Subchapter V Eligibility: “Engaged In” is NOT Modified By “Petition Date”!

Opposing views (photo by Marilyn Swanson)

By: Donald L Swanson

To be eligible for Subchapter V relief, the debtor must be “a person engaged in commercial or business activities” (§ 1182(1)(a)).

Opposing Views

Opposing views are developing on how this “engaged in” criterion should be applied. 

  • One view says, (i) nothing requires a debtor to be currently engaged in business or commercial activities, and (ii) addressing residual business debt can qualify as “engaged in”—the first opinion in this line of cases is In re Wright, South Carolina Bankruptcy Court (Case No. 20-01035, issued 4/27/2020, Doc. 37); and
  • Another view says, once a debtor sells the business pre-petition with no intent to return to it, the debtor cannot be “engaged in commercial or business activities” as of the petition date—the first opinion in this line of cases is In re Thurmon, Western Missouri Bankruptcy Court (Case No. 20-41400, Doc. 97).

 A recent opinion creates a middle ground, expanding upon the “engaged in” criterion and “as of petition date” language, like this:

  • “Although the Court must assess whether the Debtor was “engaged in commercial or business activity” as of the Petition Date, focusing only on the exact nano-second the Petition was filed is a bit too narrow” and
  • “the Court deems relevant the circumstances immediately preceding and subsequent to the Petition Date as well as the Debtor’s conduct and intent.” [Fn. 1, emphasis added]

A False Doctrine

Adding “as of the Petition Date” language to the “engaged in” eligibility criterion has become a nearly-ubiquitous doctrine. 

Such a doctrine, however, is false—as counter to the plain language of the governing statute.

I’ll try to explain.

Statutory Language

The operative § 1182(1)(a) language is this (emphasis added):

“The term ‘debtor”—(A) . . .  means a person engaged in commercial or business activities . . . that has aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition . . . not more than $7,500,000 . . . “

–Two eligibility criteria, but only one is modified

Such § 1182(1)(a) language identifies two distinct eligibility criteria: (i) “engaged in,” and (ii) $7,500,000 debt limit. 

The phrase “as of the date of the filing of the petition,” in § 1182(1)(a), is:

  • embedded within the $7,500,000 debt limit criterion—not the “engaged in” criterion; and
  • is cut-off from the “engaged in” criterion by the statutory words, “that has.” 

Accordingly, the petition date language in § 1182(1)(A) does not modify the “engaged in” criterion.  The statute explicitly separates the phrase “engaged in” from the petition date modifier.  The petition date phrase modifies only the debt limit criterion.

–A hurdles analogy

The application of such statutory language to a particular set of facts is in the form of clearing two consecutive hurdles:

  1. The first hurdle is whether debtor is “a person engaged in” the specified activities; and
  2. The second hurdle is whether debtor, “as of the date of the filing of the petition,” has total debts “not more than $7,500,000.”

Applications

So . . . what is the significance of the statutory separation of the “petition date” modifier from the “engaged in” criterion?

Here are two minimum suggestions.

First, the following opinion language quoted above is consistent with the statutory distinction:

  • “focusing only on the exact nano-second the Petition was filed is a bit too narrow”; and
  • “the Court deems relevant the circumstances immediately preceding and subsequent to the Petition Date as well as the Debtor’s conduct and intent.”

Second, the following argument-by-analogy, made in a South Dakota case, is also consistent with the statutory distinction:

  • Chapter 12 opinions emphasize that “engaged in a farming operation” does not include a time frame—e.g., a farmer who files in the dead of winter is is still “engaged in a farming operation,” even though there are no crops and no farming activity on the Petition date. [Fn. 2]

Conclusion

As courts evaluate the “engaged in” and “as of the petition date” words in § 1182(1)(a), it would be nice to see an acknowledgement that the words, “as of the petition date,” are separated from and do not modify the “engaged in” criterion.

———————-

Footnote 1.  The opinion is In re Ikalowych, Case No. 20-17547 in Colorado Bankruptcy Court (issued 04/15/2021, Doc. 93, at 20).

Footnote 2.  This argument is made in In re U Stop Pump & Wash, LLC, Case No. 20-40448 in the South Dakota Bankruptcy Court (see Doc. 30, par. 11).

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