Inactive Business Addressing Legacy Debt Can Be “Engaged in Commercial or Business Activity” for Purposes Subchapter V Eligibility

Inactive Business Addressing Legacy Debt Can Be “Engaged in Commercial or Business Activity” for Purposes Subchapter V Eligibility

The U.S. Bankruptcy Court for the E.D. of New York joined a growing consensus of bankruptcy courts that have held that a debtor can be eligible to proceed under the special provisions for small business reorganizations under chapter 11 (subchapter V), even though the business that generated the relevant commercial debts was no longer active.

Most bankruptcy courts which have addressed the issue have held that, while the debtor must be presently engaged in commercial or business activities as of the petition date, “activities” is a broader term than “operations”. In this context, these courts have said that a look into the totality of the debtor’s circumstances is appropriate to determine if the debtor was engaged in commercial or business activities as of the petition date.

In this case, the court concluded that the following circumstances were sufficient to meet the requirement:

• the debtor was winding down the business, including addressing its residual business debt;
• the debtor was marshaling business assets for the benefit of her creditors, including pursuing litigation against former business partners; and
• separately, the debtor was engaged in the business of renting a

separate portion of her residence, a two-family home. As to this last point, the court concluded that a business activity that the debtor is engaged with on the petition date does not need to have a nexus to the commercial debt that the debtor uses to meet the 50% commercial or business debt requirement.

Lastly, the court also emphasized that the record did not show, or even suggest, the debtor somehow “manufactured” her eligibility to be a Subchapter V or that the bankruptcy case was “motivated by gamesmanship.”