The opinion
B. McKay Mignault, fe Judge
□□□ =< United States Bankruptcy/Court
Dated: January 28th, 2025
UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF WEST VIRGINIA
AT HUNTINGTON
IN RE: CASE NO. 3:24-bk-30248
SHAWN DERRICK STEVENS and CHAPTER 11
SUZANNE MARIE STEVENS, Subchapter V
Debtors. JUDGE B. MCKAY MIGNAULT
MEMORANDUM OPINION AND ORDER OVERRULING
THE UNITED STATES TRUSTEE’S OBJECTION TO DEBTORS’ ELIGIBILITY AND
DESIGNATION UNDER SUBCHAPTER V
Pending before the Court are several pleadings, including briefing ordered by the
Court on the 19" day of November 2024 [dkt. 58] regarding whether Mr. and Mrs. Stevens (the
“Debtors”) are “person[s] engaged in commercial or business activities” pursuant to 11 U.S.C.
§§ 101(51D), 11821). On December 18, 2024, the Court held a hearing (the “Hearing’’)
regarding:
e the Objection of Acting United States Trustee to Debtors’ Designation and
Eligibility under Subchapter V [dkt. 42] (the “UST’s Objection”) and its exhibit
in support thereof [dkt. 53];
e the Debtors’ Response to Objection of U.S. Trustee to Subchapter V
Designation [dkt. 49] (the “Debtors’ Response”) and its affidavit in support
thereof [dkt. 50] (“Debtors’ Affidavit”); and
the supporting briefs filed by the United States Trustee (“UST”) [dkt. 60] (the
“UST’s Brief”) and the Debtors [dkt. 66] (“Debtors’ Brief”).
Counsel for the UST contends that the Debtors are not “engaged in commercial or
business activities” because the Debtors were not actively operating or winding down a business
when they filed their bankruptcy petition on August 19, 2024 (the “Petition Date”). All, or
substantially all, of their businesses’ assets were liquidated either before or directly after the
Petition Date. The Debtors assert that they held business assets on the Petition Date and were
winding down that business. Upon consideration of the parties’ filings and arguments as well as
relevant case law, the Court concludes that the Debtors were “engaged in commercial or business
activities” on the Petition Date as required by 11 U.S.C. §§ 101(51D), 1182(1). For the reasons
set forth herein, the UST’s Objection is overruled, and this case shall proceed under Subchapter V
of Chapter 11.
I. FACTUAL AND PROCEDURAL BACKGROUND
1. The Court is vested with subject matter jurisdiction over this matter
pursuant to 28 U.S.C. §§ 157 and 1334. This matter is a core proceeding pursuant to 28 U.S.C.
§ 157(b)(2)(A).
2. The facts relating to this matter are undisputed.
A. CAMBRIDGE DEVELOPMENT, LLC
3. In 2007, the Debtors formed Cambridge Development, LLC (“Cambridge
Development”) for the purpose of owning and operating two Bellacino’s restaurants located in
Barboursville and Kanawha City, West Virginia. The Debtors and Mr. Stevens’ father held all
membership interests in Cambridge Development.
4. Cambridge Development is the obligor on a November 5, 2007 Promissory
Note in the original principal amount of $345,000.00 with BB&T, which by merger, is now known
as Truist (the “Cambridge/Truist Loan”). See Proof of Claim #19-1. The Cambridge/Truist Loan
proceeds were used to purchase equipment, improvements, and furniture to operate the
Barboursville Bellacino’s restaurant. As security, Mr. Stevens’ father granted a deed of trust to a
130-acre farm, and the Debtors granted a first position deed of trust to their residence. The Debtors
also personally guaranteed the loan.
5. Cambridge Development is also an obligor on a September 2, 2008
Promissory Note in the original principal amount of $150,000.00 to United Bank (the “United
Bank Loan”). The United Bank Loan proceeds were used to purchase equipment, improvements,
and furniture to operate the Kanawha City Bellacino’s restaurant. As security, the Debtors’ father
granted a deed of trust in a commercial building located at 2601 8th Avenue, Huntington, WV
25702. See In re Cambridge Development, LLC, Case No. 3:11-bk-30737, Motion to Lift
Automatic Stay, dkt. 26. Mr. Stevens also granted a security interest in his excavation equipment.
6. The Bellacino’s restaurants ultimately failed and, as a result, Cambridge
Development ceased operations in the summer of 2011. On December 1, 2011, Cambridge
Development sought relief pursuant to Chapter 11 of Title 11 of the United States Code (the
“Bankruptcy Code”).
