Can Stockbrokers file for Bankruptcy?

            One issue in practicing bankruptcy that has come up time and time again is the rumor that stockbrokers are not allowed to file bankruptcy.  Most of the public, and many bankruptcy lawyers for that matter, are under the impression that the Bankruptcy Code precludes stockbrokers and commodity brokers from filing bankruptcy.  Well, like most rumors, this one is partially true. 

            To answer the question simply: stockbrokers and commodity brokers are allowed to file for bankruptcy under Chapter 7 of the code, but not under 11 or 13.  The relevant provisions belong in 11 U.S.C. 109, titled Who may be a Debtor.  Under section 109, subsection (b) deals with Chapter 7 filers, subsection (c) with Chapter 9 (municipalities), subsection (d) with Chapter 11, subsection (e) with chapter 13, and subsection (f) with farmers.  Thus the relevant subsections for our discussion are (b), (d), and (e).

             Subsection (b) is an expansive list that enumerates all those who may NOT file for bankruptcy under Chapter 7 of the code. Nowhere in this list are stockbrokers or commodity brokers mentioned.  Read for yourself:

(b) 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, savings bank, cooperative bank, savings and loan association, building and loan association, homestead association, a New Markets Venture Capital company as defined in section 351 of the Small Business Investment Act of 1958, a small business investment company licensed by the Small Business Administration under subsection (c) or (d) (!1) of section 301 of the Small Business Investment Act of 1958, credit union, or industrial bank or similar institution which is an insured bank as defined in section 3(h) of the Federal Deposit Insurance Act, except that an uninsured State member bank, or a corporation organized under section 25A of the Federal Reserve Act, which operates, or operates as, a multilateral clearing organization pursuant to section 409 of the Federal Deposit Insurance Corporation Improvement Act of 1991 may be a debtor if a petition is filed at the direction of the Board of Governors of the Federal Reserve System; or (3) a foreign insurance company, bank, savings bank, cooperative bank, savings and loan association, building and loan association, homestead association, or credit union, engaged in such business in the United States.

            Therefore, the fact that they are not included in the prohibitive section indicates the intent of the legislature to allow stockbrokers and commodity brokers to file for relief under Chapter 7.  But our analysis does not stop here.

            Next let's look at subsection (d), which deals with filing under Chapter 11.  Read the following section and notice the language dealing with stockbrokers and commodity brokers.

Only a railroad, a person that may be a debtor under chapter 7 of this title (except a stockbroker or a commodity broker), and an uninsured State member bank, or a corporation organized under section 25A of the Federal Reserve Act, which operates, or operates as, a multilateral clearing organization pursuant to section 409 of the Federal Deposit Insurance Corporation Improvement Act of 1991 may be a debtor under chapter 11 of this title. (emphasis added)

            This section delineates who may file under Chapter 11, unlike Chapter 7, which lists who may not. This section allows railroads (who were excluded from protection of a Chapter 7 in subsection (b)) and all of those who are able to file under a Chapter 7 “except a stockbroker and a commodity broker.”  By implication, a stockbroker and a commodity broker must be able to file for protection under Chapter 7, otherwise that language is (1) superfluous and (2) inconsistent. 

             The drafters specifically excluded brokers from filing under Chapter 11.  They did so by allowing all those who qualify for  a Chapter 7 file a Chapter 11 with the exception of brokers.  Therefore, the writers are telling us that brokers do qualify for a 7 but are specifically exempted out of filing for an 11.  Furthermore, brokers are specifically precluded from filing an 11 in subsection (d), yet not specifically excluded in subsection (b).  This word choice demonstrates that in order to remain consistent with delineations and exclusions, and with the implication of the specific exclusion from qualifying 7 debtors, brokers are allowed to file bankruptcy under Chapter 7, but not Chapter 11.

            Finally is subsection (e), which deals with those allowed to file bankruptcy under Chapter 13.  This section reads as follows:

(e) Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $250,000 and noncontingent, liquidated, secured debts of less than $750,000, or an individual with regular income and such individual's spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $250,000 and noncontingent, liquidated, secured debts of less than $750,000 may be a debtor under chapter 13 of this title.  (emphasis added)

Subsection (e) makes it easy.  The Code here specifically says that a stockbroker and a commodity broker are not allowed to file a Chapter 13 bankruptcy case. No “ifs,” “ands,” or “buts” about it.

             To remain consistent with the rest of the language used in the other subsections a broker must be allowed to file for bankruptcy under Chapter 7.  Subsections (d) and (e) specifically exclude brokers from their filing bankruptcy under those respective chapters, while the one section, subsection (b), that delineates specifically who may note file under its respective chapter does not list brokers.  Therefore, the exclusion of brokers in subsection (b), coupled with the specific exclusions in (d) and (e), along with the implication created in (d)'s language of allowing all qualifying 7 filers, except brokers, to file an 11, lead to the conclusion that a stockbroker and a commodity broker are allowed to filed for bankruptcy under Chapter 7 of the Code, but not 11 or 13.