To qualify as a small business debtor eligible for the streamlined provision of subchapter V of chapter 11, the debtor is not required to be conducting business when filing the original petition, according to Bankruptcy Judge Helen B. Burris of Spartanburg, S.C. Dealing with the debt of a defunct business is enough to qualify.

The April 27 decision by Judge Burris is especially important at a time when many businesses are not generating income. If other courts agree with Judge Burris, small businesses and their owners will be able to proceed under subchapter V, even if they are out of business.

The Defunct Businesses

A man had owned two closely held corporations. Both had been in chapter 11 and sold their assets. Only secured creditors were paid. Neither company had elected treatment as a small business debtor. Both cases were dismissed in 2019, and neither company was conducting business when the owner filed his own chapter 11 petition on February 28.

The owner designated himself for treatment as a small business debtor under subchapter V, which became effective on February 19 pursuant to the Small Business Reorganization Act, codified as subchapter V in chapter 11, 11 U.S.C. §§ 1181 – 1195. He scheduled a total of about $400,000 in debt. From the total, 56% was debt of the two companies that he evidently had guaranteed.

The U.S. Trustee filed a motion to strike the designation as a small business debtor, contending that the owner was not eligible for subchapter V because he was not engaged in business at the time he filed his original petition.

Previously Conducting Business Is Enough

Analyzing the U.S. Trustee’s argument, Judge Burris began with the definition of a small business debtor in Section 101(51D). To be eligible for subchapter V, the debtor must be “a person engaged in commercial or business activity” that has not more than $7.5 million in secured and unsecured debt, “not less than 50 percent of which arose from the commercial or business activities of the debtor.”

Judge Burris recognized that the scant legislative history of the SBRA indicates it was “intended to improve the ability of small businesses to reorganize and ultimately remain in business.” However, she said, nothing in the definition “limits application to debtors currently engaged in business or commercial activities.” [Emphasis in original.]

Next, Judge Burris consulted the Collier treatise and quoted a section saying that a small business debtor “is not restricted to a person who at the time of filing of the petition is presently engaged in commercial or business activities and who expects to continue in those same activities under a plan of reorganization.” 2 Collier on Bankruptcy ¶ 101.51D (16th ed. 2020).

To qualify, Judge Burris said that the owner could not rely on the companies’ bankruptcies because they had been dismissed. She referred to the definition in Section 101(51D), which includes an affiliate “that is also a debtor under this title . . . .” [Emphasis in original.]

Nonetheless, Judge Burris said that coexistent “cases for the person and the affiliate are not required.”

Judge Burris held that the owner qualified on his own without reliance on the two companies. She ruled that he was eligible for treatment as a small business debtor because he was “‘engaged in commercial or business activities’ by addressing residual business debt and otherwise meets the remaining requirements under § 101(51D).”