7. In that case, Cambridge Development moved to liquidate the restaurant
equipment. This Court granted that relief. See In re Cambridge Dev., LLC, Case No. 3:11-bk-
30737, Order Granting Debtor’s Motion to Sell Restaurant Equipment and Authorizing
Distribution to Secured Creditors, dkt. 55. Subsequently, Mr. Stevens also sold his excavation
equipment and those funds were applied to reduce the balance of the United Bank Loan.
8. Simultaneously, United Bank sued Cambridge, the Debtors, and Mr.
Stevens’ father in the Circuit Court of Cabell County (Case No. 11-C-887) for the remaining
balance due on the United Bank Loan. Pursuant to a settlement agreement in that action, the
Debtors agreed: (1) to allow United Bank to foreclose upon the commercial building located at
2601 8th Avenue and (2) in exchange for a release of Mr. Stevens’ father from all obligations
under the United Bank Loan, the Debtors granted United Bank a second position deed of trust on
their home.
9. On August 30, 2013, the Court authorized the sale of the 130-acre farm that
secured the Cambridge/Truist Loan. In re Cambridge Dev., LLC, Case No. 3:11-bk-30737, Order
Granting Debtor’s Motion to Sell 130 Acre Farm Free and Clear of Liens to Hold Public Auction
on August 31, 2013 and to Employ Auctioneer and Authorizing Distribution of Sale Proceeds, dkt.
112. An auction was conducted, and those proceeds were applied to the outstanding balance of
the Truist Loan.
10. Cambridge Development’s bankruptcy case was dismissed on December
26, 2013, after it had liquidated all assets for the benefit of creditors and there were no remaining
assets or revenue to support a confirmable Chapter 11 plan or warrant conversion to Chapter 7.
See In re Cambridge Dev., LLC, Case No. 3:11-bk-30737, Agreed Order Dismissing Case, dkt.
119. The case was closed on June 4, 2014.
B. LESAGE PROPERTIES, LLC
11. The Debtors formed Lesage Properties, LLC (“Lesage Properties”) in
November 2006. Lesage Properties owned four properties and operated a real estate leasing
business. The Debtors and Mr. Stevens’ father owned all membership interests in Lesage
Properties.
12. Lesage Properties executed a July 9, 2008 Promissory Note in the original
principal amount of $180,000.00 with Truist (the “Lesage/Truist Loan”). See Proof of Claim #19-
1. As security, Lesage Properties granted a deed of trust on its four rental properties and the
Debtors personally guaranteed the Lesage/Truist Loan.
13. On November 1, 2011, Lesage Properties’ charter was revoked by the West
Virginia Office of the Secretary of State due to a failure to file an annual report. See UST’s
Objection, dkt. 53.
14. Lesage Properties defaulted under the terms of the Lesage/Truist Loan, and
Truist accelerated the balance. On September 27, 2016, Truist sued the Debtors and Lesage
Properties for the deficiency balance on the Cambridge/Truist Loan and the Lesage/Truist Loan
(collectively, the “Truist Loans”). See Branch Banking and Trust Co. v. Lesage Props. LLC, et
al., Case No. 3:16-cv-09161 (S.D. W.Va. 2016).
15. On January 6, 2017, the United States District Court for the Southern
District of West Virginia entered a consent judgment order against the Debtors and Lesage
Properties for $406,933.89, along with attorneys’ fees and costs of $7,028.85. That judgment was
subsequently recorded in the Cabell County Clerk’s Office.
16. On April 2023, Truist sold and assigned the Truist Loans and judgment to
SMS Financial AFC, LLC (“SMS Financial”).
17. Debtors attempted a workout agreement with SMS Financial to reduce their
monthly payments. Debtors also tried to negotiate a consensual resolution with United Bank,
asking it to release its second position deed of trust on the residence. These negotiations failed.
18. On August 19, 2024, the Debtors filed this bankruptcy case seeking relief
under Chapter 11 of the Bankruptcy Code. On their voluntary petition, the Debtors designated
themselves as small business debtors and elected to proceed under Subchapter V.
19. On the Debtors’ Schedules A/B, they claimed a 100% interest in Lesage
Properties. See dkt. 1 at 23.
20. In response to questions 38-41, the Debtors responded “no” to having
accounts receivables, office equipment and furnishings, machinery, supplies, and inventory related
to the business. Id. at 22–23. The Debtors also responded “no” to having customer and mailing
lists or any other business-related property to questions 43–44. Id.
21. The “Summary of Your Assets and Liabilities . . .” reflects total liabilities
on the Petition Date of $491,252.43. Id. at 15.
22. Mrs. Stevens is employed as the Director of Special Education Support for
the Cabell County Board of Education. Mr. Stevens is disabled and receives social security
income. See Schedule I, dkt. 1 at 51–52.
