By: Donald L Swanson
“We now hold that a not-for-profit company can be ‘engaged in commercial or business activities’ as that phrase is used” in Subchapter V of the Bankruptcy Code.
- Guan v. Ellingsworth Residential Community Association, Inc., 125 F.4th 1365 (11th Cir. 2025).
Guan is a homeowner who fails to conform his property to covenants of the homeowners association (the “HOA”). So, the HOA sues Guan in state court.
Guan countersues the HOA for state-law claims, and the state court awards Guan costs and fees totaling $500,000 because the HOA waived its claims against Guan by suing rather than by arbitrating the dispute.
But before Guan can collect and proceed with the counterclaims, HOA files Subchapter V bankruptcy and confirms a Subchapter V plan.
Bankruptcy Court Ruling & Appeals on Subchapter V Eligibility
In the Bankruptcy Court, Guan opposes the HOA’s Subchapter V eligibility.
Specifically, Guan contends that, since the HOA is a not-for-profit corporation, (i) its debt is not “business debt,” (ii) it is not engaged in “commercial or business activities,” and (iii) it is not a “moneyed, commercial, or business” corporation under § 303 and § 1112.
The Bankruptcy Court rejects each of Guan’s arguments, specifically finding that:
- HOA’s debts qualifies as business debts and are not consumer debts;
- HOA’s activities qualify as “commercial or business” for Subchapter V eligibility (i.e., a profit motive is not required); and
- § 303 and § 1112 references to “moneyed, commercial, or business” are inapplicable and irrelevant.
Guan appeals to the U.S. District Court—which affirms.
So, Guan appeals to the Eleventh Circuit Court of Appeals, which also affirms HOA’s Subchapter V eligibility.
What follows is a summary of the Eleventh Circuit’s rationale on Subchapter V eligibility.
Lack of Profit Motive
Guan argues that the HOA is not eligible for Subchapter V because HOA lacks a profit motive.
The Eleventh Circuit Court of Appeals disagrees.
–Statutory Background
Subchapter V removes many of the complex requirements that made bankruptcy unapproachable for small businesses. It, for example:
- modifies the absolute priority rule by replacing it with a projected disposable income requirement;
- shortens the length of the bankruptcy process; and
- lowers the costs associated with bankruptcy.
To qualify for Subchapter V, the debtor must:
- be “engaged in commercial or business activities”;
- have “aggregate noncontingent liquidated secured and unsecured debts” as of the date of petition of no more than a statutorily defined limit, without including “debts owed to . . . affiliates or insiders”; and
- have most debts arising “from the commercial or business activities of the debtor.”
–Textual Basis
The broad eligibility for Subchapter V includes not-for-profit entities.
Subchapter V allows any entity involved in regular business-like functions (no matter if its primary goal is to earn a profit or not) to qualify for reorganization under Subchapter V. That’s because “business activities” can be either:
- the carrying out of a series of similar acts for the purpose of realizing a pecuniary benefit; or
- otherwise accomplishing a goal (according to Black’s Law Dictionary (11th ed. 2019)).
Further, “churches, hospitals, and other nonprofit businesses” are all allowed to file for relief under standard Chapter 11 of the Bankruptcy Code—and Subchapter V is a subchapter “within chapter 11.”
- So, “it would be insensible to consider nonprofit entities capable of petitioning for chapter 11 relief but not for relief under a subchapter of chapter 11.”
–Practicalities
Homeowner associations engage in “business activities” as a matter of course—despite their not-for-profit status.
And there is nothing about a not-for-profit that precludes it from engaging in business-like operations. To the contrary, homeowner associations can, under governing state law:
- collect assessments;
- manage budgets;
- enforce rules; and
- maintain common areas.
In practice, a homeowners association operates much like a small business by:
- overseeing the maintenance of shared properties;
- contracting with service providers; and
- negotiating with third parties on behalf of its members.
–Bankruptcy Code, Generally
Further, a nonprofit corporation, like a for-profit corporation, is eligible to file for relief under the Bankruptcy Code because:
- Congress did not explicitly or implicitly include not-for-profit companies alongside the list of other excluded debtors; and
- where Congress knows how to say something but chooses not to, its silence is controlling.
11th Circuit’s Summation
“In the end,” because the HOA was “engaged in commercial or business activities,” it is properly classified as a Subchapter V debtor.
“Subchapter V contains no textual requirement that a debtor pursue a profit, and we refuse to impose such a requirement here.”
“Consequently, we affirm the order affirming” Debtor’s designation as a Subchapter V debtor.
Conclusion
Subchapter V eligibility based on “commercial or business activities” includes not-for-profit entities who engage in business-like activities.
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