Can a Non-operating Business and Its Owner Still Qualify under the SBRA?

A small business debtor is defined as one that is engaged in commercial or business activities and has no more than $2,725,625 in noncontingent liquidated secured and unsecured debt (excluding debts owed to affiliates or insiders), not less than 50 percent of which arose from the commercial or business activities of the debtor.  11 U.S.C. § 101(51D). The Coronavirus Aid Relief and Economic Security Act (“CARES”) increases the eligibility threshold to $7,500,000; however, the eligibility threshold will return to $2,725,625 after one year.   But what does it mean to be "engaged in commercial or business activities?"  Are the benefits of the SBRA foreclosed to businesses that have ceased operations?  The court in In re Wright, 2020 Bankr. LEXIS 1240, at *2 (Bankr. D.S.C. Apr. 27, 2020), held that the debtor could still make the Subchapter V election even if business operations had ceased.   

In Wright, the debtor was an individual who owned two failed businesses.  The businesses ceased operations in 2018.  Those businesses were not debtors.  56% of the debtor's debts were business debts relating to those defunct businesses.  He elected to proceed under Subchapter V.  The US Trustee objected because the debtors’ businesses were not operating at the time of the filing and there was no hope of those businesses ever operating again.  Therefore, the US Trustee argued that the debtor was not engaged in business activities.  The court found in favor of the debtor and held that “he is engaged in commercial or business activities by addressing residual business debt and he otherwise meets the remaining requirements under § 101(51D).”  Thus, if the non-operating debtor otherwise qualifies for the Subchapter V election and is addressing residual business debts, the debtor has a strong argument with supporting caselaw that the debtor can take advantage of the SBRA.