On a question where the lower courts are split, Bankruptcy Judge Edward L. Morris of Fort Worth ruled that the owner of a defunct business does not qualify for reorganization as a small business debtor under subchapter V of chapter 11.
On the petition date, the individual chapter 7 debtor owned seven defunct oil and gas exploration and production companies. All of them were out of business with no plans for returning to operation.
The U.S. Trustee and several creditors objected to the debtor’s chapter 7 discharge. In response, the debtor filed a motion for conversion to chapter 11, conditioned on his ability to reorganize as a small business debtor under subchapter V of chapter 11.
Although the debtor was otherwise entitled to convert to chapter 11, the U.S. Trustee and the objecting creditors contended that he was not eligible for subchapter V because the businesses he owned were all defunct.
The debtor countered by pointing to his current employment: He was the president of an oil and gas company owned by his mother. However, he had no ownership interest in his mother’s company.
In his March 1 opinion, Judge Morris decided that the debtor was not eligible for subchapter V.
The outcome turned on the definition of a “small business debtor” in Section 101(51D). The term “means a person engaged in commercial or business activities . . . .” Judge Morris gave the terms their “plain and unambiguous meanings” because they are not defined in the Bankruptcy Code.
The debtor argued that “engaged in” encompasses prior ownership and management. Judge Morris disagreed.
The term “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 said. He said that “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.”
Judge Morris found support for his conclusion in cases involving railroad and chapter 12 family farmer reorganizations. He cited the Third Circuit for holding that a former railroad does not qualify for subchapter IV of chapter 11. To qualify for chapter 12, a “majority of courts,” he said, require someone to be currently engaged in farming, except when operations are halted seasonally.
Consequently, the debtor was not “engaged in” business and was thus ineligible to be a small business debtor.
Judge Morris also analyzed whether the debtor was engaged in “commercial or business activities.” The debtor contended that managing his mother’s company qualified.
Again, Judge Morris disagreed. The debtor, he said, was “nothing more than an employee” and was not conducting his mother’s business for his own profit.
Judge Morris said that “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 of his mother’s company, even with “heightened obligations . . . . does not qualify as a small business debtor under section 101(51D).”
Judge Morris therefore denied the motion for conversion to chapter 11 because it was conditioned on qualifying for subchapter V.
Observations
Judge Morris cited Bankruptcy Judge Cynthia A. Norton of Kansas City, Mo., who likewise ruled that debtors must be currently engaged in business to qualify for reorganization under subchapter V of chapter 11. In re Thurmon, 20-41400, 2020 WL 7249555 (W.D. Mo. Dec. 8, 2020). To read ABI’s report on Thurmon, click here.
Judge Morris also cited but disagreed with In re Wright, 20-01035, 2020 WL 2193240 (Bankr. D.S.C. April 27, 2020), where Bankruptcy Judge Helen B. Burris of Spartanburg, S.C., held that restructuring the debt of a defunct business is enough to qualify. To read ABI’s report on Wright, click here.
On a question where the lower courts are split, Bankruptcy Judge Edward L. Morris of Fort Worth ruled that the owner of a defunct business does not qualify for reorganization as a small business debtor under subchapter V of chapter 11.
On the petition date, the individual chapter 7 debtor owned seven defunct oil and gas exploration and production companies. All of them were out of business with no plans for returning to operation.
The U.S. Trustee and several creditors objected to the debtor’s chapter 7 discharge. In response, the debtor filed a motion for conversion to chapter 11, conditioned on his ability to reorganize as a small business debtor under subchapter V of chapter 11.
Although the debtor was otherwise entitled to convert to chapter 11, the U.S. Trustee and the objecting creditors contended that he was not eligible for subchapter V because the businesses he owned were all defunct.
The debtor countered by pointing to his current employment: He was the president of an oil and gas company owned by his mother. However, he had no ownership interest in his mother’s company.
In his March 1 opinion, Judge Morris decided that the debtor was not eligible for subchapter V.
The outcome turned on the definition of a “small business debtor” in Section 101(51D). The term “means a person engaged in commercial or business activities . . . .” Judge Morris gave the terms their “plain and unambiguous meanings” because they are not defined in the Bankruptcy Code.
The debtor argued that “engaged in” encompasses prior ownership and management. Judge Morris disagreed.
The term “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 said. He said that “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.”
Judge Morris found support for his conclusion in cases involving railroad and chapter 12 family farmer reorganizations. He cited the Third Circuit for holding that a former railroad does not qualify for subchapter IV of chapter 11. To qualify for chapter 12, a “majority of courts,” he said, require someone to be currently engaged in farming, except when operations are halted seasonally.
Consequently, the debtor was not “engaged in” business and was thus ineligible to be a small business debtor.
Judge Morris also analyzed whether the debtor was engaged in “commercial or business activities.” The debtor contended that managing his mother’s company qualified.
Again, Judge Morris disagreed. The debtor, he said, was “nothing more than an employee” and was not conducting his mother’s business for his own profit.
Judge Morris said that “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 of his mother’s company, even with “heightened obligations . . . . does not qualify as a small business debtor under section 101(51D).”
Judge Morris therefore denied the motion for conversion to chapter 11 because it was conditioned on qualifying for subchapter V.