Recent Case Liberally Interprets Sub-Chapter V Eligibility

The Small Business Reform Act defines small business debtor as a person engaged in commercial or business activities (including any affiliate of such person that is also a debtor under this title and excluding a person whose primary activity is the business of owning single asset real estate) that has aggregate non-contingent 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 $ $2,725,625  (excluding debts owed to 1 or more affiliates or insiders) not less than 50 percent of which arose from the commercial or business activities of the debtor.

The holding of a recent Bankruptcy Court decision in South Carolina, In re Charles Christopher Wright, Case No. 20-01035-HB (Bankr. D.S.C. April 27, 2020), represents a broad view of who can qualify as a small business debtor under Subchapter V that will undoubtedly have a significant impact as the Nation begins to recover from the fallout of the Covid-19 pandemic. The Wright Court holds that a debtor filing a case “addressing residual business debt” is sufficient to meet the requirement of “engage[ment] in commercial or business activities” under the new Subchapter V of the Bankruptcy Code.

The Debtor in Wright is an individual who had significant ownership interest in two previous businesses that were involved in Chapter 11 cases. As a result of those cases, the Debtor had retained personal liability for significant business debts. Both entities had ceased to do business prior to the filing of the case. The Debtor listed business debt of more than $395,816.29 and consumer debt of $220,882.42. Accordingly, the Debtor met the requirement under Subchapter V that more than 50% of the total debt be business or commercial debt. The only remaining issue before the Court was whether the Debtor met the requirement of being “engaged in commercial or business activities.” 

The Court analyzed the plain meaning of the statute and considered the definition of “debtor” from the Code and treatises interpreting that definition. Finding that “current” debt is nowhere to be found in Subchapter V, the Court held that the business activity requirement had been met and allowed the case to proceed under Subchapter V. 

This broad view expressed by the Court in Wright will certainly have an impact on small business cases in the future. The significance of the Court’s holding is that it allows Debtor’s that would otherwise be ineligible for a Chapter 13 avoid having to file a standard Chapter 11 and instead elect Subchapter V treatment. This will save those Debtors the time and expenses often associated with a standard Chapter 11 reorgainziation.



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