College Columns June 2021 - Page 9

Doing the Splits SBRA and the Ghosts of Business Past , Present and Future – a Circuit Split in the Making

Annette W . Jarvis , Greenberg Traurig , LLP Secretary , American College of Bankruptcy
In the last year or so since the effective date of the Small Business Reorganization Act ( SBRA ), or Subchapter V as it is commonly known , courts have grappled with a particular aspect of eligibility for this streamlined Chapter 11 process designed for small businesses . There are four requirements for eligibility : 1 ) the debtor must be a “ person ,” as defined in the Bankruptcy Code ; 2 ) the debtor must be “ engaged in commercial or business activities ;” 3 ) the debtor cannot have aggregate debts exceeding $ 7.5 million as of the date of the petition ( the debt limit being raised temporarily under the CARES Act and then extended for another year ); and 4 ) at least 50 % of the debts must have arisen from the debtor ’ s commercial or business activities . The issue that arises in these eligibility cases arises from the second requirement : whether “ engaged in commercial or business activities ” requires a current business , a past business , or a future business and the exact nature of the business required . Thus arises the Dickensonian specter of whether the Ghosts of Business Past , Present and Future are needed for eligibility under Subchapter V .
The question of the meaning of the “ engaged in commercial or business activities ” has led to a split in the lower courts , with no case yet having been decided at the circuit level . However , given the growing division among the lower courts , this issue appears to be a circuit split in the making and an important issue in this current business environment . Further , while the requirement that at least half of the debts must be from the debtor ’ s commercial or business activities is separate from the “ engaged in commercial or business activity ” requirement , these two requirements are often conflated .
The Ghost of Business Past and Present – The Broader Approach
In In re Ventura , 615 B . R . 1 ( Bankr . E . D . N . Y . 2020 ), while the court addressed the meaning of “ commercial or business activities ,” the real focus was on whether a mortgage debt on a house that was the debtor ’ s primary residence could qualify as debt arising from the debtor ’ s commercial or business activities for purposes of eligibility under Subchapter V . The court found that “[ w ] hile the Property is clearly the Debtor ’ s primary residence , the primary purpose of purchasing the Property appears to have been to own and operate a bed and breakfast ,” thus qualifying the debtor as being “ engaged in commercial or business activities ” with the mortgage debt being a debt arising from such activities . Noting that the “ Congressional intent for the SBRA was to keep small business owners in business ,” the court took a broad approach in interpreting the statute , rejected a “ brightcontinued on page 24
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