23. Neither Schedule I nor J reflect income or expenses associated with Lesage
Properties or Cambridge Development. Id. at 51–54.
24. In the Debtors’ Statement of Financial Affairs (“SOFA”), they indicate that
they did not receive any income from operating a business, but Mr. Stevens received $28,716.00
in rent collected from Lesage Properties in the three years prior to the Petition Date. See SOFA,
dkt. 1 at 56–57. The Debtors indicate that their debts are not primarily consumer debts. Id.
25. On August 20, 2024 (the day after the Petition Date), SMS Financial
conducted a foreclosure sale of Lesage Properties’ only remaining asset: an apartment building.
SMS Financial was the successful bidder, and the proceeds were applied to reduce the Debtors’
indebtedness on the Truist Loans.
26. The meeting of creditors pursuant to 11 U.S.C. § 341 took place on
September 26, 2024. At the meeting, the Debtors testified that they were not currently engaged in
business activities. However, Mr. Stevens stated that the Debtors collected rental payments from
the apartment building owned by Lesage Properties until SMS Financial foreclosed upon it.
27. The UST’s Objection was filed on October 16, 2024. The UST asserts that
the Debtors were not “engaged in commercial or business activities,” because there are no bank
accounts, account receivables, or litigation claims that they can pursue that would result in a
distribution to creditors. See UST’s Objection.
28. On November 9 and 12, 2024, the Debtors filed their response and affidavit
arguing that they are engaged in commercial or business activities because they were winding
down their businesses on the Petition Date. See Debtors’ Response and Debtors’ Affidavit.
29. At a hearing held on November 15, 2024, in support of their objection, the
UST argued that the Debtors have no assets, and thus cannot be winding down. The UST asserts
that Cambridge Development ceased its operations and Lesage Properties, LLC was
administratively dissolved by the Secretary of State in 2011, therefore the timing is too distant
from the Petition Date for the Debtors’ activities to be considered winding down. The Debtors
reiterated that they are attempting to restructure legacy business debt and, thus, are winding down
remaining business obligations. The Debtors have not expressed an intention to reinstate or
operate their businesses in the future.
30. On November 18, 2024, the Court issued its Order Requiring Briefing on
the United States Trustee’s Objection to the Debtors’ Designation under Subchapter V [dkt. 58].
31. With the briefing complete, the Court took this matter under advisement.
This matter is ripe for adjudication.
II. ANALYSIS
32. The Small Business Reorganization Act of 2019 (“SBRA”) was enacted on
August 23, 2019 and became effective on February 19, 2020. Pub. L. No. 116-54, 133 Stat. 1079
(2019). The SBRA introduced a new subchapter V to Chapter 11 of the Bankruptcy Code to
eliminate the barriers that small businesses face in the reorganization process. H.R. REP. NO. 116-
171, at 1 (2019); In re Johnson, No. 19-42063-ELM, 2021 Bankr. LEXIS 471, at *16, 2021 WL
825156, at *6 (Bankr. N.D. Tex. Mar. 1, 2021) (stating that the purpose of the SBRA is to “allow
these debtors to file bankruptcy in a timely, cost-effective manner . . .”).
33. To be eligible as a debtor in Subchapter V, a debtor must meet the definition
of a small business debtor under Section 101(51D) and must elect its application. 11 U.S.C.
§§ 101(51D), 103(i). Section 101(51D) provides:
(51D) The term “small business debtor”—
(A) subject to subparagraph (B), means 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 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 $3,024,725 (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[.]
11 U.S.C. §§ 101(51D), 1182(1) (stating that the term debtor means a small business debtor.).1
34. Upon the debtor’s election to proceed under Subchapter V, the case will
continue under this designation “unless and until the court enters an order finding that the debtor’s
statement is incorrect.” Fed. R. Bankr. P. 1020(a).
35. The United States Trustee or a party in interest may object to the debtor’s
Subchapter V election. The objection must be filed either within 30 days after the conclusion of
the meeting of creditors under Section 341(a) or 30 days after an amendment to the election is
filed, whichever date is later. Fed. R. Bankr. P. 1020(b). The UST’s Objection was timely filed.
36. The Debtors bear the burden of proving their eligibility under Subchapter
V. In re Blue, 630 B.R. 179, 187 (Bankr. M.D.N.C. 2021) (citing In re Wright, No. 20-01035-HB,
2020 Bankr. LEXIS 1240, at *5-6, 2020 WL 2193240, at *2 (Bankr. D.S.C. Apr. 27, 2020)); In re
Ikalowych, 629 B.R. 261, 275 (Bankr. D. Colo. 2021); NetJets Aviation, Inc. v. RS Air, LLC (In re
RS Air, LLC), 638 B.R. 403, 414 (B.A.P. 9th Cir. 2022); In re Offer Space, LLC, 629 B.R. 299,
304 (Bankr. D. Utah 2021); but see In re Body Transit, Inc., 613 B.R. 400, 409 n. 15 (Bankr. E.D.
