In re Offer Space, LLC

629 B.R. 299

IN RE: OFFER SPACE, LLC Debtor.

Bankruptcy Case Number: 20-27480

United States Bankruptcy Court, D. Utah.

Signed April 22, 2021

Deborah Rae Chandler, Blake D. Miller, Anderson & Karrenberg, Mark C. Rose, McKay, Burton & Thurman, P.C., Salt Lake City, UT, for Debtor.

MEMORANDUM DECISION ADDRESSING THE U.S. TRUSTEE'S OBJECTION TO DEBTOR'S ELECTION TO PROCEED UNDER SUBCHAPTER V OF THE BANKRUPTCY CODE

WILLIAM T. THURMAN, U.S. Bankruptcy Judge

This matter is before the Court by way of the U.S. Trustee's Objection to Debtor's Election to Proceed Under Subchapter V. The Court conducted a preliminary hearing telephonically on April 1, 2021. At the April 1 hearing, the Court accepted and adopted the Stipulated Facts that the parties submitted on March 30. See Stipulated Facts for the U.S. Trustee's Objection to Debtor's Election to Proceed Under Subchapter V ("Stipulated Facts"), ECF No. 43. In addition, the Court scheduled a final hearing.

The Court held the final hearing telephonically on the U.S. Trustee's objection on April 16, 2021. Melinda Willden appeared on behalf of the U.S. Trustee and Mark Rose appeared on behalf of Offer Space, LLC (the "Debtor"). Ray Strong, the Subchapter V Trustee, also appeared. The Court took the matter under advisement. The court carefully considered the memoranda and other materials submitted by the parties, as well as the law and facts relating to the U.S. Trustee's objection. Now being fully advised, the court issues the following Memorandum Decision.

BACKGROUND

The Debtor is a limited liability company that was formed in the State of Utah in 2015.¹ After formation, the Debtor provided vendor marketing solutions to direct marketers, including customer relations management, merchant account management, and marketing campaign management using certain proprietary software.

In late 2019 and early 2020, the Debtor's business began suffering difficulties due to legal claims and chargebacks. As a result, in August 2020, the Debtor began informing its vendors that it would be unable to continue providing them its services. One of the Debtor's vendors, Ecommerce Tech, LLC ("Ecommerce Tech") offered to purchase the Debtor's proprietary software. Thus, in August 2020, the Debtor sold its software to Ecommerce Tech for $1,000,000, paid in the form of 6,290,170 publicly tradable shares of Thoughtful Brands, Inc. (the "Stock")—a corporation organized under Canadian law. The Debtor's software was the main operational asset of its business.

Over the next several months, the Debtor marshaled its assets and took reasonable measures to conduct its business, pay its creditors, and generate revenue. Then, on December 30, 2020, the Debtor filed for chapter 11 bankruptcy relief (the "Petition Date"). Specifically, the Debtor elected to proceed under Subchapter V of Chapter 11. On the Petition Date, (1) the Debtor's assets consisted of a bank account, accounts receivable, claims in a lawsuit against a third-party entity called Nutra Now, Inc. ("Nutra Now"), and the Stock; (2) the Debtor had no employees, was no longer conducting business in the manner previously described, and had no intention to reorganize its business; and (3) the Debtor was using reasonable efforts to pay its creditors and realize value for its assets.

The Debtor filed its Schedules and Statement of Financial Affairs (collectively, "Schedules") on January 13, 2021. The Schedules list the Debtor's total liabilities at $3,470,089.57. The Schedules also list the Debtor's assets, with an estimated value of $392,625.25. That amount, however, excludes possible preference claims.

The meeting of creditors was held on February 5, 2021. The Debtor's principal, Chris Armstrong, attended and testified that the Debtor intended to liquidate the Stock to pay creditors. Mr. Armstrong also explained that the Debtor had no intention to resume business in the manner previously described. The meeting of creditors was then continued to February 19, 2021, to allow the Debtor to obtain new counsel, and the U.S. Trustee concluded the meeting on that date. Then, on February 26, 2021, the U.S. Trustee formally objected to the Debtor's election to proceed under Subchapter V.

JURISDICTION, VENUE, & NOTICE

The Court's jurisdiction is properly invoked under 28 U.S.C. § 1334. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A), and the Court may enter a final order. The Court finds that venue is proper under the provisions of 28 U.S.C. § 1408. In addition, the Court finds that notice for the hearings for this matter was proper in all respects.

