Circuit splits as to issues presented under the Small Business Reorganization Act/Subchapter V of Chapter 11 of the Bankruptcy Code (“SBRA”) continue to grow in 2021 with Judge Benjamin A. Kahn of Durham, North Carolina finding debt from a non-operating business can still be used to help a debtor quality for relief under Subchapter V.
The debtor in In Re Blue[1] had owned a corporation in the business of providing information transport consulting services. The company has gone out of business about two years prior to the filing of the petition under Subchapter V and had no assets at the time of filing nor did the debtor plan on trying to reopen the business. At the time of filing, the debtor was a regular, salaried employee of a company also in the information transport consulting services industry. The debtor also did some work as an independent contractor/consultant proving information technology related services for two other companies.
Both the United States trustee and Case Trustee assigned to the case objected to the debtor’s election under Subchapter V.
In siding with the debtor, Judge Kahn addressed the issue of whether the debtor was “engaged in commercial or business activities,” as required by Section 101(51D) of the Bankruptcy Code. Finding no definition in the statute and “scant” legislative history, Judge Kahn joined with recent decisions requiring only that the the debtor be currently engaged in some business noting debtor was working and such work is “clearly the delivery of services in exchange for a profit.” Additionally, Judge Kahn found nothing in the statute or legislative history requiring that the debtor’s self-employment be full-time. Further, Judge Kahn was not persuaded that there must be a nexus between the business debt arising from the defunct business and the debtor’s current business activities, noting requiring the debt to have arisen from current business activities “would be far too limiting for the remedial purposes of Subchapter V” and would otherwise “disqualify meritorious small businesses from the remedial purposes of subchapter V simply by having significant debts from former operations.”
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[1] In re Blue, 21-80059 (Bankr. M.D.N.C. May 7, 2021).