In re: Rs Air, LLC

FILED
APR 26 2022
ORDERED PUBLISHED
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. NC-21-1227-BGT
RS AIR, LLC,
Debtor. Bk. No. 20-51604
NETJETS AVIATION, INC.; NETJETS
SALES, INC.; NETJETS SERVICES, INC.,
Appellants,
v. OPINION
RS AIR, LLC,
Appellee.
Argued and Submitted on January 19, 2022 at Pasadena, California
Appeal from the United States Bankruptcy Court
for the Northern District of California
M. Elaine Hammond, Bankruptcy Judge, Presiding
Before: BRAND, GAN, and TAYLOR, Bankruptcy Judges.
APPEARANCES
Kelly Singer of Squire Patton Boggs (US) LLP argued for appellants; Jennifer
C. Hayes of Finestone Hayes LLP argued for appellee.
BRAND, Bankruptcy Judge:
INTRODUCTION
Appellants NetJets Aviation, Inc., NetJets Sales, Inc., and NetJets
Services, Inc. (collectively, "NetJets") appeal an order confirming the chapter
1
11 1 plan of debtor RS Air, LLC ("RS Air"). Specifically, NetJets appeals the
bankruptcy court's prior order denying its objection to RS Air's subchapter V
election, and the court's later ruling upholding the eligibility decision in
confirming the plan.
NetJets argues that the bankruptcy court erred in determining that RS
Air was eligible for subchapter V relief. According to NetJets, since RS Air had
no profit motive, it was not "engaged in commercial or business activities" on
the petition date pursuant to § 1182(1)(A). 2 NetJets argues that the bankruptcy
court further erred by allocating the burden of proof to NetJets to establish
that RS Air was not eligible for subchapter V. Finally, NetJets argues that the
bankruptcy court erred in ruling that the law of the case doctrine precluded
the court from reconsidering RS Air's eligibility for subchapter V when new
evidence at the final confirmation trial demonstrated that it was ineligible.
We hold that a profit motive is not required to satisfy § 1182(1)(A). We
further hold that the burden is on the debtor to prove subchapter V eligibility.
Although the bankruptcy court ruled otherwise on that issue, such error was
harmless, because the record established that RS Air met its burden of
establishing its eligibility to proceed under subchapter V. Finally, we conclude
1
Unless specified otherwise, all chapter and section references are to the Bankruptcy
Code, 11 U.S.C. §§ 101-1532.
2 As relevant here, § 1182(1)(A) provides that the term "debtor" "means a person
engaged in commercial or business activities . . . that has aggregate noncontingent
liquidated secured and unsecured debts as of the date of the filing of the petition or the
date of the order for relief in an amount not more than $7,500,000 (excluding debts owed to
1 or more affiliates or insiders) not less than 50 percent of which arose from the commercial
or business activities of the debtor." NetJets does not challenge RS Air's eligibility based on
2
that any error the bankruptcy court made regarding its law of the case ruling
was harmless, because no new evidence was presented at the final
confirmation trial that the court should have considered or that would have
changed the outcome. Accordingly, we AFFIRM.
FACTS
RS Air, a Delaware LLC doing business in California, was formed in
2001 by its sole member and manager, Stephen Perlman, for the purpose of
using and providing aircraft transportation services, acquiring and selling
interests in aircraft, and providing depreciation tax benefits to Perlman. From
2001 to 2017, RS Air's principal source of revenue from business operations
was from providing flight services for Perlman and affiliated third parties and
flying fragile technology prototypes to prevent damage from baggage
handling on commercial flights. RS Air also obtained revenue from acquiring
and selling fractional interests in aircraft.
Beginning in 2001, RS Air entered into a series of agreements to
purchase or lease from NetJets fractional interests in private jets. NetJets is a
private business jet charter company that sells fractional jet interests, charter
jet flight time, and aircraft management services. NetJets actively marketed
depreciation tax benefits as a key benefit to fractional jet ownership.
The parties had a good business relationship until July 2017, when one
of the jets fractionally owned by RS Air was involved in a non-injury runway
crash, which RS Air contends NetJets failed to disclose and was caused by a
debt limits.
