By: Donald L Swanson
In re Blanchard, Case No. 19-12440, Bankr. E.D. La. (Doc. 137, decided 7/16/2020), is a Subchapter V eligibility opinion.
The opinion stands for two propositions:
- Subchapter V exists to help small businesses reorganize; and
- Nothing in Subchapter V, or in the definition of a small business debtor, requires a debtor to be “currently” engaged in business or commercial activities.
Husband and Wife file their Chapter 11 Petition on September 10, 2019—before Subchapter V exists.
Subchapter V becomes effective on February 19, 2020.
On April 29, 2020, Debtors amend their Chapter 11 Petition, electing to proceed as small business debtors under Subchapter V.
The U.S. Trustee and a creditor oppose this election.
Creditor objects to the election, insisting that Debtors are not eligible for Subchapter V because they are not “currently” engaged in commercial or business activities.
Debtors had guaranteed the business debts of separate entities in which Debtors hold controlling interests. But creditor insists that such guarantees do not qualify Debtors for Subchapter V.
Bankruptcy Court’s Ruling & Rationale
The Bankruptcy Court rules that Debtors do qualify for proceeding under Subchapter V. Here is its rationale.
Legal Standards. When a debtor’s bankruptcy eligibility is challenged, debtor has the burden of proving eligibility. And to qualify for Subchapter V, a debtor must be “engaged in commercial or business activities” (§ 1182(1)).
Evidence. Debtors demonstrate that they have independent status as small business debtors, “engaged in commercial or business activities,” by the following evidence:
- They are sole owners of (i) Pearl Inc. d/b/a Indian Ridge Shrimp Company, a shrimp-processing company, (ii) A & C Cajun Distributors, LLC, a snack-vending operation, and (iii) Lagniappe Cajun Farms, LLC, a company that produces commercially sold pickled quail eggs;
- Husband Debtor owns 49% of Bayou Blue Hemp, LLC, a farming operation;
- Both Debtors own and rent two properties from which they receive rental income; and
- Their business debts stem from, (i) personal guarantees of debts from ten businesses, and (ii) mortgages on their rental properties.
Additionally, the Claims Register shows, (i) debts associated with commercial or business activities in the amount of $1,110,714.04, and (ii) consumer debts in the amount of $290,712.73.
Creditor argues that the eligibility phrase, “a person engaged in commercial or business activities,” requires a debtor to be currently engaged in such activities.
The following legal considerations support Debtors’ eligibility for Subchapter V:
- Subchapter V is intended to improve the ability of small businesses to reorganize and ultimately remain in business;
- Nothing in Subchapter V, or in the definition of a small business debtor, limits Subchapter V eligibility to debtors “currently” engaged in business or commercial activities;
- Most of Debtors’ debts stem from “both currently operating businesses and non-operating businesses” and do not exceed the Subchapter V eligibility limit;
- One precedent is In re Bonert, 2020 WL 3635869, at *5 (finding proper a debtor’s election to proceed under Subchapter V to address the debtors’ liabilities stemming from their prior operation of a bakery); and
- Another precedent is In re Wright, 2020 WL 2193240, at *3 (a debtor with “residual business debt he incurred from non-operating companies” is “engaged in commercial or business activities”).
U.S. Trustee’s Arguments
The US Trustee’s arguments against Debtors proceeding under Subchapter V, after ten prior months in Chapter 11, are “procedural in nature.” Here is how the Bankruptcy Court responds:
- It is true that practical and scheduling issues exist when a Subchapter V election occurs during a pending case; but
- Nothing prevents a resetting or rescheduling of these procedural matters.
As to the U.S. Trustee’s concern that creditors may have vested rights jeopardized by a Subchapter V election, the Bankruptcy Court provided opportunity for any such creditors to come forward—but “none did so.”
The Bankruptcy Court concludes its opinion with this summary:
“the whole, the entire whole, of the legislative history and statements of Congress teaches the Court that the primary purpose” of Subchapter V “is to promote successful reorganizations using the tools that are now available under current law.”
This In re Blanchard opinion is one more demonstration of a judicial inclination to give Subchapter V a broad reading to effect its purpose.
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