To qualify for Subchapter V of chapter 11, an individual must be engaged in business on the filing date. According to Bankruptcy Judge Thomas P. Agresti of Erie, Pa., previously being “engaged in commercial or business activities” does not suffice.
In his December 14 opinion, Judge Agresti further narrowed eligibility for Subchapter V by holding that being an employee of a business owned by someone else does not qualify the debtor to be a small business debtor under Section 1182(1)(A).
The Defunct Medical Practice
The debtor was a medical doctor who specialized as an OBGYN. She had been the full or partial owner of three limited liability corporations through which she practiced medicine. She and her “partner” sold the practice in 2014. By 2017, the corporations had lost or liquidated all of their assets and were no longer conducting business.
Beginning in 2011, the debtor became a part-time employee of a health care provider where she performed “secondary admission reviews for hospital patients,” Judge Agresti said. Later, she worked for the provider full time.
Although Judge Agresti did not say so directly, one infers from his opinion that the debtor was not treating patients on the filing date in 2021. She was earning about $14,000 a month but was not a shareholder, manager or officer of the provider.
The U.S. Trustee and a creditor objected to the debtor’s eligibility for Subchapter V. Judge Agresti struck the Subchapter V designation.
The Statute
The outcome was controlled by Section 1182(1)(A), which says that a small business debtor must be
a person engaged in commercial or business activities . . . that has aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition or the date of the order for relief in an amount not more than $7,500,000 . . . not less than 50 percent of which arose from the commercial or business activities of the debtor.
The objectors conceded that the debtor was a “person” with no more debt than the statute allows.
However, the objectors argued that the debtor did not qualify for Subchapter V because she was not “engaged” in business activities on the filing date, since her medical practice had ended years earlier. They also argued that her employment by the health care provider did not mean she was “engaged” in business on the filing date.
Prior Business Activities Don’t Qualify
The Bankruptcy Code does not define what it means to be “engaged in business or commercial activities.” Judge Agresti framed the question as whether the debtor must “be engaged in commercial or business activities at the time the bankruptcy case is filed, or is it sufficient that the debtor was engaged in commercial or business activities at some time in the past though she is no longer doing so at the time the petition is filed?”
To find the answer, Judge Agresti approvingly cited In re Johnson, 2021 WL 825156 (Bankr. N.D. Tex. March 1, 2021), where Bankruptcy Judge Edward L. Morris of Fort Worth, Texas, ruled that the owner of a defunct business does not qualify for reorganization as a small business debtor under Subchapter V of chapter 11. To read ABI’s report on Johnson, click here.
Judge Agresti said that a Third Circuit railroad reorganization opinion from 2002 was “particularly salient.” There, the appeals court held that a railroad that had ceased operations could not qualify for railroad reorganization. The case, he said, “strongly indicates that for a debtor to be eligible to proceed under Subchapter V it must be presently engaged in commercial or business activities.”
Judge Agresti approvingly cited two other opinions requiring the debtor to have been engaged in business on the filing date. See In re Thurmon, 20-41400, 2020 WL 7249555 (W.D. Mo. Dec. 8, 2020); and In re Ikalowych, 629 B.R. 261, 276 (Bankr. D. Colo. 2021). To read ABI’s report on Thurmon and Ikalowych, click here and here.
On the other side of the street, Judge Agresti cited “some contrary caselaw holding that past commercial or business activity by the debtor is sufficient to meet the Subchapter V eligibility requirement.” See, e.g., In re Wright, 2020 WL 2193240 (Bankr. D.S.C. April 27, 2020); and In re Blanchard, 2020 WL 4032411 (Bankr. E.D. La. July 16, 2020). To read ABI’s reports on Wright and Blanchard, click here and here.
Judge Agresti did not find those cases “persuasive,” and he rejected them.
Having decided that the debtor was not presently engaged in business, Judge Agresti turned to the meaning of “commercial or business activities,” terms also not defined in the Bankruptcy Code. He cited decisions like In re Offer Space, LLC, 529 B.R. 299 (Bankr. D. Utah Apr. 22, 2021), where winding down a non-operating business met the definition. For ABI’s report on Offer Space, click here.
Even if Offer Space were the law, the LLCs had not conducted any wind-down activities in years, Judge Agresti said. Moreover, her current employment was a “garden-variety employee-employer relationship” with a company where she was neither an officer, director nor a manager.
Judge Agresti held that the debtor’s current employment “does not constitute engaging in commercial or business activities.” He therefore ruled that the debtor had not carried her burden of establishing entitlement to proceed under Subchapter V.
N.B.: The opinion contains interesting dicta on circumstances when an individual’s tax liabilities might or might not constitute business debts as required to qualify for Subchapter V.
To qualify for Subchapter V of chapter 11, an individual must be engaged in business on the filing date. According to Bankruptcy Judge Thomas P. Agresti of Erie, Pa., previously being “engaged in commercial or business activities” does not suffice.
In his December 14 opinion, Judge Agresti further narrowed eligibility for Subchapter V by holding that being an employee of a business owned by someone else does not qualify the debtor to be a small business debtor under Section 1182(1)(A).
The Defunct Medical Practice
The debtor was a medical doctor who specialized as an OBGYN. She had been the full or partial owner of three limited liability corporations through which she practiced medicine. She and her “partner” sold the practice in 2014. By 2017, the corporations had lost or liquidated all of their assets and were no longer conducting business.
Beginning in 2011, the debtor became a part-time employee of a health care provider where she performed “secondary admission reviews for hospital patients,” Judge Agresti said. Later, she worked for the provider full time.