3
NetJets pilot. RS Air ceased doing business with NetJets after the accident and
was still not engaged in its normal flight operations when it filed for
bankruptcy in November 2020. RS Air attributed its lack of operations to
NetJets not allowing RS Air to use or sell any jets after the accident and the
parties' falling out. Ultimately, the parties ended up in litigation in Ohio, with
NetJets filing suit against RS Air for breach of contract and RS Air asserting
counterclaims against NetJets for breach of contract and fraud.
B. The bankruptcy case and litigation over subchapter V eligibility
Just before trial was to begin in Ohio, RS Air filed a chapter 11
bankruptcy case and elected to proceed under subchapter V. NetJets is RS
Air's largest, non-insider creditor and holds approximately 98% of the total
non-insider debt.
1. Objection to subchapter V designation
NetJets objected to RS Air's election as a subchapter V debtor, arguing
that RS Air was not eligible for subchapter V because it was not currently
"engaged in commercial or business activities" pursuant to § 1182(1)(A).
NetJets argued that RS Air had no flight operations since at least 2017, no
revenue or income since as early as 2012, and no employees. In fact, argued
NetJets, RS Air had never been a revenue-generating business, and its sole
purpose was to serve as the intermediary through which Perlman acquired
interests in and paid for the availability and use of private jets. NetJets argued
that it was RS Air's burden to establish eligibility for subchapter V.
In opposition, RS Air argued that ongoing operations, employees, or
4
historical profitability were not required for subchapter V eligibility. RS Air
argued that it was currently engaged in business activities by (1) litigating
with NetJets, (2) negotiating with NetJets to sell its fractional jet interests back
to NetJets, (3) paying its aircraft registry fees, (4) remaining in good standing
as a Delaware LLC, and (5) keeping its tax obligations current with the state of
California and the federal government. RS Air also intended to resume
normal flights operations with a different partner once able. RS Air argued
that NetJets, as the movant, bore the burden of establishing that RS Air was
not eligible for subchapter V.
The bankruptcy court overruled NetJets' objection to RS Air's
subchapter V election ("Subchapter V Order"). First, it determined that
NetJets, as the party challenging eligibility, had the burden to establish that
RS Air was not eligible for subchapter V. Second, it found that RS Air was
engaged in commercial or business activities on the petition date because RS
Air: (1) transformed its business from flight services to investigation into and
litigation with NetJets (its primary contractual party); (2) intended to resume
fractional jet ownership with a different partner; (3) paid its aircraft registry
fees; (4) remained in good standing as a Delaware LLC; and (5) filed its tax
returns and paid taxes as required. The court rejected NetJets' argument that
employees are required for eligibility, observing that many small businesses
have no employees. Therefore, because NetJets did not meet its burden to
establish that RS Air failed to satisfy the eligibility requirements of § 1182, RS
Air would proceed as a subchapter V debtor.
5
2. RS Air's plan of reorganization
At an earlier plan confirmation hearing, Perlman testified that, while
some income is generated from providing flights to him or his related entities,
RS Air would have no projected disposable income within the next five years,
if ever. Instead, the primary financial benefit obtained is a tax deduction for
aircraft depreciation that flows through Perlman. As a result, he would pay all
administrative expenses and contribute new value of $50,000 (later increased
to $100,000), which was more than the expected disposable income of $0.
At the final plan confirmation hearing, RS Air's financial expert testified
that the net present value of RS Air's projected disposable income was $8,200.
Because RS Air's value in a traditional disposable income analysis was
projected to be a large negative number in the three- to five-year period
postconfirmation, the financial expert created an alternative model to capture
nontraditional kinds of value (e.g., tax benefits and aircraft flight services) that
would not be included in a traditional analysis. The expert's alternative model
recognized that RS Air was set up primarily to create value as a tax benefit
from owning a fractional aircraft share and providing aircraft flight services,
not to create value from profit on income.
In opposing confirmation, NetJets again argued that RS Air was not
eligible for subchapter V, and therefore the Plan did not meet the good faith
requirement of § 1129(a)(3). NetJets argued that RS Air was not a business
with income, the expert's financial projections improperly included indirect
items of value such as the depreciation tax benefit, and the expert's financial
6
projections were based on non-GAAP and never-before-seen methodologies.
