Disagreeing with three other courts that decided the same issue, Bankruptcy Judge Cynthia A. Norton of Kansas City, Mo., ruled that debtors must be currently engaged in business to qualify for reorganization under subchapter V of chapter 11.

Although the debtors had not filed a disclosure statement and were ineligible for subchapter V, Judge Norton nevertheless found reason for confirming their chapter 11 plan.

The husband and wife debtors were owners of 70% of the stock of two pharmacies that had shut their doors in April and sold all the assets. The couple filed chapter 11 petitions under subchapter V in August. At the time of the owners’ bankruptcy, the business was not operating and had no income, no customers, and no employees. The corporation still owned a few assets, but they were subject to the claim of the secured lender. The corporation was still in good standing with the state.

The debtors filed a plan on time and complied with the procedural requirements of subchapter V. The plan was accepted by all classes of impaired claims, including the secured lender’s.

No creditors objected to confirmation, but the U.S. Trustee raised an objection to the debtors’ eligibility for subchapter V and submitted a limited confirmation objection to preserve the argument.

The debtors contended that subchapter V does not require that they be “currently” engaged in business. The only three reported decisions on the question all hold in their favor, including the leading case, In re Wright, 20-01035, 2020 WL 2193240 (Bankr. D.S.C. April 27, 2020). To read ABI’s report on Wright, click here.

Judge Norton declined “to follow those cases.”

The outcome turned on the definition of “small business debtor” in Section 101(51D). The term “means a person engaged in commercial or business activities . . . .” Judge Norton said that Congress “was not writing on a blank slate” when it used the words “engaged in.” She listed the definitions of “family farmer,” health care provider,” and “railroad,” which use the same language, but the words are not defined in the Bankruptcy Code.

Referring to the plain meaning or common understanding of the term, Judge Norton said that “engaged in” means “to be actively and currently involved.” Adding the word “currently” would be “redundant,” she said.

Judge Norton alluded to an Eighth Circuit opinion that says that someone must be actively engaged in farming to be “engaged in farming” as required of family farmers in Section 101(18)(A). Another Eighth Circuit opinion required “some significant degree of engagement” in farming.

Judge Norton said that the debtors were retired and did not intend to return to business. She said that the debtors “were not as a matter of law ‘engaged in commercial or business activities’ on the day they filed bankruptcy.” Keeping the “empty shell of” the corporation “does not render them ‘engaged’ in business, either,” she said.

Judge Norton said she was “compelled” to rule that the debtor must “now proceed as regular chapter 11 debtors.”

Although the U.S. Trustee had raised the eligibility question months earlier, Judge Norton said that the U.S. Trustee never demanded that the debtors file a disclosure statement, which is not required in subchapter V but is required in “regular” chapter 11. Furthermore, she said that the plan itself “substantially” complied with Section 1125, and no creditor had objected.

Since she had accepted the debtor’s proffer of feasibility, Judge Norton said it “would make no sense for confirmation of the plan to be delayed for the filing of a separate disclosure statement when all voting impaired creditors voted in favor of the plan and no party requested the court make § 1125 applicable, suggesting that the information in the plan was adequate for the creditors to determine how to vote.”

In view of the “unusual circumstances” of the case, Judge Norton said she was prepared to confirm the plan so long as the debtor amended the plan to begin paying fees for the U.S. Trustee “effective as of the date of this opinion.”