In re Hillman, 2023

In this bankruptcy, ULM challenged the filing by the debtor, Michelle Corbin Hillman, that  “the Debtor is ineligible to elect to proceed with her case under Subchapter V of Chapter 11  … because she is not a ‘person engaged in commercial or business activities … as of the  date of filing of the petition.’” The debtor claims a 50% interest in two business entities: Tom  Murray USA Inc. and Corbin-Hillman Communications Ltd. “The parties have stipulated that  the Debtor’s aggregate debt on the Petition Date is below subchapter V’s debt limit of  $7,500,000.00 and not less than 50% of the Debtor’s total debt arose from commercial or  business activities of the Debtor.” 

ULM was the debtor’s largest creditor, claiming a liability of $671,399 relating to a New York State Court case alleging three courses of action. In schedule A/B of her petition, Hillman  listed Corbin-Hillman Communications as “closed.” She also listed the state court action as  “pending” to which ULM did not disagree. The debtor had been the owner of Tom Murray  since its inception in 2000. Its primary asset was the last publicity photograph shoot that the  Beatles did as a group. 

The debtor submitted bank records with transactions as recent as Feb. 10, 2022; Chase  credit card with activities for both businesses; emails showing ongoing dealings with art  galleries; the sale of a signed and numbered print of the Beatles in 2022; and current emails  discussing sales opportunities. There were no liabilities related to Tom Murray as of the  petition date. 

Arguments.

ULM submitted “the Debtor is ineligible to elect to proceed with her case under  Subchapter V of Chapter 11 … because she is not a ‘person engaged in commercial or  business activities … as of the date of filing of the petition.’” ULM submitted that the debtor  admitted that Corbin-Hillman Communications was closed with a value of $0.00. ULM further  submitted that any activity related to Tom Murray may “be charitably characterized as a hobby, but clearly do not constitute being ‘presently engaged in business or commercial activity’ as of the [Petition] Date.” 

Hillman argued that ULM’s objection relied on an incorrect interpretation of filed documents, an incorrect reading of the debtor’s testimony at a hearing of creditors, and an incorrect  interpretation of the statute. The debtor claimed ULM conflated business activities and  business operations. The debtor relied on limited but undisputed activities of Tom Murray,  contending that the courts had interpreted “business activities” broadly. 

The Subchapter V trustee submitted that the debtor was defending a large claim brought  against her by ULM. Per the trustee, “not only is [the debtor] engaged in a business activity involving her former company, that activity is the defense of a claim arising from the lease of commercial real estate and is the very reason for the filing of this bankruptcy.”  Alternatively, the debtor was involved currently in business activities related to a 50%  interest in Tom Murray. The trustee believed the requirement was met. 

Burden of proof.

The Bankruptcy Code was silent as to who has the burden of proof  regarding Subchapter V eligibility. The majority of courts found the debtor to have the  burden. (In re Phenomenon Mktg. & Ent., LLC) The debtor’s counsel conceded it was the  debtor’s burden to prove eligibility. The court found it was the debtor’s burden to prove  eligibility. 

Whether the debtor was engaged in commercial or business activities. The majority of  bankruptcy courts reviewing eligibility required the analysis as of the petition date. (Nat’l  Loan Invs., L.P. v. Rickerson [In re Rickerson]) The court found the majority view well founded and adopted it. Further, in determining whether the debtor was engaged in  commercial or business activities required a “totality of the circumstances approach.” (In re  Offer Space) This spoke only to whether the debtor was involved in commercial or business  activities and not to whether the debtor made a profit or whether the debtor intended to  operate in the future. 

The debtor relied primarily on her activities in Tom Murray but also asserted that Corbin Hillman Communications “engaged in commercial or business activities” based upon the  state court action. “As previously noted, a debtor can qualify for a subchapter V absent the  company’s traditional business operations where the company is winding down.” (In re Port  Arthur Steam Energy) Here, there was no doubt the state court action was pending and was  sufficient winding down activity for the debtor to satisfy the “engaged in commercial and  business activities” requirement. 

Whether a nexus was required between the qualifying commercial or business  activity and the qualifying business debt. “Some courts find fifty percent or more of the  total debt relating to any commercial or business activity is sufficient while other courts  require fifty percent or more of the total debt to relate to the specific commercial or business  activity (or activities) being relied upon by a debtor for subchapter V eligibility purposes.” The courts were split. 

The seminal case, In re Ikalowych, found a nexus requirement between the debtor’s  business activities and the qualifying debt as necessary for Subchapter V eligibility. The  court found this reasoning to be persuasive and adopted it here. As of the petition date, the debtor was engaged in commercial or business activities in both Corbin-Hillman  Communications and Tom Murray. “The Debtor has $671,398.91 of scheduled debt relating  to the commercial or business activity of CHC. This debt is greater than 50% of the total  $957,038.00 of liabilities reflected in the petition.” The court found that the debtor satisfied the nexus requirement. 

Conclusion.

“For all the reasons stated, the Court finds the Debtor has met her burden of  proving eligibility for subchapter V of Chapter 11 and may proceed accordingly.”