Subchapter V: To Be Construed Openhandedly For Debtor (In re Wright)

By: Donald L Swanson

Subchapter V exists “to improve the reorganization process for small business chapter 11 debtors.”

In re Wright, Case No. 20-01035 (Bankry.S.Car., Order dated 4/27/2020, Doc. 37 at 5).

Charles Wright (“Debtor”) files a Chapter 11 case on February 28, 2020, designating himself a small business debtor and electing to proceed under Subchapter V.

The U.S. Trustee moves to strike the Subchapter V election, alleging that Debtor cannot qualify as a small business debtor because he has no ongoing business. The Bankruptcy Court disagrees and allows Debtor to proceed under Subchapter V.

Facts

Here are the In re Wright facts:

• Debtor owns Boiling Pot Investments, LLC (“Boiling Pot”), which owned a parcel of real property as its only asset. Boiling Pot files Chapter 11 bankruptcy without designating itself a small business debtor—the bankruptcy is dismissed.
• Debtor is a 49% owner of Carolinas Custom Clad, Inc. (“CCC”), which provided powder coating services (Debtor’s wife owns the other 51%). CCC files a Chapter 11 bankruptcy, which is later dismissed.
• Both Boiling Pot and CCC cease operations in 2018.
• In 2019, Boiling Pot and CCC sell all their assets for $700, 000, and the purchaser assumes responsibility for an IRS lien.
• On February 28, 2020, Debtor files his own Chapter 11, designating himself a small business debtor and electing to proceed under Subchapter V.
• Debtor schedules $395,816.29 total debts, of which 56% ($220,882.42) are business debts—the remaining 44% are consumer debts.

“Small Business Debtor” Definition

The Bankruptcy Code defines a “small business debtor” as a “person” (including individual, partnership and corporation):

• “engaged in commercial or business activities (including any affiliate of such person that is also a debtor under this title and excluding a person whose primary activity is the business of owning single asset real estate)”;
• with aggregate noncontingent, liquidated, secured and unsecured debts of not more than $2,725,625 (excluding debts owed to affiliates or insiders); and
• with at least 50% of such debts arising from debtor’s commercial or business activities.

The burden of proving “small business debtor” status is upon the debtor.

A Question

A central question, in deciding whether Debtor qualifies as a “small business debtor,” is whether the statutory definition should be construed openhandedly in favor of a debtor, harshly against a debtor, or somewhere in between.

An Answer

The In re Wright Court goes with openhandedness in favor of a debtor.

–Statute Construction Standards

Here are the legal standards the Court applies in construing a statute:

• In deciding questions of statutory interpretation, the Court’s duty is “to ascertain and implement the intent of Congress” by interpreting statutory words “in accordance with their ordinary meaning.”
• To determine ordinary meaning, the court also looks to “the specific context in which that language is used” and “the broader context of the statute as a whole.”
• “If the plain language is unambiguous, we need look no further,” but “if the text of a statute is ambiguous,” the court looks to “other indicia of congressional intent such as the legislative history.”

In this situation, the statutory language, the context, and the legislative history all reveal a Congressional intent for openhanded availability and application of Subchapter V to debtors.

–Legislative History

Legislative history shows that Subchapter V, (i) is “designed to broaden relief available to address small business debt,” and (ii) is “intended to improve the ability of small businesses to reorganize and ultimately remain in business.” An example of such history is the House Committee on the Judiciary (Report No. 116-54), which says:

• “Notwithstanding the 2005 Amendments, small business chapter 11 cases continue to encounter difficulty in successfully reorganizing”;
• Legislation is needed “to improve the reorganization process for small business chapter 11 debtors”; and
• Subchapter V allows debtors “to file bankruptcy in a timely, cost-effective manner” and “allows them to remain in business” which “not only benefits the owners, but employees, suppliers, customers, and other who rely on that business.”

–Statutory Language

The In re Wright Debtor meets all statutory standards for Subchapter V eligibility. Here’s how:

• Nothing in the Bankruptcy Code limits Subchapter V to debtors currently engaged in business or intending to engage in business in the future; so, a person who has discontinued prior business activities can still qualify;
• Debtor meets the debt requirements because, (i) 56% of his debts are business debts, and (ii) his total debt amount is less than the statutory cap; and
• Debtor is “a person engaged in commercial or business activities.”

Regarding the “person engaged” in business standard, the In re Wright Court makes this distinction:

1. This Debtor cannot qualify for Subchapter V by reason of the Boiling Pot or CCC bankruptcies, since those cases have been dismissed. An affiliate’s bankruptcy can bootstrap a person into Subchapter V eligibility because the small business debtor definition includes an affiliate of the debtor that is also a bankruptcy debtor. But “coexistent cases for the person and the affiliates are required,” so the dismissed Boiling Pot and CCC Chapter 11s can’t help this Debtor.
2. The In re Wright Debtor qualifies as a small business debtor, nonetheless, because he is personally “engaged in commercial or business activities” by dealing with the residual business debts of both Boiling Pot and CCC.

Accordingly, the In re Wright Bankruptcy Court allows the Debtor to proceed as a small business debtor under Subchapter V.

Conclusion

The In re Wright Order is now precedent for the proposition that Subchapter V is to be construed openhandedly in favor of debtors.

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