Many years ago, bankruptcy cases were not the big business matters they are today. Small and midsize companies filed for bankruptcy and attempted either to reorganize or be sold. Over time, huge companies utilized Chapter 11 for massive restructurings and sales, and to address significant mass tort liabilities. Many AmLaw 50 firms built large restructuring practices and assembled large teams to represent constituencies in these cases. And all of them required financial advisory firms. Today, the cost of pursuing a Chapter 11 reorganization is just too much for most small companies to endure. In response to this reality, Congress enacted the Small Business Reorganization Act of 2019 (SBRA), Pub. L. No. 116-54, Section 5, 133 Stat. 1079 (2019). The SBRA created a new “Subchapter 5” of the U.S. Bankruptcy Code that enables small businesses to use many of the provisions of Chapter 11, but without many of the costs and burdens of a typical Chapter 11 proceeding.

We do not have the time today to review the process of Subchapter 5 in comprehensive detail, but practitioners must think about electing Subchapter 5 whenever they address a company with less than $7.5 million in debt. However, there is a catch. Debtors must meet certain qualifications in order to avail themselves of Subchapter 5. One of these requirements is a debtor must be “engaged in commercial or business activities.” Recent decisions from two bankruptcy courts both held that a debtor that was not operating a business on the petition date and was only administering and liquidating its remaining assets nevertheless qualified for Subchapter 5 relief.

The Debtors’ Business Operations Had Ceased Prepetition