By: Donald L Swanson
Negotiating a lease for office space in a portion of the debtor’s business premises qualifies as “engaged in commercial or business activities” on the petition date for Subchapter V eligibility.
That’s the ruling by Hon. Charles L. Nail, Jr., Bankruptcy Judge for the District of South Dakota, in the case of In re U Stop Pump & Wash, LLC (Case No. 20-40448, decided January 28, 2021). Judge Nail also serves as Chief Judge for the Eighth Circuit Bankruptcy Appellate Panel.
U.S. Trustee Objection
The Office of the U.S. Trustee files an Objection (Doc. 26) to Debtor’s Subchapter V election.
Here is a summary of facts in the U.S. Trustee’s Objection:
- Debtor owns real property originally built as a convenience store / gas station;
- The convenience store / gas station effort fails because an investor backs out;
- Debtor has not operated any business activity at the property or otherwise since 2017;
- Debtor’s Statement of Financial Affairs, Part 1, Question 1, identifies Debtor’s gross income for 2019 and 2020 as $-0-;
- At the § 341 meeting, Debtor confirms that, as of the Petition date, Debtor had no business operations.
Here is a summary of the U.S. Trustee’s argument:
- A “small business debtor” is defined in § 101(51D) and § 1182(1) as “a person engaged in commercial or business activities“;
- The term “engaged” is an active verb that means a debtor must be actively engaged in commercial or business activities at the time of filing;
- In a corresponding section, a family farmer is an “individual . . . engaged in a farming operation . . .”—the Eleventh Circuit and other courts hold that a family farmer must be engaged in farming operations at the time they file for Chapter 12 relief;
- Similarly, § 101(44) defines “railroad” as a “common carrier by railroad engaged in the transportation of individuals or property . . . ”—the Third Circuit and other courts hold that “engaged” in this definition is a present tense word;
- Further, “engaged in” of § 101(27A) is construed as a present tense term;
- A contrary construction of “engaged in,” under §§ 101(51D) and 1182(1), found in In re Wright (Bankr. D. S.C., April 27, 2020) is based on a faulty rationale that ignores, (i) “the Supreme Court’s admonition that a court should look only to the statute’s language when the language is plain,” and (ii) the Eighth Circuit’s emphasis that “[v]ague notions about the statutes’ purposes . . . cannot be used to override their actual texts”;
- Additionally, the In re Wright holding that “addressing residual business debt” qualifies for Subchapter V relief would render the “engaged in” language of both §§ 1182(1) and 101(51D) superfluous; and
- A decision contrary to Wright, from the Western District of Missouri, is persuasive and should be followed: In re Thurmon, Case No. 20-41400 (Doc. 97, issued 12/8/2020).
Debtor files a Response (Doc. 30) to the U.S. Trustee’s Objection.
Here is a summary of facts in Debtor’s Response:
- Debtor purchases the C-Store mid-2014 and spends over two years remodeling and preparing it to reopen;
- In 2017 Debtor is set to open the C-Store but loses an investor—so, Debtor is unable to open when intended;
- The C-Store is not open on the Petition date: December 3, 2020;
- On the Petition date, Debtor is negotiating with an insider on a lease for the office space located on the premises;
- Shortly after filing the Petition date, and as a result of those negotiations, Debtor enters into a 1-year lease on the office space—the first lease payment if $1,500.00 is due and paid on January 5, 2021; and
- Debtor has a tentative opening date for the C-Store of August, 2021.
Here is a summary of arguments in Debtor’s Response:
- The Thurmon case is informative, but not on point because the Thurmon Debtors had ceased operating, sold assets and retired with the specific intent to not operate or engage in a business—the U Stop Debtor has income from operations and has every intent to open a C-Store;
- A strict focus on the Petition date is unduly restrictive: e.g., Chapter 12 opinions emphasize that “engaged in a farming operation” does not include a time frame (notably, a farmer who files in the dead of winter is is still “engaged in a farming operation” on the filing date, even though there are no crops on the Petition date);
- Chapter 12’s focus is on a farmer who intends to continue farming—if a debtor abandons farming with no intent to return, then Chapter 12 relief is not available, but pre-petition business decisions to remedy financial woes should not exclude an attempt to reorganize and actually farm;
- In the present case, Debtor has every intention of operating, and is leasing part of the facility—the fact that Debtor never got open in 2017 should be of no matter, since Debtor was preparing to open but had to make prepetition business decisions to remedy financial woes; and
- Debtor’s intent to continue operations and engaging in business should be the controlling factor.
Split of Opinions
The In re U Stop ruling occurs amid a split of opinions referenced in the U.S. Trustee’s Objection and the Debtor’s Response:
- Majority View. The In re Wright opinion from South Carolina’s Bankruptcy Court (Case No. 20-01035, issued 4/27/2020, Doc. 37) allows an individual debtor to proceed under Subchapter V, despite his business entities having, (i) ceased operations, and (ii) sold all business assets, except for one parcel of real estate. That’s because Debtor is “engaged in commercial or business activities” by “addressing residual business debt.” Accord see, In re Bonert, 619 B.R. 248 (Bankr. C.D. Cal. 2020), and In re Blanchard, Case No. 19-12440, E.D. La. July 16, 2020, Doc. 137).
- Minority View. The In re Thurmon opinion from Western Missouri’s Bankruptcy Court (Case No. 20-41400, Doc. 97) rejects the Subchapter V election by individual Debtors who, (i) had sold their business with no intent to return to it, and (ii) had no other commercial or business activity.
Bankruptcy Court Ruling
In an oral ruling (Doc. 35), Judge Nail:
- Declares his agreement with the “minority view” expressed in the In re Thurmon opinion;
- Finds that, unlike the debtor in Thurmon, this Debtor had not yet “given up the ghost”;
- Finds that this Debtor’s efforts at negotiating a lease (for office space in a portion of Debtor’s business property) qualify as “engaged in commercial or business activities” on the Petition date;
- Declares that an insider’s involvement in the lease negotiations is not relevant to the “engaged in” analysis; and
- Denies the Objection to Debtor’s Subchapter V status.
Judge Nail’s findings and ruling are a helpful addition to the body of case law dealing with the “engaged in commercial or business activities” standard for Subchapter V eligibility.
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