By: Donald L Swanson
Is a debtor “engaged in commercial or business activities” for Subchapter V eligibility?
Such question has been addressed on many occasions and by many courts.
The trend seems to be toward a conclusion that the nature and quantity of “commercial or business activities” required for Subchapter V eligibility is this:
- Nature = “easily met”; and
- Quantity = “not much.”
The latest opinion to confirm the trend is In re Robinson, Case No. 22-2414, Southern Mississippi Bankruptcy Court (issued April 17, 2023; Doc. 90).
What follows is a summary of the In re Robinson opinion, demonstrating the “easily met” and “not much” conclusions for the “engaged in commercial or business activities” standard.
The Trustee contends that Debtor, Tracy Neal Robinson, is not eligible for Subchapter V relief because, at the time of Debtor’s bankruptcy filing, Debtor is:
- not “engaged in commercial or business activities,” as required by 11 U.S.C. § 1182(1); and
- not operating his poultry farming business.
Debtor conducted a business that failed. Debtor claims to be winding that business down, at the bankruptcy filing and to the present time, with activities that meet the “engaged in commercial or business activities” requirement.
The Court rules: Debtor has established Subchapter V eligibility.
For many years, Debtor operates a poultry farming business as a sole proprietor under contract with a chicken processing company.
Then, the processing company terminates its contract with Debtor.
Debtor gets a job at a local lumber yard as a loader operator—and still holds that position.
Several months after taking the new job, Debtor files bankruptcy under Subchapter V of Chapter 11, proposing a liquidating plan.
Debtor’s major secured creditor claims liens on:
- the former poultry operation;
- the surrounding land; and
- a manufactured home on the surrounding land, where Debtor lives.
Before resorting to bankruptcy, Debtor:
- tries to find another grower contract (Debtor receives some inquiries—but none have come to anything); and
- tries to sell the poultry farming operation and farming equipment.
As of the bankruptcy filing and to the present time, Debtor is:
- inspecting his four chicken houses and keeping them repaired and in reasonably good condition;
- mowing around his home and over the rest of the surrounding land; and
- trying to sell the farming equipment—one piece has been sold, and five or six are still for sale (including a tractor worth $35,000)
- all remaining equipment will sell within six months; and
- the former operation can sell too, even if only for the price of the real property and the facilities’ liquidation value.
If such assets cannot be sold, Debtor proposes to either abandon the assets to the bank or allow the bank to foreclose.
Debtor’s debts total roughly $487,000—substantially all of which arise from loans that funded the poultry farming business.
Congress enacted Subchapter V to “streamline the bankruptcy process” for small business debtors.
The new Subchapter V applies only to a subset of Chapter 11 debtors that:
- are “engaged in commercial or business activities,” excluding a single asset real estate business;
- owe total secured and unsecured debts of no more than $7,500,000 as of the bankruptcy filing; and
- with at least fifty percent of that debt having arisen from commercial or business activities.
Debtor bears the burden of proof on Subchapter V eligibility.
Here, it is undisputed that Debtor’s debts total less than the $7.5 million maximum for Subchapter V eligibility and that most, if not all, of Debtor’s debts arose from the poultry farming business.
On the question of whether a debtor is, at the time of the bankruptcy filing, “engaged in commercial or business activities”:
- the focus is inherently contemporary, not retrospective—on debtor’s state of affairs as of the bankruptcy filing;
- the “commercial or business activities” phrase is to be construed very broadly—virtually all courts have applied a liberal construction of that phrase; and
- the courts are to look at the totality of circumstances.
Debtor claims that, at bankruptcy filing, he is winding down his poultry farming business and therefore is “engaged in commercial or business activities” as required for subchapter V eligibility.
Trustee objects, alleging:
- Debtor’s poultry farm ceased operating more than a year before Debtor’s bankruptcy filing—a time so distant that Debtor’s current activities cannot be considered winding down;
- The activities Debtor is engaged in are not sufficient for subchapter V eligibility;
- Debtor does not intend to return to poultry farming; and
- Debtor works as an employee in an unrelated business.
Rejecting Trustee’s Arguments
The Bankruptcy Court rejects Trustee’s arguments because:
- Trustee cites no authority for the premise that a wind-down must be completed within a certain amount of time after the business has ceased operation;
- the bare assertion that Debtor’s activities do not meet the eligibility standard cannot, without more, carry the day;
- bankruptcy courts across many jurisdictions have held that a debtor may be “engaged in commercial or business activities” when the business itself is no longer operating; and
- Applying a broad construction, courts have recognized a variety of wind-down functions as “commercial or business activities,” including:
- maintaining bank accounts and preparing assets for sale;
- collecting accounts receivable;
- managing stock and winding down a business;
- managing a limited liability company and receiving income from that company; and
- maintaining facilities, filing tax returns, selling assets, and overseeing contractors.
Applying Evidence to the Law
The In re Robinson evidence shows that Debtor, at bankruptcy filing and through the present, continues to manage his farm assets, is actively seeking buyers for the entirety of the farm, or parts thereof, and inspects and maintains the improvements on his property.
Debtor compares such activities to those in four other wind-down cases where debtors are held eligible for subchapter V:
- In three of those cases, debtors’ “commercial and business activities” at bankruptcy filing include actively maintaining the value of assets and working to sell them; and
- In the fourth case, the LLC debtor had already surrendered its assets.
As to the Trustee’s contention that Debtor’s activities are insufficient:
- the totality of circumstances standard does not dictate a quantum of activities or time engaged in them;
- one court has defined “activities” to include even a single act; and
- in another case, debtor spent only twelve hours a month on the wind-down work and forecasted fewer hours in the future.
The Bankruptcy Court concludes:
- the totality of circumstances test is a fact-specific inquiry; and
- on the facts here, Debtor has met his burden of proof for subchapter V eligibility.
In re Robinson is the latest in a line of opinions applying the “engaged in business or commercial activities” standard for Subchapter V eligibility.
What In re Robinson reveals is how case law has progressed so that the phrase “commercial or business activities” is easily satisfied and that the quantity required of such activities is—not much.
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