Pa. 2020) (stating that “[i]t is appropriate to place the burden of proof on [the party in interest], as
it is the de facto moving party.”).
37. The requirements that the Debtors must prove to be eligible under
Subchapter V are: (1) they meet the definition of a “person” under Section 101(41); (2) they are
engaged in commercial or business activities; (3) they do not have an aggregate debt exceeding
1 The Debtors do not fall under the single asset real estate exclusion because their primary activity
is not in the business of owning single asset real estate as their income primarily comes from social
security and employment for the Cabell County Board of Education. See 11 U.S.C. § 101(51B).
The other exclusions enumerated in Section 101(51D) are also inapplicable and not disputed as
the Debtors are not “member[s] of a group of affiliated debtors,” a “corporation subject to the
reporting requirements under 15 U.S.C. §§ 78m, 78o(d), or an “affiliate of a corporation.”
the $3,024,725 limit on the Petition Date; and (4) 50% or more of their debts must have arisen
from their commercial or business activities. See Ikalowych, 629 B.R. at 274–75; 11 U.S.C.
§§ 101(51D), 1182(1). The Court will consider each of these requirements in turn.
38. The first requirement that the Debtors must satisfy to proceed under
Subchapter V is that they are “persons.” The term “person” includes “individual, partnership, and
corporation . . .” 11 U.S.C. § 101(41). Here, the Debtors are individual persons, and the Court
finds that the first requirement is met.
39. The third requirement that the Debtors must satisfy is that their aggregate
debt on the Petition Date does not exceed $3,024,725.00. Here, the record shows and no parties
dispute that the Debtors’ schedules reflect liabilities of $491,252.43 and, therefore, does not exceed
the $3,024,725.00 limit. See UST’s Brief. Therefore, the Court finds that the third requirement
for eligibility is satisfied.
40. The fourth requirement is that at least 50 or more percent of the Debtors’
liabilities are attributed to commercial or business activities. Here, 50 percent of their liabilities is
$245,626.22.2 Cambridge Development executed a Commercial Promissory Note with United
Bank which required personal guarantees from the Stevens. According to the schedules, the
amount of that claim is $50,000.00. Cambridge Development and Lesage Properties both executed
Commercial Promissory Notes with Truist which required personal guarantees. Truist filed a
2 This figure is derived from the Debtors’ schedules. Looking at the proofs of claim filed, total
liabilities would be $718,404.00, and half of that amount is $359,202.00. See In re Jones, 2013
Bankr. LEXIS 2262, at *10, 2013 WL 2352569, at *3 (Bankr. D.S.C. May 29, 2013) (stating that
“[i]t is appropriate for a court considering eligibility to rely primarily upon a debtor’s schedules
and proof of claims,” in the Chapter 13 context.); see also In re Blue, 630 B.R. at 191 n. 12. Either
way, the Debtors’ commercial and business debts exceed 50 percent of their total debt, and their
total liabilities are below the statutory limit. This calculation is for eligibility purposes only and
should not be construed as a determination of the allowed amount of any filed claim.
lawsuit against the Debtors and Lesage Properties for the deficiency balance on the Truist Loans,
which resulted in a judgment lien. Both the Truist Loans and the judgment lien were assigned to
SMS Financial. The amount of this claim according to the schedules is $345,000.00. Other
business debts include Huntington Sanitary Board and Petroleum Compensation Board with
scheduled claim amounts of $807.31 and $23,785.90 respectively. The total is $419,593.21 in
business debts which is substantially more than 50 percent of the Debtors’ liabilities, therefore the
fourth requirement is satisfied. The parties do not dispute this requirement. Id.
41. The remaining, second requirement is the central dispute between the
parties: whether the Debtors are “engaged in commercial or business activities” in accordance with
Sections 101(51D) and 1182(1).
42. The UST asserts that the Debtors are ineligible to proceed under Subchapter
V because they are not engaged in commercial or business activities.
43. The UST argues they are not because, as of the Petition Date, substantially
all business assets were sold, and neither Lesage Properties nor Cambridge Development had any
bank accounts, outstanding accounts receivables, or were otherwise pursuing litigation that would
generate money to their creditors. The Debtors reported no income from operating a business in
2024. The last remaining asset that Lesage Properties owned (an apartment building) was
foreclosed upon and liquidated the day after the Petition Date, and Lesage Properties, LLC’s
charter was revoked by the West Virginia Secretary of State in 2011 for failure to file annual
reports. For these reasons, the Debtors are not engaged in ongoing wind down activities in the
UST’s view. See UST’s Brief.
