Rochelle's Daily Wire

Synthesizing the leading cases about eligibility for Subchapter V, Bankruptcy Judge Elizabeth S. Stong of Brooklyn, N.Y., held that an individual debtor was entitled to reorganize in Subchapter V because she owned a small, income-producing real property and was dealing with a $3.3 million judgment arising from a defunct business in which she was a 25% owner.

The debtor and her brother were each 25% owners of a hardware business. Ten months before bankruptcy, the business, the debtor and her brother were saddled with joint and several liability for a $3.3 million judgment owing to a supplier. The business had halted operations several years before the debtor filed her individual chapter 11 petition and elected treatment under Subchapter V.

The debtor also owned a two-family home and had been renting one of the units for about three years before filing.

The judgment creditor filed a motion objecting to the debtor’s election to proceed under Subchapter V. Given that the business had long since ceased operations, the creditor contended that the debtor was not currently engaged in business. Judge Stong denied the motion in her 41-page opinion on September 15.

The outcome turned on Section 1182(1)(A), which demands that a debtor in Subchapter V must be “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 or the date of the order for relief in an amount not more than $7,500,000 . . . not less than 50 percent of which arose from the commercial or business activities of the debtor.”

The debtor was a “person” with a smattering of debt aside from the judgment. Consequently, her eligibility for Subchapter V turned on whether she could carry the debtor’s burden of showing that she was “a person engaged in commercial or business activities.”

The creditor in large measure objected to eligibility because the business was no longer operating, and the debtor had ceased her participation in the business about six years before filing.

Citing a plethora of leading cases on the topic, Judge Stong held that the “debtor’s eligibility to reorganize under Subchapter V turns on whether the debtor is ‘engaged in’ commercial or business activities as of the . . . Petition Date.” But what does “commercial or business activities” mean?

Judge Stong noted that the statute refers to “activities,” not the “operation” of a business, and that the two words are not “interchangeable.” She said that “activities” is “more encompassing” and is intended to provide “wide availability” for electing treatment under Subchapter V, citing authorities.

Following courts that look to the “totality of the circumstances,” Judge Stong held that

the court may look to the facts and circumstances of the debtor’s particular situation, including what led to the debtor’s bankruptcy filing, the activities in which the debtor is engaged as of the petition date, and how the debtor plans to proceed in the bankruptcy case to marshal its assets and address its debts.

While the act of filing a petition is not sufficient in itself to confer eligibility, Judge Stong noted that the debtor remained a 25% owner of the defunct business and that she was renting one unit in a two-family home. In addition, the debtor was a plaintiff in an ongoing lawsuit with former associates in the business.

Judge Stong agreed “with the substantial majority of courts that have found that a debtor may be eligible to reorganize under Subchapter V when it seeks to address residual business debt, and to marshal residual business assets.” In particular, she said that “evaluating, asserting, pursuing, and defending litigation claims . . . can still . . . satisfy Section 1182(1)(A)’s requirement of ‘commercial or business activities.’”

Furthermore, Judge Stong noted that the debtor was renting a unit in the two-family home and that no “nexus” is required between the debt and an active business.

Judge Stong ruled that the debtor was eligible for Subchapter V because “the purpose of this Subchapter V case is to address residual business debt, and to marshal residual business assets.”