Judge Thomas B. McNamara of Denver, CO recently widened the door (and the circuit split) as to the types of debtors entitled to seek relief under the Small Business Reorganization Act/Subchapter V of Chapter 11 of the Bankruptcy Code (“SBRA”). To qualify for relief under the SBRA, a debtor must be currently engaged in business at the time of filing. According to Judge McNamara, almost any business will do as long as the debtor is engaged in it at the time of filing, i.e. the debtor need not be currently engaged in the same commercial or business activities that gave rise to the underlying, Subchapter V debts, nor must the debtor be an owner of the business in which the debtor is employed on the filing date.[1]
The debtor in In Re Ikalowych was the sole owner of an LLC that in turn, owned 30% of an LLC that performed car repairs related to hail damage. The repair business failed, ceased operations, and, eventually, turned the assets over to the secured lender. This failure resulted in the debtor being personally liable for roughly $6.4 million as a result of personal guarantees on the car repair business’s loans. The debtor started working as an insurance salesman shortly before filing his Subchapter V petition. Per the debtor, he was engaged in “winding down” the repair business at the time of his bankruptcy filing, although neither he nor the business was generating income.
Both the U.S. Trustee and the debtor’s primary secured creditor filed a motions asking the court to declare the debtor ineligible for Subchapter V because he was not currently engaged in business. The Subchapter V trustee supported the debtor’s eligibility.
Judge McNamara first addressed the question of whether a Subchapter V debtor must be engaged in business on the filing date to be eligible for Subchapter V. Section 1182(1)(A), states a small business debtor “means a person engaged in commercial or business activities,” other than owning single-asset real estate.
Judge McNamara applied the test as of the filing date, but also examined the “relevant . . . circumstances immediately preceding and subsequent to the Petition Date as well as the Debtor’s conduct and intent.” Per Judge McNamara, the statute (and dictionaries) give an “exceptionally broad” meaning to “commercial or business activities.” In line with other courts that have faced this issue, Judge McNamara looked to similar statutory language regarding eligibility for reorganization as a railroad or family farmer, and found courts that have only required a debtor to be “presently doing something” in terms of business to be eligible for relief under the SBRA.[2]
[1] In re Ikalowych, 20-17547 (Bankr. D. Colo. April 15, 2021).
[2] See In re Johnson, 2021 WL 825156, at *6 (Bankr. N.D. Tex. Mar. 1, 2021), and In re Thurmon, 2020 WL 7249555, at *3 (Bankr. W.D. Mo. Dec. 8, 2020); but cf., In re Wright, 2020 WL 2193240 (Bankr. D.S.C. April 27, 2020) (where the bankruptcy court held that Subchapter V is not limited to someone engaged in business on the filing date).
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