NetJets contended that the real purpose of RS Air's subchapter V bankruptcy
was to sustain a facade business with no operations or income to protect
Perlman and affiliates and provide him with valuable tax benefits.
In confirming RS Air's third amended plan of reorganization (the
"Confirmation Order"), the bankruptcy court found that the disposable
income projections of Perlman and RS Air's financial expert were consistent
with NetJets' argument that RS Air was not a business with income, but that
whether RS Air generated income was not determinative for confirmation.
The court decided that the law of the case doctrine precluded revisiting the
issue of RS Air's subchapter V designation. However, the court noted that
developing case law, which interpreted broadly the types of commercial or
business activities that can satisfy § 1182(1)(A), supported its earlier decision
that RS Air was engaged in commercial or business activities on the petition
date. NetJets timely appealed the Confirmation Order, which included the
prior Subchapter V Order. A motions panel granted NetJets' request for stay
of the Confirmation Order pending appeal.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(L). We have jurisdiction under 28 U.S.C. § 158.33
The interlocutory Subchapter V Order merged into the final Confirmation Order.
See United States v. Real Prop. Located at 475 Martin Lane, 545 F.3d 1134, 1141 (9th Cir. 2008)
(under merger rule, interlocutory orders entered prior to the judgment merge into the
7
ISSUES
1. Did the bankruptcy court err in determining that RS Air was "engaged
in commercial or business activities" on the petition date?
2. Did the bankruptcy court err by allocating the burden to NetJets to
prove that RS Air was not eligible for subchapter V?
3. Did the bankruptcy court abuse its discretion in determining that the
law of the case doctrine precluded its review of the Subchapter V Order?
STANDARDS OF REVIEW
The question of whether a particular activity constitutes "commercial or
business activities" under § 1182(1)(A) is a legal question we review de novo,
and the bankruptcy court's determination whether the debtor engaged in that
particular activity is a factual question we review for clear error. See Int'l
Ass'n of Firefighters, Local 1186 v. City of Vallejo (In re City of Vallejo), 408 B.R.
280, 288-89 (9th Cir. BAP 2009) (we review questions of law and statutory
interpretation of the Code de novo and the bankruptcy court's factual findings
for clear error) (chapter 9 eligibility); see also Watford v. Fed. Land Bank of
Columbia, 898 F.2d 1525, 1527 (11th Cir. 1990) (applying these standards of
review to chapter 12 eligibility). Factual findings are clearly erroneous if they
are illogical, implausible, or without support in the record. Retz v. Samson (In
re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010).
Whether the bankruptcy court identified and applied the correct burden
of proof is a question of law we review de novo. Boruff v. Cook Inlet Energy
judgment and may be challenged on appeal).
8
LLC (In re Cook Inlet Energy LLC), 583 B.R. 494, 500 (9th Cir. BAP 2018).
We review the bankruptcy court's decision whether to apply the law of
the case doctrine for an abuse of discretion. See United States v. Lummi Indian
Tribe, 235 F.3d 443, 452 (9th Cir. 2000). A bankruptcy court abuses its
discretion if it applies the wrong legal standard, or misapplies the correct
legal standard, or makes factual findings that are illogical, implausible, or
without support in inferences that may be drawn from the facts in the record.
See United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc).
DISCUSSION
A. The bankruptcy court did not err in determining that RS Air was
"engaged in commercial or business activities" on the petition date.
Under the Small Business Reorganization Act of 2019, commonly
referred to as "subchapter V," Congress authorized eligible persons to avail
themselves of streamlined chapter 11 bankruptcy relief designed to help small
businesses. 4 Generally, a debtor is eligible to elect subchapter V if the debtor:
(1) is a "person;"5 (2) is "engaged in commercial or business activities;" (3) does
4
The SBRA became effective on February 19, 2020. See 11 U.S.C. §§ 1181, et seq.
