In re Dobson

1

In re: TOMMY DEWAYNE DOBSON, ANNE CHRISTINE DOBSON, Debtors.

No. 23-60148

United States Bankruptcy Court, W.D. Virginia

May 17, 2023

Chapter 11

MEMORANDUM OPINION

Rebecca B. Connelly, United States Bankruptcy Judge

Tommy Dewayne Dobson and Anne Christine Dobson are debtors who filed a joint chapter 11 petition and elected to proceed under subchapter V of chapter 11 of the Bankruptcy Code. John P. Fitzgerald, III, Acting United States Trustee for Region Four (the "U.S. Trustee"), by counsel, objects to Mr. and Mrs. Dobson's election. For the reasons explained in this Memorandum Opinion, this Court overrules the U.S Trustee's objection.

JURISDICTION

This Court has jurisdiction over Tommy and Anne Dobson's bankruptcy case by the provisions of 28 U.S.C. §§ 1334(a) and 157(a) and the delegation made to this Court by Order of Reference from the District Court entered on December 6, 1994.

The issue in this contested matter is whether Tommy Dobson qualifies as a debtor who may proceed under subchapter V of chapter 11 of the Bankruptcy Code. Determining the eligibility of a debtor to proceed under a chapter or subchapter of the Bankruptcy Code requires interpreting and applying the provisions of the Bankruptcy Code, or in other words, is a core bankruptcy matter over which this Court has authority to hear and issue a final order.

Mr. and Mrs. Dobson and the U.S. Trustee agree that this Court has jurisdiction over the debtors' bankruptcy case and this contested matter. Joint Stip. ¶ 1, ECF Doc. No. 63. In addition, they agree that venue is proper. Id. ¶ 2.

PROCEDURAL HISTORY

On February 7, 2023, Tommy and Anne Dobson filed a joint voluntary petition for relief under chapter 11 of the Bankruptcy Code. On their petition, the debtors elected to proceed under subchapter V. See ECF Doc. No. 1. The following day, on February 8, 2023, Dobson Homes, Inc. ("DHI") filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code. See Case No 23-60158 (Bankr. W.D. Va.).

The next month, on March 6, 2023, the U.S. Trustee held and concluded the meeting of creditors pursuant to section 341(a). See ECF Doc. No. 34. Within a few weeks, on March 23, 2023, the U.S. Trustee filed an objection to the debtors' subchapter V election. See ECF Doc. No. 40. The debtors initially moved to dismiss the U.S. Trustee's objection, ECF Doc. No. 45, but then withdrew the motion through a consent order endorsed by the U.S. Trustee and the subchapter V trustee, ECF Doc. No. 48, and ultimately filed a response to the objection, ECF Doc. No. 66. The U.S. Trustee filed a memorandum of law in support of his objection and in response to the debtor's motion to dismiss it. ECF Doc. No. 47. In addition, the U.S. Trustee and the debtors filed a joint stipulation, ECF Doc. No. 63, and a supplemental joint stipulation, ECF Doc. No. 64. The pleadings, responses, and hearing information were noticed to all creditors. At the conclusion of the hearing on the objection, the Court took the matter under advisement. See ECF Doc. Nos. 68, 70.

FACTS

The facts are not contested. Although they disagree as to the significance and relevance of some facts, neither party has pointed to any contested facts that would make a difference to the decision.

The debtors are individuals. They are married and filed a joint petition under chapter 11, electing to proceed under subchapter V of chapter 11.^[1] Mr. Dobson formerly ran a home construction business through a corporation, DHI. He is the only shareholder of DHI. He has been an officer and a director of DHI. When Mr. and Mrs. Dobson filed their petition under chapter 11 and elected to proceed under subchapter V of chapter 11, DHI was not a debtor in bankruptcy.

The parties agree that Mr. and Mrs. Dobson meet the eligibility criteria of section 1182(1)(A).^[2] They disagree as to whether Mr. Dobson falls within the exception under section 1182(1)(B)(i).

DHI, an affiliate of Mr. Dobson, filed a chapter 7 petition on the day after Mr. and Mrs. Dobson filed their petition. According to Mr. and Mrs. Dobson, this filing did not change their eligibility to continue under subchapter V. According to the U.S. Trustee, DHI's filing changed everything. It is undisputed that if DHI's debts are added to Mr. and Mrs. Dobson's debts, the combined amount exceeds the statutory cap for subchapter V of chapter 11.^[3] The debate is whether DHI's debts must be added to Mr. Dobson's debts for purposes of section 1182(1)(B)(i).

