapter. Quoting from the Bankruptcy Code, Justice Blackmun wrote that "Section 109(d) provides: 'Only a person that may be a debtor under chapter 7 of this title, except a stockbroker or a commodity broker, and a railroad may be a debtor under chapter 11 of this title.' Section 109(b) states: 'A person may be a debtor under chapter 7 of this title only if such person is not - (1) a railroad; (2) a domestic insurance company, bank, . . .; or (3) a foreign insurance company, bank, . . . engaged in such business in the United States.'" Nothing in the text of the Code itself imposes a requirement that only businesses can file for protection under chapter 11, and given the great care with which Congress enumerated those who can and cannot receive protection under each of the various chapters the Court was "loath to infer the exclusion of certain classes of debtors from the protections of Chapter 11."
Turning to the legislative history of the then-current version of the Bankruptcy Code, the Court determined that a Senate report showed that Congress anticipated that only businesses would ever file for bankruptcy under chapter 11, but did not show that Congress intended that only businesses would be able to file under chapter 11. Likewise, the Court considered the ultimate purposes of the various chapters of the bankruptcy code, one of which is "maximizing the value of the bankruptcy estate"; because a chapter 11 reorganization plan must be approved by creditors or must provide that creditors "will receive not less than they would receive under a Chapter 7 liquidation," denying chapter 11 protection to individuals would not advance Congress' overall purpose.
Finally, the Court considered the possibility that if chapter 11 were held to apply to individuals, somebody might be involuntarily forced to file for chapter 11 (thus resulting in "debt peonage," a form of involuntary servitude
Involuntary servitude
Involuntary servitude is a United States legal and constitutional term for a person laboring against that person's will to benefit another, under some form of coercion other than the worker's financial needs...
); although chapter 13
Chapter 13, Title 11, United States Code
Chapter 13 of the United States Bankruptcy Code, codified under Title 11 of the United States Code, governs a form of bankruptcy in the United States that allows individuals to undergo a financial reorganization supervised by a federal bankruptcy court. The goal of Chapter 13 is to enable...
bankruptcy petitions are always voluntary, chapter 11 contains no such provision. The Court held that if a debtor were to choose not to cooperate in a chapter 11 case, a bankruptcy court would simply be able to convert it to a chapter 7
Chapter 7, Title 11, United States Code
Chapter 7 of the Title 11 of the United States Code governs the process of liquidation under the bankruptcy laws of the United States...
case, and thus the danger of an involuntary chapter 11 filing would be minimal; furthermore, because only chapter 13 bankruptcy includes "future wages" in the "bankruptcy estate," there is no danger of forcing anybody into debt peonage.
In summary, the Court held that individuals, even if they are not the owner of a business, can file for chapter 11 bankruptcy because the plain language of Title 11 (which contains chapter 11) does not expressly prohibit them from doing so, because Congress did not specifically intend to deny them the ability to do so (even if it assumed that they would not), because allowing them to do so would not likely violate the rights of creditors, and because allowing them to do so would not result in anybody being forced to do so against their will.
Dissenting opinion
Justice StevensJohn Paul Stevens
John Paul Stevens served as an Associate Justice of the Supreme Court of the United States from December 19, 1975 until his retirement on June 29, 2010. At the time of his retirement, he was the oldest member of the Court and the third-longest serving justice in the Court's history...
wrote a dissent
Dissent
Dissent is a sentiment or philosophy of non-agreement or opposition to a prevailing idea or an entity...
stating that chapter 11 of the Bankruptcy Code in fact is intended to apply to businesses only.
In his dissent, he noted that chapter 11 is entitled "Reorganization," and noted that the various provisions of chapter 11 refer repeatedly to a "business." Thus, he argued, the plain language of the statute
Statute
A statute is a formal written enactment of a legislative authority that governs a state, city, or county. Typically, statutes command or prohibit something, or declare policy. The word is often used to distinguish law made by legislative bodies from case law, decided by courts, and regulations...
strongly suggests that it applies to businesses. Additionally, 11 U.S.C. § 109(d) (1988), the section relied on by the majority to support the assertion that individuals are not excluded, says "only a person that may [be] a debtor under Chapter 7 … may be a debtor under Chapter 11.…" (emphasis added). It does not say that "all" who may be debtors under chapter 7 may be debtors under chapter 11.
Stevens noted that, to resolve this ambiguity, it is necessary to consider the legislative history
Legislative history
Legislative history includes any of various materials generated in the course of creating legislation, such as committee reports, analysis by legislative counsel, committee hearings, floor debates, and histories of actions taken...
of this case. The Senate report quoted by the majority assumes that only businesses will ever file for chapter 11, but it does not exclude the possibility that individuals may make use of that chapter as well; rather, it notes that the cost of filing for chapter 11 would likely prevent individuals from using it. However, the House report "unambiguously states that a Chapter 7 liquidation is 'the only remedy' for 'consumer debtors [who] are unable to avail themselves of the relief provided under chapter 13.' H.R.Rep. No. 95-595, p. 125 (1977). See also 124 Cong.Rec.
Congressional Record
The Congressional Record is the official record of the proceedings and debates of the United States Congress. It is published by the United States Government Printing Office, and is issued daily when the United States Congress is in session. Indexes are issued approximately every two weeks...
, at 32392, 32405 (Chapter 11 is 'a consolidated approach to business rehabilitation' and a 'new commercial reorganization chapter') (statement of Rep. Edwards)."
Finally, the Bankruptcy Code specifically allows for involuntary chapter 7 and chapter 11 filings, and in Justice Stevens
John Paul Stevens
John Paul Stevens served as an Associate Justice of the Supreme Court of the United States from December 19, 1975 until his retirement on June 29, 2010. At the time of his retirement, he was the oldest member of the Court and the third-longest serving justice in the Court's history...
' view (contrary to the majority opinion) there were not adequate protections to prevent this from actually happening. Thus, according to Stevens, chapter 11 of the bankruptcy law is intended to apply to businesses (and business owners) only, and he would have voted to affirm the decision of the Eighth Circuit.
Discussion
Toibb stands for the counterintuitive proposition that individuals can file for chapter 11 "reorganization" under the Bankruptcy Code. The complexity and cost of chapter 11 bankruptcy is rather high (the case-filing fee alone is $1000). However, a New York Times article reports that chapter 11 may be "an attractive alternative for individuals who have relatively large debts and relatively large income, or at least the expectation of future income, with which to finance a repayment plan."Toibb has not been overruled by any subsequent decision of the Supreme Court, and although the Bankruptcy Code has since been amended, individuals remain eligible to file for bankruptcy under Chapter 11.
See also
- List of United States Supreme Court cases, volume 501
- List of United States Supreme Court cases
- Lists of United States Supreme Court cases by volume
- List of United States Supreme Court cases by the Rehnquist Court
External links
- Text of the case on justia.com (includes both the majority opinion and the dissent)
- Text of the majority opinion on lii.law.cornell.edu
- Text of the dissenting opinion on lii.law.cornell.edu