Definition Of “Engaged In Business” Includes Liquidation Under Subchapter V

The Small Business Reorganization Act/Subchapter V of Chapter 11 of the Bankruptcy Code (“SBRA”) defines a qualified debtor as being, in part, “engaged in commercial or business activities.” Just how “engaged” continued to be disputed. According to Judge Christopher M. Lopez of Houston, Texas liquidating a defunct business qualifies a debtor as being “engaged” in business activity.

Prior to filing for bankruptcy protection, the Debtor in In re Port Arthur Steam Energy LP,[1] owned and operated a facility converting waste heat into electricity and steam, which it then sold to other nearby plants. After disputes with certain creditors arose, the Debtor ceased operations and was involved in litigation and arbitration when it filed a Chapter 11 petition and elected to be treated as a small business under the SBRA.

The Debtor then filed chapter 11 plan of liquidation aimed at liquidating its assets, collecting on accounts receivable, and prosecuting claims with proceeds to be later distributed to its creditors. Both the U.S. Trustee and the Debtor’s primary creditor objected to the Debtor’s SBRA election arguing the debtor was no longer operating its business. Judge Lopez overruled the objections and allowed the Debtor c to continue its case under the SBRA.

Again, pursuant to Title 11 U.S.C. Section 1182(1)(A), a small business debtor is defined, in part, as being “engaged in commercial or business activities.” Applying the “plain meaning” to this section and looking to other case law on the issue, Judge Lopez held the Debtor was “‘engaged in” commercial or business activities as of the chapter 11 petition date because the debtor was pursuing litigation, collecting accounts receivable, selling assets and maintaining assets – all of which were “commercial and business activities.” Additionally, Judge Lopez noted the SBRA “does not require a debtor to maintain its core or historical business operations on the petition date.”

Of note, Judge Lopez also looked to the fact that the Debtor was a corporation and distinguished and declined to follow case law where individuals owned defunct businesses and were held ineligible for Subchapter V, even though their debts arose from the defunct business.[2]

If you need help understanding your rights in the complicated bankruptcy process, contact the experienced bankruptcy attorneys at Goosmann Law in our Sioux City, Sioux Falls, and Omaha offices.

[1] In re Port Arthur Steam Energy LP, 21-60034 (Bankr. S.D. Tex. July 1, 2021)

[2] In re Johnson, 2021 WL 825156 (Bankr. N.D. Tex. Mar. 1, 2021); In re Thurmon, 2020 WL 7249555 (Bankr. W.D. Mo. Dec. 8, 2020).