Subchapter V Eligibility: Engaged In “Activities,” Not “Operations” (In re Offer Space)

 

Activity (Photo by Marilyn Swanson)

By: Donald L Swanson

A recent Bankruptcy Court opinion, In re Offer Space, LLC, [fn. 1] adds an important statutory distinction to the “engaged in” criterion analysis for Subchapter V eligibility, under § 1182(1)(A).

The distinction is this (emphasis added):

  • § 1182(1)(A) refers to a person “engaged in commercial or business activities”;
  • It does NOT refer to a person “engaged in commercial or business operations.”  

Eligibility Arguments

Since Subchapter V eligibility requires a debtor to be “engaged in commercial or business activities,” the U.S. Trustee objects to the Debtor’s eligibility, in Offer Space, contending:

  • Debtor must be “engaged in” an “operating business” for Subchapter V eligibility; and
  • Debtor did not have “an operational business on the Petition Date,” since on that date it had no employees, was no longer conducting its prior business, had no intention to reorganize its business, and intended only to liquidate remaining assets in the Subchapter V proceeding.  

Debtor contends that:

  • “engaged in commercial or business activities” is not synonymous with conducting an “operating business”;
  • the U.S. Trustee’s view is far too narrow—conflating the terms “activities” and “operations,” which are not interchangeable (“activities” refers to a much broader array of conduct than “operations”); and
  • Debtor was “engaged in” commercial and/or business activities on the petition date.

Court’s Analysis

–A Present Activity

The term “engaged in” indicates that a debtor is currently—as opposed to formerly—taking part in an activity. To be eligible for Subchapter V, a debtor must be presently “engaged in commercial or business activities” on the date of filing the petition.

–The Legal Standard

To determine whether the Debtor satisfies the “engaged in” standard, a “totality of the circumstances” must be considered.

The Court notes that the terms “activities” and “operations” are distinct and not interchangeable:

  • “operation” is “the quality or state of being functional or operative”;
  • had Congress utilized the term “operations” in lieu of “activities,” the U.S. Trustee’s objection would be sustained; but
  • the “plain and unambiguous language of Subchapter V indicates a small business debtor may engage in a very inclusive range of commercial or business activities.”

Court’s Conclusion

The Court concludes that Debtor has met the standard for being “engaged in commercial or business activities” because, as of the Petition date, Debtor was: 

  • having active bank accounts;
  • having accounts receivable;
  • analyzing and exploring counterclaims in a lawsuit;
  • managing remaining assets; 
  • winding down its business; and
  • taking reasonable steps to pay its creditors and realize value for its assets.

A Contrasting Analogy

By contrast, § 101(18)(A) defines a “family farmer” for Chapter 12 eligibility as someone “engaged in a farming operation.”  In this Chapter 12 definition, Congress uses the term “operation” instead of the term “activities.”

Congress could have, easily and similarly, confined the bounds of Subchapter V eligibility to “operations.”  But Congress elected in Subchapter V, instead, to use the much more broad and inclusive term “activities.”

Other Rulings

–Bankruptcy Activities Are Not Enough

The Court is unpersuaded by Debtor’s contention that “engaged in . . . activities” is satisfied by (i) filing this bankruptcy case, (ii) retaining counsel, (iii) preparing filings, (iv) participating in proceedings, (v) etc.  Otherwise, any and every bankruptcy debtor would automatically satisfy the “engaged in” requirement.

–Liquidation is Permitted

The Court is also unpersuaded by the U.S. Trustee’s argument that the Offer Space Debtor, who seeks to liquidate its already-shutdown enterprise, is ineligible for Subchapter V:

  • While successful reorganizations may be the primary purpose behind Subchapter V, that does not exclude the possibility of a liquidating plan;
  • Chapter 11 provides for liquidation in § 1129(a)(11) (“Confirmation of the plan is not likely to be followed by the liquidation, . . . of the debtor or any successor to the debtor under the plan, unless such liquidation . . . is proposed in the plan”); and
  • While Congress made certain sections of Chapter 11 inapplicable to Subchapter V, Section 1129(a)(11) was not included in those exclusions.

Conclusion

Bankruptcy courts across our 94 districts are struggling with the meaning of the requirement for Subchapter V eligibility, that a debtor must be “engaged in commercial or business activities.”  And a substantial body of law now exists on the subject.

The In re Offer Space opinion adds an important statutory-distinction to that body of law: “activities,” not “operations,” are what’s required.

————————————

Footnote 1.  The opinion is In re Offer Space, LLC, Case No. 20-27480 in the Utah Bankruptcy Court (issued April 22, 2021 (Doc. 50)).

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