Eleventh Circuit Favors Debtor’s Claims of Thirteenth Amendment Violation

Eleventh Circuit Favors Debtor’s Claims of Thirteenth Amendment Violation

In general, debtors in bankruptcy case do not raise allegations of involuntary servitude and a violation of the Thirteenth Amendment. But recently this has been decided in a case [Breland v. United States (In re Breland), No. 19-14321, 2021 U.S. App. LEXIS 6970 (11th Cir. Mar. 10, 2021) wherein the debtor claimed that he was unwillingly forced to work for his creditors. A chapter 11 trustee was appointed to take over the debtor’s bankruptcy estate. The case was appealed to the Eleventh Circuit and was sent for further consideration.

In Breland v. United States No. 19-14321, 2021 U.S. App. LEXIS 6970 (11th Cir. Mar. 10, 2021), 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. A trustee in bankruptcy will generally have the exclusive right to pursue certain claims on behalf of a debtor or its creditors [Artesanias Hacienda Real S.A. de C.V. v. North Mill Capital LLC, No 18-5553 at 9-10 (E.D. Pa. Aug. 8, 2019)]. The debtor did not agree with the appointment of a trustee by Bankruptcy court and hence claimed that his Thirteenth Amendment rights (right to be free from “involuntary servitude”) had been violated. He also contended that if a trustee will be appointed, his earnings would be taken away by the bankruptcy estate and be placed beyond his control.

However, the bankruptcy court rejected the debtor’s Thirteenth Amendment claim as unripe on the ground that it hadn’t yet imposed a plan of reorganization that would require him to work for the benefit of the estate and his creditors (Breland v. United States, 2021 U.S. App. LEXIS 6970, at 2). Further to this, an appeal to the district court also got rejected on the ground that the debtor did not show that he had suffered an injury-in-fact sufficient to confer Article III standing (id). But, the Eleventh Circuit’s recent decision addressed the standing issue. However, the court also remanded the case to the district court for consideration of the alleged Thirteenth Amendment violation.

It is important on the part of 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’s case, the appointment of trustee would remove Breland as the debtor-in-possession. It stripped him of the ability to do—or to seek permission to do—any of those things (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, at 6]. The Eleventh Circuit ruled that this deprivation gave rise to an injury-in-fact. This could be rectified by removing the trustee and allowing the debtor to resume his role as debtor-in-possession. As a result, the Eleventh Circuit ruled that the debtor had Article III standing to pursue his claim. (Id)

The Eleventh Circuit’s observation is quoted as: “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 (id at 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).