44. In response, the Debtors assert that they were “engaged in commercial or
business activities” as of the Petition Date because: (1) they held business assets on the Petition
Date that were subsequently foreclosed upon to reduce the Debtors’ liability on business debt owed
to SMS Financial; (2) they collected rent for Lesage Properties until the apartment building was
foreclosed upon postpetition; and (3) they are engaged in wind-down efforts in this case because
they liquidated business assets for the payment of creditors postpetition and are attempting to
resolve personal liability on guarantees of legacy business debt. Although Lesage Properties’
charter was revoked in 2011, “this fact lends even more support to a finding that the Debtors were
engaged in business since only the members and officers of a [LLC] are authorized to wind up the
affairs of a [LLC] after dissolution.” See Debtors’ Brief at 7.
45. The Bankruptcy Code does not define the terms “engaged in” or
“commercial or business activities.” To resolve the dispute over the meaning of this phrase, the
Court starts its analysis “where all such inquiries must begin: with the language of the statute
itself.” U.S. v. Ron Pair Enters., 489 U.S. 235, 241, 109 S. Ct. 1026, 1030 (1989). The plain
language of the statute must be viewed in the overall context of the Bankruptcy Code. Offer Space,
LLC, 629 B.R. at 305 (citing In re Morreale, 959 F.3d 1002, 1007 (10th Cir. 2020)).
46. Unless in “rare or exceptional circumstances,” the Court must rely on the
plain meaning of the statutory language as conveyed by its common or ordinary meaning. United
States v. Chambers, 985 F.2d 1263, 1267 (4th Cir. 1993). Dictionaries provide insight as to the
common or ordinary meaning of the text around the time the statute was enacted. See Davidson
v. United Auto Credit Corp., 65 F.4th 124, 129 (4th Cir. 2023) (citing United States v. Ward, 972
F.3d 364, 370 n.4 (4th Cir. 2020)).
47. According to Merriam Webster Online Dictionary, the term “engaged,”
means to be “involved in activity: occupied, busy.” Engaged, MERRIAM-WEBSTER,
https://www.merriam-webster.com/dictionary/engaged#word-history (last visited Jan. 27, 2025).
48. The term “commerce” is described as “the exchange or buying and selling
of commodities on a large-scale involving transportation from place to place.” Commerce,
MERRIAM-WEBSTER, https://www.merriam-webster.com/dictionary/commerce (last visited Jan.
27, 2025). See Commerce, BLACK’S LAW DICTIONARY (12th ed. 2024) (providing a similar
definition).
49. The term “commercial” is described as “occupied with or engaged in
commerce or work intended for commerce,” and “viewed with regard to profit.” Commercial,
MERRIAM-WEBSTER, https://www.merriam-webster.com/dictionary/commercial (last visited Jan.
27, 2025). See also Commercial, BLACK’S LAW DICTIONARY (12th ed. 2024) (defining
commercial as “of, relating to, or involving the selling of goods or services for profit.”).
50. Business is described as “a usually commercial or mercantile activity
engaged in as a means of livelihood: trade, line,” or “dealings or transactions especially of an
economic nature.” Business, MERRIAM-WEBSTER, https://www.merriam-
webster.com/dictionary/business (last visited Jan. 27, 2025). See Business, BLACK’S LAW
DICTIONARY (12th ed. 2024) (defining business as a “commercial enterprise carried on for profit,”
or a “particular occupation or employment habitually engaged in for livelihood or gain.”).
51. Lastly, “activity” is defined as “the quality or state of being active: behavior
or actions of a particular kind,” or “a pursuit in which a person is active.” Activity, MERRIAM-
WEBSTER, https://www.merriam-webster.com/dictionary/activity (last visited Jan. 27, 2025). See
Activity, BLACK’S LAW DICTIONARY (12th ed. 2024) (providing a similar definition).
