Petition date determines eligibility for subchapter V

Where the debtors were eligible for proceeding under subchapter V of Chapter 11 at the time they filed their petition, the court could not consider eligibility based on events that occur postpetition (such as the later filing of a bankruptcy case by an affiliate of a debtor).

Background

On Feb. 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.

Mr. Dobson formerly ran a home construction business through a corporation, Dobson Homes Inc., or DHI. He is the only shareholder of DHI. On Feb. 8, 2023, DHI, filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code. 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. The debate is whether DHI’s debts must be added to Mr. Dobson’s debts for purposes of § 1182(1)(B)(i).

Analysis

The U.S. Trustee insists that the language of § 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). The court disagrees. The language of § 1182 does not direct a court to determine petition eligibility based on postpetition events.

The parties agree that when Mr. Dobson filed his petition, he was the sole shareholder of DHI. Nevertheless, when Mr. Dobson filed his petition, DHI was not in bankruptcy. So, if the phrase “a member of a group of affiliated debtors under this title” means that the debtor under subchapter V is an affiliate of another debtor who is also in bankruptcy, the phrase did not apply to Mr. Dobson when he filed his petition and elected to proceed under subchapter V of chapter 11.

In essence, the U.S. Trustee asks this court to find that the correct statement on the petition becomes an incorrect statement if an objecting party can show that based on some later event, the statement is no longer true as of a later date. The court is unwilling to do so. A later event does not make a statement made as of the petition date incorrect. It does not change the eligibility as of the petition date. The debtor is either eligible or not. He does not change his existence during the case. If the postpetition filing of a bankruptcy case by an affiliate would cause a debtor under subchapter V to lose eligibility, would the dismissal of the affiliate’s case cause the debtor to regain eligibility?

Bankruptcy Procedure 1020

The U.S. Trustee maintains that Federal Rule of Bankruptcy Procedure 1020 resolves concern and eliminates the potential for a subchapter V debtor to “float in and out” of eligibility. Because the Rule provides for a deadline to object to the statement, the U.S. Trustee contends a debtor’s eligibility is only “floating” (or rather undetermined) until the expiration of the deadline to object.

Reliance on the rule of procedure as the “fix” for indeterminate eligibility during a case simply does not work. For one thing, § 1182(1) defines who is a debtor eligible to proceed under subchapter V of chapter 11. The statutory definition does not limit the criteria for eligibility by a time period to object to it. More than that, the deadline in Bankruptcy Rule 1020 does not help avoid a “roaming eligibility trap.”

Abuse of process

Prior to filing bankruptcy, Mr. Dobson met with an insolvency lawyer and paid the lawyer for services related to DHI. The U.S. Trustee asks this court to consider the strategic decision by DHI to not file a bankruptcy petition until after its sole shareholder filed his petition as if the professional planning is by itself an abuse or an indication of harm.

Yet, the U.S. Trustee has failed to show how professional advice and deliberate planning of the timing of a bankruptcy petition is unlawful or abusive. Further, as already stated, this court concludes the debtors’ eligibility in this case is determined as of the petition date. Thus, the court will not count the debts of an affiliate not in a case under title 11 at that time, even if the affiliate was planning to file a case under title 11.

In re: Tommy Dewayne Dobson, Case No. 23-60148, May 17, 2023. WDVA Bankr. at Lynchburg (Connelly). VLW No. 023-4-010. 12 pp.