When affiliates file petitions for reorganization under subchapter V of chapter 11, their aggregate secured and unsecured debt may not exceed $7.5 million.

If one of the affiliates is not eligible for subchapter V, the debt of the ineligible affiliate is nonetheless included in calculating the $7.5 million cap, according to Chief Bankruptcy Judge Jason D. Woodard of Aberdeen, Miss.

Four companies with common ownership filed petitions under subchapter V. They were therefore affiliates under Section 101(2). One of the affiliates owned single-asset real estate and was therefore ineligible for subchapter V under the definition of a small business debtor in Section 101(51D)(A).

The other three affiliates had less than $7.5 million of debt in the aggregate and were otherwise eligible for subchapter V. Combining the debt of the single-asset real estate debtor with the debt of its three affiliates, the debts of the four affiliates exceeded $7.5 million.

In his October 27 opinion, Judge Woodard addressed the question of whether the debt of the ineligible, single-asset debtor precluded the other three companies from resorting to subchapter V.

The result turned on the definition in 101(51D). Subsection (A) defines a “small business debtor” as a “person” engaged in “commercial or business activity (including any affiliate of such person that is also a debtor under this title and excluding a person whose primary activity is the business of owning single asset real estate).” The subsection goes on to say that the “aggregate noncontingent liquidated secured and unsecured debts” of the “person” may not exceed $7.5 million. In addition, “not less than 50 percent” of the aggregate debt must have arisen “from the commercial or business activities of the debtor.”

Subsection (A) ends with the word “and.” Therefore, a small business debtor must meet the requirements of both subsections (A) and (B).

Subsection (B) provides that a small business debtor “does not include . . . any member of a group of affiliated debtors that has” aggregate debt greater than $7.5 million or is a reporting company under the Securities and Exchange Act.

The three otherwise eligible debtors contended that the real estate owner’s debt should not be included because it was ineligible for subchapter V. The argument was logical but did not convince Judge Woodard.

Judge Woodard said that a debtor must satisfy both subsection (A) and (B). If Congress had intended to exclude the debt of the real estate owner, “it would have said so” in subsection (B) “just as it did in subsection (A).”

Judge Woodard held that a “small business debtor cannot be a member of a group of affiliates whose aggregate debt exceeds $7,500,000.00. Section 101(51D)(B)(i), by its plain language, excludes the debtors from subchapter V.”

Observation

By the same logic, affiliates of a reporting company may not be debtors under subchapter V.