Bankruptcy Update Blog

Debtor Alleges Thirteenth Amendment Violation; Court Says Debtor Has Standing to Assert the Claim; Decision on the Merits to Follow

It’s rare for a debtor in bankruptcy to raise allegations of involuntary servitude and a violation of the Thirteenth Amendment.  But one debtor did just that in a recent chapter 11 case.  The court had appointed a trustee to take over the debtor’s bankruptcy estate.  This prompted the debtor to assert a violation of his constitutional rights, arguing that he would be involuntarily forced to work for his creditors.

The case made its way to the Eleventh Circuit, which last week remanded for further consideration of the issue.  Breland v. United States (In re Breland), No. 19-14321, 2021 U.S. App. LEXIS 6970 (11th Cir. Mar. 10, 2021).  As such, we will watch to see how that matter is resolved.

The debtor is a real estate developer who filed for chapter 11 in the Southern District of Alabama.  The bankruptcy court appointed a trustee based on evidence that the debtor was defrauding his creditors.  The debtor argued that the appointment of the trustee violated his Thirteenth Amendment rights because his earnings would go to the bankruptcy estate and be placed beyond his control.

The bankruptcy court dismissed the claim, holding that it was not yet ripe since no plan of reorganization had been proposed to require the debtor to work for the bankruptcy estate or his creditors.  On appeal, the district court affirmed on a different ground, ruling that the debtor lacked standing because he hadn’t shown an injury-in-fact.  The Eleventh Circuit’s recent decision addressed the standing issue. And the court also remanded the case to the district court for consideration of the alleged Thirteenth Amendment violation.

For a plaintiff to have Article III standing, it must show (i) an actual or imminent concrete injury-in-fact, (ii) that is traceable to the defendant’s actions, and (iii) that can be redressed with a favorable decision.  Friends of the Earth, Inc. v. Laidlaw Envtl. Servs., Inc., 528 U.S. 167 (2000).

In Breland, the appointment of the chapter 11 trustee “stripped [the debtor] of the ability to — or to seek permission to” administer his bankruptcy estate (e.g., to retain professionals; sell assets outside the ordinary course of business; assume and reject executory contracts; and bring avoidance actions).  2021 U.S. App. LEXIS 6970, *6.

The Eleventh Circuit ruled that this deprivation gave rise to an injury-in-fact.  The injury could be redressed by removing the trustee and allowing the debtor to resume the role of debtor-in-possession.  As a result, the Eleventh Circuit ruled that the debtor had Article III standing to pursue his claim.

How the debtor will fare on the merits of the Thirteenth Amendment claim is another matter.  The Eleventh Circuit’s observation on this point is worth quoting:

“It’s oh-so tempting to forge ahead and address the merits of [the debtor’s] Thirteenth Amendment claim, but our hands are tied.  It’s true, of course, that we can affirm a district court’s judgment based on any ground supported in the record . . . . But when the district court here held that [the debtor] lacked standing to sue, it dismissed his claim for lack of subject matter-jurisdiction — and thus without prejudice.  2021 U.S. App. LEXIS 6970, *7 (emphasis in original) . . . .  Were we to range beyond the jurisdictional issue here and reject [the debtor’s] claim on the merits, we would, in effect, be direction a dismissal with prejudice — and thereby altering the district court’s judgment.  This we cannot do.”  Id. (emphasis in original).

We will follow the case and report again when there’s a decision on the merits.