Bankruptcy Judge Edward L. Morris of Fort Worth, TX deepened the split between the circuits as to whether or not 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]

Originally filing for individual chapter 7 protection, the debtor In re Johnson owned seven oil and gas exploration and production companies all of which were out of business with no plans for returning to operation as of the petition date. The U.S. Trustee as well as a number of creditors objected to the debtor’s chapter 7 discharge, and the debtor then filed a motion to convert the case to chapter 11, conditioned on his ability to reorganize as a small business debtor under Subchapter V. The U.S. Trustee contended debtor was not eligible for Subchapter V because the businesses he owned were all defunct.

Siding with Judge Cynthia Norton of Kansas City, MO, Judge Morris ruled a debtor must be currently engaged in business to qualify for reorganization under subchapter V of chapter 11, and disagreed with what had been the leading case on the issue In re Wright[2], wherein Bankruptcy Judge Helen B. Burris of Spartanburg, SC, held that restructuring the debt of a defunct business is enough to qualify.

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). The debtor argued that “engaged in” encompasses management and he was the president of an oil and gas company owned by his mother; although, debtor had no ownership interest in his mother’s company. Judge Morris disagreed.

Specifically, Judge Morris found the term “engaged in” “is inherently contemporary in focus instead of retrospective, requiring the assessment of the debtor’s current state of affairs as of the filing of the bankruptcy petition.” Judge Morris noted, “engaged in” means “a person occupied with or busy in commercial or business activities – not a person who at some point in the past had such involvement.”

Like Judge Norton, Judge Morris looked to and found support in cases involving railroad and chapter 12 family farmer reorganizations noting a former railroad does not qualify for subchapter IV of chapter 11, and to qualify for chapter 12, a majority of courts require a debtor to be currently engaged in farming, except when operations are halted seasonally. Accordingly, the debtor was not “engaged in” business as of the petition date and was ineligible to be a small business debtor.

Turning to the debtor’s argument that he was engaged in “commercial or business activities,” via his role managing his mother’s company, Judge Morris disagreed finding the debtor was “nothing more than an employee.” According to Judge Morris, “a person engaged in ‘commercial or business activities’ is a person engaged in the exchange or buying and selling of economic goods or services for profit.” Being an employee, even one with “heightened obligations . . . . does not qualify as a small business debtor under section 101(51D).”

Judge Morris, therefore, denied the motion for conversion because it was conditioned on qualifying for subchapter V.

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 Johnson, 19-42063 (Bankr. N.D. Tex. March 1, 2021); see also, In re Thurmon, 20-41400, 2020 WL 7249555 (W.D. Mo. Dec. 8, 2020).

[2] In re Wright, 20-01035, 2020 WL 2193240 (Bankr. D.S.C. April 27, 2020).

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