“Engaged In”: The Rocky Marriage Between Commercial and Business Activity and Subchapter V Eligibility

The Small Business Reorganization Act of 2019, which created subchapter V bankruptcy relief for eligible small business debtors, is a step towards a small-business-friendly bankruptcy environment. The legislative history of subchapter V stated the goal of this new statute was to provide a cost-effective and streamlined path to reorganization to allow financially distressed small businesses to remain in business. To be eligible for subchapter V relief, a debtor must, among other requirements, be “engaged in commercial or business activities.” However, courts have continuously disagreed on the meaning of “engaged in commercial or business activities.” Courts have taken different stances on whether the debtor must be presently engaged in commercial or business activities, and what conduct satisfies the “activities” prong. This Comment proposes a revision to subchapter V’s eligibility requirements to alleviate the confusion caused by inconsistent judicial interpretation, correct legislative drafting mistakes, and harmonize legislative intent and application, and proposes that the phrase “engaged in commercial or business activities” should be replaced with “presently engaged in the operation of, as of the petition date, a trade or business.” The term “trade or business” is a term of art commonly used in the Tax Code. The test set out by the Supreme Court in Commissioner v. Groetzinger should be used to determine if unregistered business forms, like sole proprietorships, are engaged in a trade or business. However, registered business forms are inherently a trade or business. These changes will remedy existing confusion by implementing a clear framework that accurately reflects legislative intent