Small Business Reorganization Act of 2019 (HR 3311), Pub. L. No. 116-54, 133 Stat. 1079
(Aug. 23, 2019). The statute as originally enacted defined the debtor under § 101(51D), in
the same way as a small business debtor who does not elect to proceed under subchapter
V. As part of the Coronavirus, Aid, Relief, and Economic Security Act (HR 748), Pub. L. No.
116-136, 134 Stat. 281, 116th Cong. 2d Sess. (Mar. 27, 2020), the definition was changed to
temporarily increase the debt limit to $7,500,000 for debtors who elected subchapter V and
included a sunset of one year. The one-year sunset for this temporary amendment was
extended to March 27, 2022, by the COVID-19 Bankruptcy Relief Extension Act of 2021,
Pub. L. No. 117-5 (Mar. 27, 2021). In this case, § 1182(1)(A) applies for the definition of a
subchapter V debtor.
5 An LLC is a "person." Gilliam v. Speier (In re KRSM Props., LLC), 318 B.R. 712, 717
9
not have aggregate debts in excess of the debt limit on the petition date; and
(4) at least 50 percent of the debtor's debts arose from its commercial or
business activities. § 1182(1)(A).
The only question here is whether RS Air was "engaged in commercial
or business activities" within the meaning of § 1182(1)(A). The Bankruptcy
Code does not define the phrase and case law is sparse. With one exception,
no appellate court has weighed in on the subject. The trial courts that have
reviewed it are divided as to its meaning.
A majority of courts have held that a debtor need not be "actively
operating" on the petition date, but must be "presently" engaged in
commercial or business activities on the petition date to satisfy § 1182(1)(A).
See Nat'l Loan Invs., L.P. v. Rickerson (In re Rickerson), 636 B.R. 416, 424-25
(Bankr. W.D. Pa. 2021); Lyons v. Family Friendly Contracting LLC (In re Family
Friendly Contracting LLC), No. 21-14213-TJC, 2021 WL 5540887, at *3 (Bankr. D.
Md. Oct. 26, 2021); In re McCune, No. 20-12326-j13, 2021 WL 4782957, at *7-9
(Bankr. D.N.M. Oct. 13, 2021); In re Vertical Mac Constr., LLC, No. 6:21-bk-
01520-LVV, 2021 WL 3668037, at *2 (Bankr. M.D. Fla. July 23, 2021)
("operations" insinuates a fully functioning business but "activities" includes
acts that are business in nature but fall short of an actual operating business);
In re Port Arthur Steam Energy, L.P., 629 B.R. 233, 236-37 (Bankr. S.D. Tex.
2021); In re Blue, 630 B.R. 179, 189-90 (Bankr. M.D.N.C. 2021); In re Offer Space,
LLC, 629 B.R. 299, 305-07 (Bankr. D. Utah 2021); In re Ikalowych, 629 B.R. 261,
(9th Cir. BAP 2004).
10
283-84 (Bankr. D. Colo. 2021); In re Johnson, No. 19-42063-ELM, 2021 WL
825156, at *6-8 (Bankr. N.D. Tex. Mar. 1, 2021); In re Thurmon, 625 B.R. 417,
422-23 (Bankr. W.D. Mo. 2020). Two courts have held that the debtor need not
have been engaged in any commercial or business activities on the petition
date to qualify for subchapter V, as long as the debtor was engaged in such
activities at some point in the past. See In re Blanchard, No. 19-12440, 2020 WL
4032411, at *2 (Bankr. E.D. La. July 16, 2020) (finding that "engaged in" has no
temporal limit); In re Wright, No. 20-01035-HB, 2020 WL 2193240, at *3 (Bankr.
D. Colo. Apr. 27, 2020) (debtor need not be "currently" engaged in commercial
or business activities on the petition date). Notably, those courts were two of
the first to consider the issue.
We agree with the majority, that the term "engaged in" is inherently
contemporary in focus and not retrospective. Thus, a debtor need not be
maintaining its core or historical operations on the petition date, but it must
be "presently" engaged in some type of commercial or business activities to
satisfy § 1182(1)(A).
