Subchapter V Eligibility: Beware The “Affiliated Debtor” Trap (In re 305 Petroleum)

“The term ‘small business debtor’— . . . (B) does not include—(i) any member of a group of affiliated debtors that has aggregate noncontingent liquidated secured and unsecured debts in an amount greater than [$7,500,000] (excluding debt owed to 1 or more affiliates or insiders).“

—11 U.S.C. § 101(51D)(B)(i) (emphasis added).

A Bankruptcy Court opinion on this quoted provision is in three jointly administered cases of In re 305 Petroleum, Inc., Pacific Pleasant Investment, LLC, & Pleasant Point Investment, LLC, Case Nos. 20-11593, 20-11594 & 20-11595 in the Bankruptcy Court of Northern Mississippi (issued October 27, 2020, Doc. 150).

A fourth debtor (In re Premier Petroleum, Case No. 20-11596 in the same Court) is another related entity intended to be a part of the jointly administered Subchapter V group.

Facts

Here’s what happened.

All four debtors filed Subchapter V petitions, with a request that all four cases be jointly administered.

However, Premier Petroleum is a single asset real estate debtor. As such, it cannot qualify for Subchapter V relief (see § 101(51D)(A)) and is now on its own in a regular Chapter 11 case.

Each of the four debtors is an “affiliate” under § 101(2) because of the following common ownerships:

Nrupesh Patel is the 100% owner of 305 Petroleum, Inc. [Case No. 20- 11593];
Nrupesh Patel is the 100% owner of Pacific Pleasant Investment, LLC. [Case No. 20-11594];
Nrupesh Patel and Tejal Patel are each a 50% owners of Pleasant Point Investment, LLC. [Case No. 20-11595]; and
Nrupesh Patel is the 100% owner of Premier Petroleum Investment, LLC. [Case No. 20-11596].

A Dispute and Court Ruling

One item of dispute is that Vikram Patel claims to be a 50% owner of each Debtor, with Nrupesh Patel’s interest being 50% in 305 Petroleum and Pacific Pleasant, and with Nrupesh Patel and Tejal Patel each having only a 25% ownership in Pleasant Point.

The Court reaches this conclusion:

While the ownership of the Debtors is currently disputed, there is no dispute that, regardless of the outcome of that dispute, all four Debtors share common ownerships that are sufficient to render them affiliates (as defined under 11 U.S.C. § 101(2)(B)); and
Premier’s debt must be included in the total debt calculation, which causes the aggregate debt, for all four debtors, to exceed the $7,500,000.00 maximum for small business eligibility.

Court’s Rationale

The issue is whether these debtors are eligible for Subchapter V relief under the statutory definition of a small business debtor. More specifically, should Premier’s debts be included in the calculation, since it does not qualify as a “small business debtor”?

The answer is that Premier’s debts must be included. This answer is derived from a lengthy statutory definition spanning two subsections of the Bankruptcy Code.

–Definition of a “small business debtor”

First, a Subchapter V debtor must meet the definition of a “small business debtor” under 11 U.S.C. § 101(51D).

The three jointly administered debtors all satisfy the provisions of subsection (A), but Premier does not, because it is a single asset real estate debtor;
Subsection (B) narrows the definition of subsection (A) to also exclude any debtor whose total debt, plus the debt of all its affiliates, exceeds the small business threshold of $7,500,000; and
While subsection (A) excludes single asset real estate debtors from the definition of “small business debtors,” subsection (B) does not exclude single asset real estate debtors from the definition of “affiliates.”

The Court concludes that Premier’s debt must therefore be added to the total debt of all four affiliates, pushing all four debtors over Subchapter V’s total debt threshold.

–Aggregating the debts of affiliates

Second, Debtors contend that, because Premier is ineligible for subchapter V, its debts should not be aggregated with other debtors in the debt limit analysis. But:

§ 101(51D)(A)’s opening sentence begins with “subject to subparagraph (B)”; and
Subsection (A) and (B) are joined by the term “and,” so a debtor must satisfy both provisions to be eligible for subchapter V.

Debtors argue, further, that the “plain language” of § 101(51D)(A) mandates exclusion of single asset real estate debtors when calculating aggregate debt. But Premier’s status as a single asset real estate debtor has no impact on its status as an affiliate of the jointly administered debtors. That’s because:

Entities are “affiliates,” as defined in § 101(2)(B), when they have at least 20% common ownership or control—and all four of these debtors have at least 25% common ownership;
§Section 101(51D)(B)(i) does not reference any specific chapter of the Bankruptcy Code—so, a debtor who cannot qualify for Subchapter V can still be an “affiliate” of a Subchapter V debtor; and
If Congress had intended § 101(51D)(B)(i) to exclude single asset real estate debtors from the eligibility calculation, it would have said so.

The Court concludes: “Congress made clear that a small business debtor cannot be a member of a group of affiliates whose aggregate debt exceeds $7,500,000.00.” Accordingly, none of this group of four affiliated debtors is eligible for Subchapter V relief, due to the plain language of § 101(51D)(B)(i).

Practice Items

The following are three related practice items that aren’t addressed in the opinion. What follows are my best predictions of what courts might do.

–What about non-debtor affiliates?

First, it appears that the three jointly administered debtors would have been fine in Subchapter V, if the fourth debtor hadn’t actually filed.

It’s not that every Subchapter V case requires an investigation into every non-bankruptcy affiliate of the debtor, for combined debts. That’s because a non-bankruptcy affiliate is excluded from the Subchapter V eligibility analysis. Here’s the operative language:

Sec. 101(51D)(B)(1) refers only to a “member of a group of affiliated debtors” (emphasis added); and
the word “debtor” is defined in § 101(13) as a “person or municipality concerning which a case under this title has been commenced” (emphasis added).

–What about debts between affiliated entities?

Second, it appears that debts between and among affiliated debtors are excluded from the calculation of total debts for Subchapter V eligibility.

Here is the operative language from § 101(51D)(A): a “small business debtor” has total debts less than $7,500,000, “excluding debts owed to 1 or more affiliates or insiders.”

So . . . . regardless of whether the affiliate/insider is in bankruptcy or not, the debtor’s debts to that affiliate/insider do not count toward the total debt limit.

–What about common debts among affiliates?

What about the situation where all affiliated debtors are obligated on the same debt? Perhaps they are co-makers on the same promissory note or guarantors of another affiliate’s obligation?

My prediction is that such a debt will only be counted once, even a guaranteed debt, because that’s what it is—one debt. Anything else would elevate form over substance.

Conclusion

When filing Subchapter V for a group of affiliated debtors, the combined debt of the group needs to fall within the total debt limit for Subchapter V eligibility, under § 101(51D) requirements.

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