The Debtor, John Matthew Ikalowych (“the Debtor”), personally guaranteed most of the debts of Lyceum Hailco, LLC (“Hailco”), 30 percent of which was owned by the Debtor’s wholly-owned limited liability company, JMI Management, Inc. (“JMI”). When Hailco failed, the Debtor filed for bankruptcy relief under Subchapter V of Chapter 11.
The United States Trustee, joined by Hailco’s lender, objected to the Debtor’s designation under Subchapter V, arguing that the Debtor was not eligible to be a small business debtor because the Debtor was not “engaged in commercial or business activities” when he filed for bankruptcy. The Debtor contested the UST’s objection, arguing that he was eligible to be a Subchapter V debtor by virtue of his full ownership of JMI, which remains in existence and operation, and his indirect ownership of Hailco, as well as his “wind down” work for Hailco.
After undertaking an analysis of the text of 11 U.S.C. § 1182(1)(A), the Court determined that the Debtor was a “person” within the meaning of 11 U.S.C. § 101(41); that the Debtor’s debts did not exceed the $7,500,000 debt cap of Section 1182(1)(A); that the Debtor was “engaged in commercial or business activities”; and that the Debtor’s debts “arose from” from such “commercial or business activities” within the meaning of Section 1182(1)(A). Specifically, the Court examined the meaning of the term “commercial and business activities” and found that the phrase is exceedingly broad. The Court also examined the meaning of the term “engaged in” and found that such language required the Debtor to be “engaged in commercial or business activities as of the date the Debtor filed his bankruptcy petition (the “Petition Date”), deeming relevant the circumstances immediately preceding and subsequent to the Petition Date. Applying those definitions, the Court found that the Debtor’s continued operation and management of JMI both before and after the filing date, his work to wind down Hailco both before and after the Petition Date, and his work as a wage-earner at an insurance brokerage company in which he held no ownership interest all constituted “commercial or business activities” which the Debtor was “engaged in” as of the Petition Date. Undertaking further statutory analysis, the Court found that the Debtor’s debts, which were based primarily on his guarantees of Hailco’s debts, arose from such “commercial or business activities.” Therefore, the Court determined, the Debtor was eligible to be a debtor in Subchapter V.