ANALYSIS

The U.S. Trustee asks this Court to "require the Debtors to affirmatively establish their eligibility to proceed under Subchapter V." UST's Obj. at 9, ECF Doc. No. 40. The U.S. Trustee makes no other request.^[4]

The debtors contend they do meet the eligibility criteria and have affirmatively established it. The debtors ask the Court to overrule the U.S. Trustee's objection.

As explained in the next paragraphs, the Court finds the debtors have established eligibility to proceed under subchapter V of chapter 11.

Eligibility to proceed under subchapter V of chapter 11

Section 1182 of the Bankruptcy Code defines the term "debtor" in subchapter V of chapter 11. The statute provides:

(1) Debtor.-The term "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 $7,500,000 (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; and

(B)does not include-

(i) any member of a group of affiliated debtors under this title that has aggregate noncontingent liquidated secured and unsecured debts in an amount greater than $7,500,000 (excluding debt owed to 1 or more affiliates or insiders) . .

11 U.S.C. § 1182(1)(A), (B)(i).

As the parties have stipulated, Mr. and Mrs. Dobson meet the criteria of section 1182(1)(A). There is no dispute that on the date of their petition, none of the exceptions in section 1182(1)(B) applied to Mr. and Mrs. Dobson. In other words, they met the criteria in (A) and did not fall within any exceptions under (B). It is hard to see how the Court could find that Mr. and Mrs. Dobson did not make a true statement when they elected subchapter V.

Despite having made a true statement as to their eligibility at that time, the U.S. Trustee contends the debtors have not established eligibility under subchapter V because the day after they filed their bankruptcy petition, DHI, an affiliate of Mr. Dobson, filed a chapter 7 petition. If the debts of the affiliate who filed a bankruptcy petition the next day are added to the debtors' debts, then the combined debts exceed the statutory debt limits.

The sticking point is the application of section 1182(1)(B)(i).

The U.S. Trustee insists that the language of section 1182 is plain, and that this plain language says that the Court must consider eligibility based on events that occur postpetition (such as the later filing of a bankruptcy case by an affiliate of a debtor) because the phrase "as of the petition date" is not expressed in subsection (B)(i). Mem. of Law at 3-5, ECF Doc. No. 47. The U.S. Trustee also notes that the language "on the date of the petition or the order for relief" in section 1182(1)(A) means the Court must consider postpetition events since the statute itself offers an option other than the petition date. Id. at 4, 7.

The Court disagrees. The language of section 1182 does not direct a court to determine petition eligibility based on postpetition events. To begin with, section 1182 notes in subsection (A) that it is "subject to subparagraph (B)," when defining who is a debtor for purposes of subchapter V. Subsection (B) says a debtor "does not include" various criteria described in subsubsections (i), (ii), and (iii). In other words, Congress says who is a debtor under (A) is subject to, or conditioned by, who is not a debtor under (B). Simply put, as long as a person does not fall into one of the three categorical exceptions in section 1182(1)(B), a person meeting the eligibility requirements in section 1182(1)(A) may properly elect to proceed under subchapter V of chapter 11.

The statute provides a basic eligibility formula. First, a person (or such person's affiliate in bankruptcy) must be engaged in commercial or business activities. Second, such person must have debts as of the petition date under the statutory cap. Third, such person must show that not less than 50 percent of their debts arose from commercial or business activities of the debtor. Finally, the person must not fall within the exceptions described in (B). The person either does meet all these conditions, and is eligible to be a debtor under subchapter V, or does not. Section 1182 does not say the conditions are ongoing, include postpetition events, or persist "throughout the case," nor does section 1182 contain any other language to provide that the debtor's eligibility is not determined as of the initiation of the case under subchapter V.

The U.S. Trustee contends that the recent amendment of section 1182(1)(B)(i) to add the phrase "under this title" supports a reading of the section to mean that provisions of (A) and (B) are not to be applied together (despite the conjunction "and") and therefore the terms contained in (B) do not apply only as of the petition date. As he puts it,

If the Debtors were correct that 11 U.S.C. §§ 1182(1)(A)

...