52. Reviewing the definition for “engaged in,” it is in present tense and
indicates that the debtor should be currently involved in an activity. A majority of courts agree
with this interpretation and hold that the phrase “engaged in” should be contemporaneous in nature,
and the debtor must show that they were engaged in commercial or business activities on the
petition date to be eligible for Subchapter V relief. See Blue, 630 B.R. at 189; In re Thurmon, 625
B.R. 417, 422 (Bankr. W.D. Mo. 2020) (“‘[E]ngaged in’ is written not in the past or future but in
the present tense. To add the word ‘currently’ to the phrase ‘engaged in’ would be redundant,
because the currency of the involvement or activeness is inherent in the idea of being ‘engaged in’
something.”); In re Port Arthur Steam Energy, L.P., 629 B.R. 233, 236 (Bankr. S.D. Tex. 2021);
RS Air, LLC, 638 B.R. at 410 (“We agree with the majority, that the term ‘engaged in’ is inherently
contemporary in focus and not retrospective. Thus, a debtor need not be maintaining its core or
historical operations on the petition date, but it must be ‘presently’ engaged in some type of
commercial or business activities….”).
53. Considering the phrase “engaged in” within the overall context of the
Bankruptcy Code, similar language appears in other sections of the Bankruptcy Code to ascertain
eligibility for bankruptcy protection in other chapters. For instance, Sections 101(18A) and (19A)
state that an individual is eligible as a family farmer or fisherman under Chapter 12 if engaged in
a farming operation or commercial fishing operation. 11 U.S.C. §§ 101(18A), (19A) (emphasis
added); see Ikalowych, 629 B.R. at 281. Case law has interpreted these sections of the Bankruptcy
Code to require the debtor to be presently engaged in something at the time of filing the bankruptcy
petition. In re Rosenberger, No. 20-50093, 2020 Bankr. LEXIS 2580, at *5, 2020 WL 6940926,
at *2 (Bankr. W.D. Va. Sep. 29, 2020).
54. The UST argues that “engaged in,” means to be currently and actively
involved in commercial or business activities on the Petition Date. In support, the UST cited to
Thurmon, Johnson, and Rickerson. See Thurmon, 625 B.R. at 423 (concluding that retired
individual debtors were not engaged in commercial activities because the debtors previously sold
their pharmacy businesses and had no intent to return to them on the petition date.); In re Johnson,
2021 Bankr. LEXIS 471, at *22, 2021 WL 825156 at *8 (holding that an individual debtor was
not engaged in commercial or business activities when he managed a defunct company and held
no stake in another company he worked as a W-2 employee.); Nat’l Loan Invs., L.P. v. Rickerson
(In re Rickerson), 636 B.R. 416, 426 (Bankr. W.D. Pa. 2021) (holding that the debtor could not be
engaged in commercial or business activities when the companies were completely inactive on the
petition date.).
55. Three courts have held that the debtor does not have to be presently engaged
in any commercial or business activity on the petition date, provided the debtor was engaged in
such activities in the past. See In re Wright, No. 20-01035-HB, 2020 Bankr. LEXIS 1240, at *7,
2020 WL 2193240, at *3 (Bankr. D.S.C. Apr. 27, 2020) (holding that the SBRA does not limit its
application to debtors currently engaged in business or commercial activities); In re Blanchard,
No. 19-12440, 2020 Bankr. LEXIS 1909, at *7, 2020 WL 4032411, at *2 (Bankr. E.D. La. July
16, 2020); In re Bonert, 619 B.R. 248, 255 (Bankr. C.D. Cal. 2020). These decisions were among
the earliest to address this issue, decided within six months after Subchapter V took effect.
56. The Court agrees with the majority and the UST that “engaged in” is
contemporaneous and not retrospective. Thus, the Debtors must demonstrate that they were
engaged in commercial or business activities in some manner on the Petition Date and not merely
attempting to restructure legacy business debt.
57. Turning to the meaning of “commercial or business activities,” the Court in
Ikalowych aptly explained:
[T]he 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. As
used in Section 1182(1)(A), both “commercial” and “business” modify “activities.”
The word “activities” mainly connotes “actions,” “functions,” or “processes.” See
WEBSTER'S THIRD NEW INT'L DICTIONARY 22 (G. & C. Merriam Co.
1968); see also AMERICAN HERITAGE DICTIONARY OF THE ENGLISH
LANGUAGE 17 (Houghton Mifflin Harcourt 5th ed. 2011) (similar). “Activities”
is plural. So, that means more than just one event and suggests continuous,
recurring, or ongoing action. Finally, the conjunction “or” in the phrase
“commercial or business activities,” expands the phrase to include as alternatives
both “commercial activities” and “business activities.”
In re Ikalowych, 629 B.R. at 278.
58. What is absent from both the statutory text and the definitions for business,
commercial, and activity is the word “operations.” Operations refers to the “quality or state of
being functional or operative.” Operation, MERRIAM-WEBSTER, https://www.merriam-
webster.com/dictionary/operation (last visited Jan. 27, 2025). The term “operation” does not
appear as a synonym for the other words. The terms “operation” and “engaged in” often appear
together in other eligibility requirements throughout the Bankruptcy Code. For instance, to be
eligible as a family farmer or fisherman under Chapter 12, a debtor must be engaged in a farming
operation or commercial fishing operation. 11 U.S.C. §§ 101(18A), (19A) (emphasis added).
