Toibb v. Radloff

Background

Sheldon Toibb, a former consultant and 24% owner of a small power company, filed for bankruptcy under Chapter 7 (liquidation). When the company offered $25,000 for his stock, he converted to Chapter 11 (reorganization) and proposed a plan to pay unsecured creditors about 11 cents on the dollar plus future dividend shares. Lower bankruptcy and appellate courts dismissed his Chapter 11 case because he was not running an ongoing business.

Reasoning

The Court examined the Bankruptcy Code’s language and found Section 109(d) allows “a person” who may be a Chapter 7 debtor to be a Chapter 11 debtor; the Code defines “person” to include an individual. The majority concluded the statute’s plain text contains no requirement that a debtor operate a business. The Court rejected arguments that legislative history or policy required an “ongoing business” rule, noting protections for creditors in the Code and courts’ power to dismiss or convert unworkable reorganization cases.

Real world impact

The decision means individual consumers who are not business owners may file Chapter 11 when the Code’s text permits, for example to preserve value that would be lost in liquidation. Creditors remain protected because a plan must provide at least as much as a Chapter 7 liquidation would. This ruling resolves a conflict among federal appeals courts and allows nonbusiness individuals nationwide to seek Chapter 11 relief when appropriate.

Dissents or concurrances

Justice Stevens dissented, arguing the Code’s structure and legislative history show Chapter 11 was meant primarily for business reorganizations and that allowing consumer Chapter 11 filings could undermine limits in Chapter 13 and permit involuntary Chapter 11 actions against individuals.