Bankruptcy Judge Cynthia Norton of Kansas City, Mo., split with three sister bankruptcy courts last week and found a debtor must be currently engaged in business to qualify for reorganization under the Small Business Reorganization Act/Subchapter V of chapter 11 of the Bankruptcy Code.[1]
The debtors in In re Thurmon owned 70% of the stock of two pharmacies that had shut their doors in April 2020 and sold all the assets prior to filing chapter 11 petitions under Subchapter V in August. Accordingly, at the time of the bankruptcy filing, the business was not operating, had no income, no customers, and no employees and what few assets remained were, subject to the claim of the secured lender.
The debtors filed a chapter 11 plan on time and otherwise met the procedural requirements of Subchapter V. The proposed plan was accepted by all classes of impaired creditors, including the secured lender, and no creditors objected to the plan.
However, the U.S. Trustee objected to the debtors’ eligibility for Subchapter V as the debtors were not currently engaged in business. The debtors argued Subchapter V does not require that they be currently engaged in business following the leading case on the matter In re Wright, 20-01035, 2020 WL 2193240 (Bankr. D.S.C. April 27, 2020). Judge Norton declined to follow Wright and its progeny.
Pursuant to Section 101(51D) of the Bankruptcy Code, a “small business debtor” is defined, in part, to mean “a person engaged in commercial or business activities.” (Emphasis added). According to Judge Norton, Congress “was not writing on a blank slate” when it used the term “engaged in.” Referring to the plain meaning of the term, Judge Norton found “engaged in” means “to be actively and currently involved.” Adding the word “currently” would be “redundant,” she said. Further, the debtors were retired, did not intend to return to business, and, therefore, “were not as a matter of law ‘engaged in commercial or business activities’ on the day they filed bankruptcy.” Keeping the “empty shell of” the corporation “does not render debtors ‘engaged’ in business, either,” she said.
Judge Norton found, therefore, that she was “compelled” to rule the debtors must “now proceed as regular chapter 11 debtors.” Regardless, Judge Norton indicated she would confirm the debtors’ plan, which had been filed without a disclosure statement that would have been required in a “traditional” chapter 11 case but is not required in cases elected under Subchapter V, with a slight modification
Specifically, while the U.S. Trustee had raised the eligibility question, Judge Norton said that the U.S. Trustee had never demanded that the debtors file a disclosure statement. Furthermore, she found the proposed plan “substantially” complied with Section 1125, and no creditor had objected. Having found the proposed plan to be feasible, Judge Norton said it “would make no sense for confirmation of the plan to be delayed for the filing of a separate disclosure statement when all voting impaired creditors voted in favor of the plan and no party requested the court make Section 1125 applicable, suggesting that the information in the plan was adequate for the creditors to determine how to vote.”
In view of the “unusual circumstances” of the case, Judge Norton said she was prepared to confirm the plan so long as it was amended to require the debtors to begin paying fees for the U.S. Trustee effective as of the date of her opinion.
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[1] In re Thurmon, 20-41400 (W.D. Mo. Dec. 8, 2020).