59. In this context, the statute contains similar “engaged in” language, but uses
the broader term “activities” for eligibility to reorganize under Subchapter V instead of the
narrower term “operations” used in other chapters. This choice 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. See In re Fama, 655 B.R. 648, 661
(Bankr. E.D.N.Y. 2023); Offer Space, LLC, 629 B.R. at 306 (concluding that operations and
activities are “not interchangeable”); In re Vertical Mac Constr., LLC, No. 6:21-bk-01520-LVV,
2021 Bankr. LEXIS 2285, at *9, 2021 WL 3668037, at *3 (Bankr. M.D. Fla. July 23, 2021).
60. The court in Thurmon and the UST suggest that if Congress had intended to
allow all debtors into Subchapter V regardless of business operations, it would have explicitly
stated so. See Thurmon, 625 B.R. at 423 (“[I]f Congress had intended to make all debtors with
business debts below the debt cap eligible for subchapter V small business relief regardless of
whether the business was still operating, it could have done so.”). However, the inverse is also
true—if Congress intended to limit eligibility to only those businesses that are still actively
operating, it would have specifically used the term “operations” as it has elsewhere in the Code.
61. Courts have taken a variety of approaches when deciphering which
activities meet the eligibility requirements for Subchapter V. Some courts narrowly construe
“commercial or business activities” to require businesses to be operating on the petition date.
Consequently, these courts deny eligibility to debtors whose business operations have ceased.
Thurmon, 625 B.R. at 423; In re Johnson, 2021 Bankr. LEXIS 471, at *22, 2021 WL 825156 at
*8; Rickerson, 636 B.R. at 426. The UST cites to the abovementioned cases to support their
argument.
62. However, other courts have adopted a “totality of the circumstances” test,
which involves scrutinizing the debtor’s activities immediately before and after the petition date
and examining the debtor’s conduct and intent. See Ikalowych, 629 B.R. at 283. This standard
provides some flexibility and does not demand a “down-to-the-second” review of the debtor’s
activities on the petition date. Applying this standard, courts have held that a broad spectrum of
commercial or business activities allow a debtor to proceed in Subchapter V. See Offer Space,
LLC, 629 B.R. at 306 (having active bank accounts, account receivables, exploring counterclaims
in a lawsuit, winding down, and taking reasonable steps to pay creditors and realize value for its
assets qualifies as “commercial or business activities”); Fama, 655 B.R. at 669 (addressing
residual debt and taking steps to pay creditors are sufficient “commercial or business activities”
when the debtor is no longer operating); Ikalowych, 629 B.R. at 288 (making financial guarantees
for a company, non-passive ownership of a LLC and receiving income from it, working as a private
sector wage earner in an unrelated entity, and winding down were “commercial or business
activities”); Blue, 630 B.R. at 189 (working as a consultant for an unrelated entity and winding
down her former IT business qualified as “commercial or business activities”); RS Air, LLC, 638
B.R. at 411–14 (pursuing counterclaims against creditors, negotiating with creditors, filing tax
returns, paying taxes, and remaining in good standing with the Secretary of State were sufficient
“commercial or business activities”); Port Arthur Steam Energy, L.P., 629 B.R. at 236 (collecting
account receivables, pursuing litigation against a third party, and maintaining assets to preserve
their value were qualifying commercial or business activities).
63. This Court agrees with those courts that apply a “totality of the
circumstances” standard when assessing whether a debtor was sufficiently engaged in
“commercial or business activities” on the Petition Date to qualify for Subchapter V. Consistent
with Congress’ intent to make Subchapter V widely available to debtors in enacting the SBRA,
this standard should be applied broadly to encompass any action of a commercial or business
nature.
64. In this case, the Debtors were 100% owners of two businesses on the
Petition Date—Lesage Properties, which was administratively dissolved in 2011, and Cambridge
Development, which has not operated since approximately 2011. However, on the Petition Date,
the Debtors were responsible for collection of rental payments for an apartment building owned
by Lesage Properties (its last asset), which was foreclosed upon the day after the Petition Date.
On the Petition Date, the Debtors 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.