DISCUSSION

In 2019, Congress passed the Small Business Reorganization Act of 2019 ("SBRA"). Pub. L. No. 116-54, § 5, 133 Stat. 1079 (2019). A key feature of SBRA was the addition of a new subchapter—Subchapter V—which created a new avenue of chapter 11 relief for small business debtors. See id. Shortly after SBRA took effect, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). Pub. L. No. 116-136, 134 Stat. 281, 310-12 (2020). The CARES Act expanded Subchapter V eligibility by increasing the debt limit from $2,000,000 to $7,500,000.² 11 U.S.C. § 1182(1)(A). Subchapter V now defines a "debtor" as: "a person engaged in commercial or business activities ... 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 ... not less than 50 percent of which arose from the commercial or business activities of the debtor."³ Id.

Pursuant to Federal Bankruptcy Rule 1020(b), the U.S. Trustee may object to a debtor's election to proceed under Subchapter V, and it has done so here. Because the U.S. Trustee has raised such an objection in this case, the Debtor now bears the burden of proving its eligibility under Subchapter V. In re Sullivan , 626 B.R. 326, 329–30 (Bankr. D. Colo. 2021) ; cf. In re Woods , 743 F.3d 689, 705 (10th Cir. 2014) (placing the burden of establishing Chapter 12 eligibility on the debtor); In re Hamilton Creek Metro. Dist. , 143 F.3d 1381, 1384–85 (10th Cir. 1998) (placing the burden of establishing Chapter 9 eligibility on the debtor).

A. Subchapter V Eligibility

Based on the statute's definition of "debtor," Subchapter V eligibility depends on four requirements: (1) the debtor must meet the definition of a "person"; (2) the debtor must be "engaged in commercial or business activities"; (3) the debtor cannot have aggregate debt exceeding $7,500,000 as of the date of petition; and (4) at least 50 percent of the debtor's debts arose from its commercial or business activities. 11 U.S.C. § 1182(1)(A). In this case, the parties do not dispute that the Debtor meets the first, third, and fourth requirements. As to the first, because the Bankruptcy Code defines the term "person" to "include[ ] individual[s], partnership[s], and corporation[s]," the Debtor satisfies the "person" requirement. Id. § 101(41). Regarding the second, as mentioned above, the Debtor has $3,470,089.57 in total liabilities, and, as such, falls well below Subchapter V's $7,500,000 debt limit. And as to the third, based on a review of the Schedules, it is clear that more than 50 percent of the Debtor's debts arose from the Debtor's commercial or business activities prior to the Petition Date. See Schedules, ECF No. 7.

The U.S. Trustee does, however, object to the Debtor's eligibility based on the second requirement—that a debtor must be "engaged in commercial or business activities." The U.S. Trustee contends that the Debtor is ineligible under the second requirement because the Debtor was no longer an operational business on the Petition Date. To support this assertion, the U.S. Trustee argues that, as of the Petition Date, the Debtor had no employees, was no longer conducting business in the manner it previously conducted business, had no intention to reorganize its business, and intended to merely liquidate the Stock and any remaining assets. In short, the U.S. Trustee asserts that a debtor must be an operating business to satisfy the "engaged in commercial or business activities" requirement. Because the Debtor admits that it had ceased business operations before the Petition Date, the U.S. Trustee takes the position that the Debtor is ineligible to proceed under Subchapter V.

In response, the Debtor contends that the U.S. Trustee's view of "engaged in commercial or business activities" is far too narrow. The Debtor asserts that the U.S. Trustee's position conflates the term "activities" with the term "operations." The Debtor emphasizes that the two terms are not interchangeable, with the former delineating a much broader array of conduct than the latter. The Debtor therefore claims that, while its business was no longer operational as of the Petition Date, that does not preclude it from proceeding under Subchapter V given that it was still engaged in commercial and/or business activities.

Before proceeding and addressing the merits of the U.S. Trustee's objection, the Court notes that this is an issue of first impression for this District. The Court appreciates the briefing and argument of both parties and applauds their work in bringing this matter before the Court. The Court respects both parties and their positions taken. The court also notes that there are decisions on this issue from other jurisdictions which the Court respects.

In order to resolve the U.S. Trustee's objection, the Court must interpret the phrase "engaged in commercial or business activities" as set forth in Subchapter V. A court's "primary task in construing statutes is to determine congressional intent, using traditional tools of statutory interpretation." In re Taylor , 737 F.3d 670, 678 (10th Cir. 2013) (quoting N.M. Cattle Growers Ass'n v. U.S. Fish & Wildlife Serv. , 248 F.3d 1277, 1281 (10th Cir. 2001) ). When it comes to the Bankruptcy Code, "[i]nterpretation ... starts ‘where all...