Because the statutory definition of “small business” refers to “business activities” not “business operations,” Bankruptcy Judge Jeffrey Norman of Houston held that the corporate debtor was eligible for Subchapter V of chapter 11 even though the debtor had never generated income.

The LLC debtor was a holding company that owned patented piping technology. As Judge Norman said in his November 20 opinion, the debtor had raised $4 million from bridge loans and by selling secured notes. However, the debtor had not landed a contract to sell pipe.

Three creditors filed an involuntary petition. The debtor consented to entry of an order for relief in chapter 11 and elected to proceed under Subchapter V. The petitioning creditors objected to Subchapter V designation, contending that the debtor was never a “business,” never generated income and was never engaged in commercial or business activities.

Judge Norman explained that the creditors were aiming to file a plan of their own, an impossibility unless the case was under “regular” chapter 11.

Defined in Section 101(51D)(A), a “small business debtor”

means a person engaged in commercial or business activities . . . that has aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition or the date of the order for relief in an amount not more than” $7.5 million. [Emphasis added.]

Judge Norman said that the Bankruptcy Code “does not provide a definition for ‘commercial or business activity.’” To decide whether the debtor qualified, he looked at the totality of the circumstances.

From testimony by the debtor’s chief operating officer, Judge Norman found that the debtor had a lease, maintained a bank account, continually attempted to generate business, provided marketing materials to potential investors and retained attorneys to protect intellectual property.

For caselaw precedent, both sides relied on In re Port Arthur Steam Energy LP, 629 B.R. 233 (Bankr. S.D. Tex. July 1, 2021), where Bankruptcy Judge Christopher M. Lopez of Houston held that collecting accounts receivable and maintaining the physical assets qualified as being engaged in commercial activities, even though the historical business was no longer operating. To read ABI’s report, click here.

Judge Norman also took counsel from In re Offer Space LLC, 629 B.R. 299 (Bankr. D. Utah April 22, 2021), where Bankruptcy Judge William T. Thurman held that a nonoperating business qualified for Subchapter V if it had a bank account and was managing its few remaining assets. To read ABI’s report, click here.

If Section 101(51D)(A) had used the word “operations” in the definition rather than “activities,” Judge Norman said he would have found the debtor ineligible for Subchapter V, because the business was no longer functional or operational on the filing date.

Judge Norman held that the debtor “was engaged in ‘commercial or business activities’” and qualified for Subchapter V because there was a lease, a bank account and marketing materials for investors, plus “attempts to generate business” and attorneys to protect intellectual property.