THE SMALL BUSINESS BANKRUPTCY BLOG
Muddied Waters: Courts Disagree Whether a Debtor Must Be Operating to Qualify for Subchapter 5 Relief
The SBRA defines a qualifying "debtor" as "a person engaged in commercial or business activities." 11 U.S.C. § 1182(1)(A). A few months ago, I cited In re Blanchard, No. 19-12440, 2020 Bankr. LEXIS 1909 (Bankr. E.D. La. July 16, 2020), In re Wright, No. 20-1035, 2020 Bankr. LEXIS 1240 (Bankr. D.S.C. Apr. 27, 2020), and In re Bonert, No. 2:19-BK-20836, 2020 Bankr. LEXIS 1783 (Bankr. C.D. Cal. June 3, 2020). These cases supported the position that current operations are not necessary for a debtor to qualify under the SBRA. In other words, if the business is no longer operating but the debtor files bankruptcy to address residual business debts, then the debtor is "engaged in commercial or business activities" and thus may still qualify for Subchapter V relief.
But not everywhere. . .
In In re Thurmon, 2020 Bankr. LEXIS 3422 (Bankr. W.D. Mo. Dec. 8, 2020), the court sustained the United States Trustee's objection to the debtors' Subchapter V election because the debtors had ceased their business operations prepetition, sold their assets, and had no intention of resuming operations. Because the SBRA does not define "engaged in commercial or business activities," the court looked to analogous cases in Chapter 12 which require family farmers to "conduct" farming operations to qualify for relief under Chapter 12. After considering these cases, the court found that the Thurmons were not engaged in commercial or business activities when they filed bankruptcy because they had already sold the business with no intent to restart it and were otherwise not active or involved in any commercial or business activities. From a practical standpoint, the decision was not a disaster for the Thurmons because the court nonetheless confirmed the plan under a traditional Chapter 11 analysis; however, it could have been very difficult for them had there been other issues.
So, what is the work around in a case where the debtor is selling its assets and ceasing operations? File bankruptcy before the sale of the business assets and include the sale as part of the plan.