The Evolved “Engaged In Commercial Or Business Activities” Standard For Subchapter V Eligibility (In re Stevens)

Engaged in commercial or business activities (photo by Marilyn Swanson)

The Bankruptcy Court in In re Stevens, 667 B.R. 428 (Bankry. S.D.W. Va. 2025), addresses the question of Debtors’ eligibility for Subchapter V relief under the “engaged in commercial or business activities” standard.

In doing so, the In re Stevens court compiles a list of opinions construing and applying such standard, categorizes and synthesizes the evolution of those opinions, and adopts a totality of circumstances standard—which it then applies to the facts of the In re Stevens case to find Debtors eligible for Subchapter V.

What follows is a summary of the In re Stevens rationale for concluding that Debtors qualify as “engaged in commercial or business activities” for Subchapter V eligibility.[Fn. 1]

“Engaged in”

“Engaged in” is in present tense, and a majority of courts hold that the debtor must be engaged in commercial or business activities on the petition date for Subchapter V eligibility. As one court explains, for example:

“the term ‘engaged in’ is inherently contemporary in focus and not retrospective”; and
“Thus, a debtor . . . must be ‘presently’ engaged in some type of commercial or business activities.”

The In re Stevens Court agrees with the majority.

“Commercial or Business”

As to the meaning of “commercial or business,” one Court aptly explains:

the words “commercial” and “business” are “clearly synonyms”; but
“’business’ might be just a little bit broader in the sense of encompassing services (in addition to goods) and the idea of earning income through occupation or employment.”

Moreover, the conjunction “or” in the phrase “commercial or business,” expands the phrase to include as alternatives both “commercial” and “business” activities.

“Activities”

As used in § 1182(1)(A), both “commercial” and “business” modify the word “activities.”

The word “activities” mainly connotes “actions,” “functions,” or “processes.” And it is plural (meaning that more than just one event) and suggests continuous, recurring, or ongoing action.

–Not “Operation”

What is absent from both the statutory text and the definitions for business, commercial, and activity is the word “operation”:

“operation” refers to the “quality or state of being functional or operative”; and
“operation” is not a synonym for business or commercial or activities.

The terms “operation” and “engaged in” often appear together in other eligibility requirements throughout the Bankruptcy Code. For instance, a farmer, to be eligible under Chapter 12, must be “engaged in a farming operation” (§ 101(18)(A)).

Subchapter V has similar “engaged in” language, but it uses the broader term “activities” for eligibility, instead of the narrower Chapter 12 term “operation.”

Such a difference is consistent with the notion that Congress intended relief under Subchapter V to be widely available to debtors regardless of whether their businesses were operating on the petition date.

The conclusion of the In re Stevens Court is this: if Congress intended to limit Subchapter V eligibility to only businesses that are still actively operating, it would have specifically used the term “operation” as it has elsewhere in the Code.

“Totality of Circumstances”

Some courts narrowly construe “commercial or business activities” to require businesses to be operating on the petition date—these courts deny eligibility to debtors whose business operations have ceased.

But other courts adopt a “totality of circumstances” standard, which:

involves scrutinizing the debtor’s activities immediately before and after the petition date and examining the debtor’s conduct and intent; and
provides flexibility and does not demand a “down-to-the-second” review of the debtor’s activities on the petition date.

In applying the “totality of circumstances” standard, courts have held that a broad spectrum of commercial or business activities allow a debtor to proceed in Subchapter V, such as:

having active bank accounts, account receivables, exploring counterclaims in a lawsuit, winding down, and taking reasonable steps to pay creditors and realize value for assets;
addressing residual debt and taking steps to pay creditors, even when debtor is no longer operating;
making financial guarantees for a company, having non-passive ownership of an LLC and receiving income from it, working as a private sector wage earner in an unrelated entity, and winding the business down;
working as a consultant for an unrelated entity and winding down debtor’s former IT business;
pursuing counterclaims against creditors, negotiating with creditors, filing tax returns, paying taxes, and remaining in good standing with the Secretary of State; and
collecting accounts receivable, pursuing litigation against a third party, and maintaining assets to preserve their value.

The In re Stevens Court agrees with the “totality of circumstances” standard for assessing whether a debtor was engaged in “commercial or business activities” on the petition date. That’s because:

such a standard is consistent with Congress’ intent to make Subchapter V widely available to debtors; and
it should be applied broadly to encompass any action of a commercial or business nature.

–The Standard Applied

In this case, Debtors were 100% owners of two non-operating businesses on the petition date:

However, on the petition date, Debtors:

were responsible for collecting rent payments for an apartment building owned by one of those businesses (its last asset), which was foreclosed upon the day after the petition date;
had no business assets, account receivables, employees, office equipment/furnishings, machinery, supplies, or inventory related to the businesses except for the apartment building which was foreclosed upon the next day;
had personal liability for the debts of their businesses, having executed personal guarantees and deeds of trust against their residence, that now encumber their home with liens many times in excess of the value of their $155,000.00 home; and
were obligated on a $406,933.89 judgment, with attorneys’ fees and costs, that now totals nearly $600,000 of business debt.

Debtors filed this Subchapter V case after their attempts to negotiate a consensual resolution with secured creditors failed.

Employing the “totality of circumstances” standard with the breadth this Court believes Congress intended, the In re Stevens Court finds that Debtors were “engaged in commercial or business activities” on the petition date.

The Court reaches this conclusion for several reasons.

First, Debtors’ rental of real property falls within the broad scope of commercial or business activities contemplated by subchapter V:

the Internal Revenue Code, for example, considers the rental of real property to “qualify as a trade or business for tax purposes when there is regular and continuous rental”;
one of Debtors’ companies had properties that were continuously rented out until the last property was foreclosed upon the day following the petition date; and
so, the rental of the real property through one of the business entities on the petition date is a “commercial or business activity” contemplated by Subchapter V.

Second, Debtors were managing one of the business entities and winding it down as of the petition date:

on the petition date, there was still a business asset to be liquidated, and that liquidation did occur for the benefit of creditors after the petition date;
liquidation of business assets is undisputedly a wind-down activity; and
Debtors are owners of both business entities, and only owners are authorized to wind down the affairs of those entities under applicable state law.

Third, Debtors were negotiating and taking reasonable steps to pay their business creditors at the time they filed their Subchapter V petition:

they were negotiating with secured creditors to establish workout agreements prior to filing their bankruptcy petition;
even after those negotiations failed, Debtors continued to communicate with the secured creditors to restructure their debts in the bankruptcy; and
such ongoing negotiations and litigation efforts constitute a commercial or business activity.

Moreover, courts have found that a financial guarantee for a company in which the debtor has an indirect equity interest is itself a “commercial or business activity” because:

no one would put millions of dollars of personal guarantees on the line for a company unless it was to advance the guarantor’s own commercial and business interests;
Debtors executed personal guarantees and placed their residence on the line to advance their interests in those business entities;
Debtors have a direct equity interest in their companies—a 100% interest in both entities; and
Debtors believed that their companies would succeed and that they would get a return through their ownership and management of the LLCs.

Therefore, the In re Stevens Court finds that Debtors’ continuing obligations on personal guarantees of their defunct companies’ business debts on the petition date qualifies as sufficient “commercial or business activities” to attain Subchapter V eligibility.

Conclusion

Very interesting and helpful!

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Footnote 1. Eligibility to be a debtor under Subchapter V of Chapter 11 of the Bankruptcy Code is determined by a combination of § 1182(a) (which says, “The term ‘debtor’ means a small business debtor”) and § 101(51D)(A) (which defines a “small business debtor” as a person “engaged in commercial or business activities”).

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