65. The record also shows that the Debtors have personal liability for the debts
of their businesses, having executed personal guarantees and deeds of trust against their residence
to Truist and United Bank that, according to the proofs of claim filed, now encumber their home
with liens many times in excess of the value of their $155,000.00 home. On January 6, 2017, the
United States District Court for the Southern District of West Virginia entered a consent judgment
in favor of Truist in the amount of $406,933.89, with attorneys’ fees and costs of $7,028.85. That
judgment along with the Truist Loans were sold to SMS Financial. SMS Financial and United
Bank filed proofs of claim that collectively total nearly $600,000.00. The principal debts that the
Debtors wish to restructure in their Chapter 11 bankruptcy case are these significant commercial
and business debts owed to United Bank and SMS Financial greatly exceed the value of their
home. This Subchapter V case was filed after their attempts to negotiate a consensual resolution
with SMS Financial and United Bank failed.
66. Employing the totality of the circumstances standard with the breadth this
Court believes Congress intended, the Court finds that the Debtors were “engaged in commercial
or business activities” on the Petition Date. The Court reaches this conclusion for several reasons.
67. First, just as the debtor in In re Blue, the Debtors’ “rental of the real property
falls within the broad scope of commercial or business activities contemplated by subchapter V.”
Blue, 630 B.R. at 195. As the court discussed in Blue, the Internal Revenue Code considers the
rental of real property to “qualify as a trade or business for tax purposes when there is regular and
continuous rental.” Id. Here, the Debtors’ company had properties that were continuously rented
out until the last property was foreclosed upon the day following the Petition Date. Accordingly,
the Court finds that the rental of real property through Lesage Properties as of the Petition Date is
a “commercial or business activity” contemplated by Subchapter V.
68. Second, similar to the debtors in Ikalowych and Robinson, the Debtors were
managing Lesage Properties and winding down that business as of the Petition Date. It is
undisputed that, 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. Moreover, the Debtors are members of Lesage
Properties and Cambridge Development, and only members are authorized to wind down the
affairs of a LLC upon dissolution. See W. Va. Code § 31B-8-803.
69. Third, like the debtors in In re Offer Space and In re Fama, the Debtors
were negotiating and taking reasonable steps to pay their creditors holding legacy business debt at
the time they filed. See Offer Space, 629 B.R. at 306; Fama, 655 B.R. at 669. The Debtors were
engaged in negotiations with SMS Financial to establish a workout agreement prior to filing their
bankruptcy petition, and they also had attempted to negotiate with United Bank to obtain a release
of its second-position lien on their residence. Even after these initial negotiations failed, the
Debtors have continued to communicate with SMS Financial (see Agreed Order, dkt. 83) and
United Bank in efforts to restructure these debts, as is clear from the activity on this Court’s
docket.3 The Court is satisfied that the Debtors’ ongoing negotiations with SMS Financial and
litigation against United Bank constitutes a commercial or business activity.
70. Courts have concluded that executing personal guarantees is a commercial
or business activity. See Ikalowych, 629 B.R. at 288 (“Making financial guarantees for a company
in which the [d]ebtor has an indirect equity interest is itself a ‘commercial or business activity.’”);
see also Blue, 630 B.R. at 191 n. 11 (“Guarantying debt can be a sufficient business or commercial
3 The Debtors commenced an adversary proceeding against United Bank on September 18, 2024;
a trial is scheduled in this matter on May 23, 2025.
activity.”). As reasoned by the Court in Ikalowych, “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.”
71. Here, the Debtors executed personal guarantees and placed their residence
on the line for both Cambridge Development and Lesage Properties to advance their interests in
owning Bellacino’s restaurants and a real estate leasing company. The Debtors have a direct equity
interest in their companies: they have a 100% interest in both entities. It is evident that the Debtors
must have believed that these companies would succeed and that they would get a return through
their ownership and management of the LLCs. Therefore, the Court finds that the Debtors’
continuing obligation 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.
72. Accordingly, the Court concludes that the Debtors were engaged in
“commercial or business activities” on the Petition Date through (1) the rental of real property
through Lesage Properties; (2) the liquidation of a business asset postpetition, which is a wind-
down business activity; and (3) the engagement in discussions, negotiations, and other efforts to
restructure and repay indebtedness under personal guarantees of commercial business debt.
III. CONCLUSION
For the reasons set forth herein, the Court concludes that the Debtors have met their burden
to show that they are eligible to proceed under Subchapter V. The Debtors have shown that they
are persons engaged in commercial or business activities (as of the Petition Date) whose debts are
less than $3,024,725.00 and more than half of their debts arose from their commercial or business
activities.
Accordingly, it is hereby ORDERED that:
1. The UST’s Objection is OVERRULED.
2. The Debtors may proceed toward the confirmation of their plan.
It is so ORDERED.
The Clerk’s Office shall serve a copy of this written opinion and order on the
Debtors, Debtors’ counsel, and the United States Trustee.