Bankruptcy Judge Lori V. Vaughan of Orlando, Fla., squarely held that a corporate debtor is eligible to sell the assets and liquidate in Subchapter V of chapter 11, even if the company had terminated normal operations before filing.
Just to distribute assets that already had been liquidated, the decision allows the estate to avoid the (probably unnecessary) expenses that would result from conversion to chapter 7 and appointment of a trustee.
Judge Vaughan’s July 23 opinion means that the sale and liquidation of assets is a legitimate activity in Subchapter V not requiring oversight from a trustee in chapters 7 or 11.
The corporate debtor had been a contractor. Claims of shoddy construction led to lawsuits that the insurer defended. Unable to renew insurance, the debtor shut down the business and filed a petition under Subchapter V of chapter 11.
The petition listed assets of some $300,000, including a $13,000 bank account and accounts receivable with a face value of $200,000. The schedules listed $800,000 in unsecured claims and another 200 unliquidated, disputed construction claims.
Soon after filing, the debtor filed a motion to sell the assets under Section 363. Before the court approved the sale, the U.S. Trustee objected to the debtor’s right to proceed under Subchapter V.
The U.S. Trustee claimed that the debtor was ineligible for Subchapter V because there were no business operations on the filing date. In essence, the U.S. Trustee was contending that Subchapter V may only be used to reorganize and may not be employed to liquidate assets.
The Small Business Reorganization Act, or SBRA, became effective in February 2020 and is codified primarily in Subchapter V of chapter 11, 11 U.S.C. §§ 1181 – 1195. To be eligible for Subchapter V, the debtor must have less than $7.5 million in debt and must be “a person engaged in commercial or business activities . . . .” See Sections 1182(1) and 101(D)(A).
Judge Vaughan ruled in favor of the debtor. In her view, the statutory words “commercial or business activities” are not ambiguous. She focused on the debtor’s activities on the filing date.
Consulting dictionaries, Judge Vaughan said that the “term ‘commercial’ is commonly understood to involve commerce.” The term “business,” she said, “has a similar meaning.”
Citing cases such as Offer Space and Ikalowych, Judge Vaughan concluded that “the plain meaning of engaged in ‘commercial or business activities’ is broad with a very inclusive range of commercial or business activity.” To read ABI’s reports on those two cases, click here and here.
On the filing date, the debtor was not operating. However, the debtor had bank accounts, was working with insurance adjusters to resolve claims, and was engaged in selling the assets. “These acts were commercial or business in nature” and were being conducted “with a view toward profit, or at least minimizing loss,” Judge Vaughan said.
By “maintaining bank accounts, working with insurance adjusters and insurance defense counsel to resolve the Construction Claims and preparing for the sale of its assets,” Judge Vaughan held that the debtor was engaged in commercial or business activities on the petition date and was thus eligible for Subchapter V.
Bankruptcy Judge Lori V. Vaughan of Orlando, Fla., squarely held that a corporate debtor is eligible to sell the assets and liquidate in Subchapter V of chapter 11, even if the company had terminated normal operations before filing.
Just to distribute assets that already had been liquidated, the decision allows the estate to avoid the (probably unnecessary) expenses that would result from conversion to chapter 7 and appointment of a trustee.
Judge Vaughan’s July 23 opinion means that the sale and liquidation of assets is a legitimate activity in Subchapter V not requiring oversight from a trustee in chapters 7 or 11.
The corporate debtor had been a contractor. Claims of shoddy construction led to lawsuits that the insurer defended. Unable to renew insurance, the debtor shut down the business and filed a petition under Subchapter V of chapter 11.