The next question is, when a debtor is no longer operational, what types
of "activities" satisfy the requirement that the debtor be engaged in
commercial or business activities. In using the common meanings of the terms
and other statutory construction methods, courts generally have held that the
scope of commercial or business activities is very broad and apply a "totality
of the circumstances" standard. See In re Rickerson, 636 B.R. at 425-26
(reasoning that "winding down" is a business activity and could be enough for
11
§ 1182(1)(A) but not deciding the issue because debtor's entities had been
inactive for years prepetition, with no assets, no employees, no accounts, and
the debtor had no intent to reactivate any of the entities); In re Vertical Mac
Constr., LLC, 2021 WL 3668037, at *3 (concluding that maintenance of bank
accounts, working with insurance adjusters and defense counsel to resolve
claims, and selling assets all qualified as commercial or business activities); In
re Port Arthur Steam Energy, L.P., 629 B.R. at 237 (concluding that actively
pursuing litigation against a third party, collecting outstanding accounts
receivable, maintaining its facility, selling an asset, and filing tax returns all
qualified as commercial or business activities); In re Blue, 630 B.R. at 190
(concluding that debtor was engaged in business activities by working as an
IT consultant for a non-related entity and by winding down her former IT
business); In re Offer Space, LLC, 629 B.R. at 306-07 (while debtor was no longer
operating, had no employees, had no intention to reorganize, and intended to
liquidate any remaining assets, debtor was engaged in commercial or business
activities by having active bank accounts and accounts receivable, exploring
counterclaims in a pending lawsuit, managing its stock, and winding down its
business and taking steps to pay creditors and realize value for its assets); In
re Ikalowych, 629 B.R. at 284-85 (concluding that the W-2 wage-earner debtor
performing wind down work and dealing with tax accountants and tax issues
for his defunct LLC qualified as commercial or business activities).
Suffice it to say, courts are less likely to find sufficient commercial or
business activities for purposes of § 1182(1)(A) where the debtor is an
12
individual who owns a non-operating business, especially where the business
has been dissolved under applicable state law. See In re Rickerson, 636 B.R. at
425-26 (concluding that individual whose entities had been inactive for years
prepetition with no ongoing activity of any type and had no intent to
reactivate any of the entities was not engaged in commercial or business
activities); In re Johnson, 2021 WL 825156, at *7-8 (concluding that individual
debtors were not engaged in commercial or business activities where
husband's former companies were defunct and both debtors were now W-2
wage earners, even though husband was currently serving as president in a
non-related business); In re Thurmon, 625 B.R. at 423 (concluding that
individual debtors who sold their business prepetition, were retired, and did
not intend to return to business were not engaged in commercial or business
activities, and keeping their empty shell LLC in good standing and the
existence of accounts receivable was insufficient).
The bankruptcy court found that RS Air was engaged in commercial or
business activities on the petition date by litigating with NetJets, paying its
aircraft registry fees, remaining in good standing as a Delaware LLC, and
filing its tax returns and paying taxes. In addition, RS Air intends to resume
fractional jet ownership and flight operations with a different partner once
able. We conclude that the activities identified by the bankruptcy court are
"commercial or business activities" within the meaning of § 1182(1)(A). And
the bankruptcy court correctly found that RS Air was "engaged in" these
activities on the petition date. While NetJets wishes to split hairs about the
13
degree of RS Air's involvement in the Ohio litigation prior to and on the
petition date, we do not view that factual issue as determinative.
NetJets argues that RS Air was not engaged in commercial or business
activities either on or before the petition date because RS Air's activities
lacked any motive to generate income or profit. NetJets contends that, to
establish eligibility for subchapter V, the debtor must have a profit motive.
Thus, the question is whether engaging in commercial or business activities
incorporates a "pursuit of profit" requirement.
NetJets cherry-picks cases which it argues support its position that an
eligible subchapter V debtor must have the intent to pursue profit. In re
Vertical Mac Constr., LLC, 2021 WL 3668037, at *3 (noting that the term
"commercial" is commonly understood to involve commerce, and includes
"occupied with or engaged in commerce or work intended for commerce," "of
or relating to commerce," and "viewed with regard to profit"); In re Port Arthur
Steam Energy, L.P., 629 B.R. at 236 (same); In re Blue, 630 B.R. at 189 (noting
that "a person is engaged in commercial or business activities when she
participates in the purchasing or selling of economic goods or services for a
profit"); In re Ikalowych, 629 B.R. at 276 (holding that commercial or business
activities means "any private sector actions related to buying, selling,
financing, or using goods, property, or services, undertaken for the purpose of
earning income"); In re Johnson, 2021 WL 825156, at *8 (a person engaged in
commercial or business activities is "a person engaged in the exchange or
buying and selling of economic goods or services for profit").
14
In addition to discussing the definition for the word "commercial," the
courts above went on to discuss the definition for the word "business," which
is defined as "a usually commercial or mercantile activity engaged in as a
means of livelihood," or "dealings or transactions especially of an economic
nature." Business, Merriam-Webster Online Dictionary, https://www.merriam-
webster.com/dictionary/business (last visited Mar. 29, 2022) (emphasis
added). Certainly, the depreciation tax benefits and the revenue generated by
RS Air's flight operations or its acquiring and selling of its fractional aircraft
interests are "dealings or transactions" of an "economic nature." Although
NetJets tries to argue that no real tax benefit exists, that is contrary to its
marketing strategy which touted tax benefits as a key advantage for fractional
jet ownership.
Further, NetJets fails to note that the Ikalowych court went on to observe
that § 1182(1)(A) speaks only to whether the debtor was engaged in
commercial or business activities – "not whether the [d]ebtor was making a
profit, actively operating, or intending to operate in the future." 629 B.R. at
285. That court further heeded:
Interpretation of statutory phrases can be aided by considering
the definitions of each of the words in a phrase; but simply
stringing separate dictionary definitions together is not enough
and might lead in the wrong direction. Instead, the Court must
consider context and purpose in applying definitions.
Id. at 278. The court in Blue was also careful not to limit the meaning of
"commercial or business activities" to basic dictionary definitions. 630 B.R. at
188-89.
15
Finally, the issue of a "profit motive" was not directly addressed in these
cases. The few courts that have addressed it have held that § 1182(1)(A) does
not require a debtor to be engaged in for-profit business to qualify for
subchapter V. In Ellingsworth Residential Community Association, 619 B.R. 519,
520 (Bankr. M.D. Fla. 2020), an unsecured creditor argued that the debtor – a
nonprofit homeowners association – was not eligible for subchapter V
because, as a nonprofit, it did not "engage in commercial or business
activities." The bankruptcy court disagreed and found that, based on the plain
and unambiguous language of the statute, no profit motive is required. Id. at
521. It went on to hold that the many commercial or business activities the
nonprofit debtor engaged in fit the "broad" categorization of such activities.
Id. (e.g., contracting for goods and services, hiring professionals, filing regular
tax returns, collecting assessments from its homeowners).
On appeal, the district court affirmed. Guan v. Ellingsworth Residential
Cmty. Ass'n (In re Ellingsworth Residential Cmty. Ass'n), No. 6:20-cv-1243-
WWB, 2021 WL 3908525, at *3 (M.D. Fla. Aug. 19, 2021), appeal dismissed, No.
21-12970-AA, 2021 WL 6808445 (11th Cir. Nov. 4, 2021). The district court
reasoned that, although corporations involved in commerce can, and
frequently do, have a profit motivation, the plain and ordinary meaning of the
terms "commercial or business activities" does not require it. For support, the
district court cited to Black's Law Dictionary, which notes that "business
activities" can be either "the carrying out of a series of similar acts for the
purpose of realizing a pecuniary benefit, or otherwise accomplishing a goal."
16
Id. (quoting Doing Business, Black's Law Dictionary (11th ed. 2019)). This
broad definition would include not-for-profit businesses, and would not be
limited to those having only a benevolent purpose.
The bankruptcy court in Family Friendly Contracting LLC also concluded
that the plain and ordinary meaning of "commercial or business activities"
does not require a profit motivation. 2021 WL 5540887, at *3. In so ruling, the
court observed that courts have interpreted the phrase broadly in keeping
with the SBRA's purpose and the language of § 1182(1)(A).
We note, and the Ellingsworth and Family Friendly courts observed,
Congress chose not to exclude nonprofits or other persons who lack a profit
motive from qualifying for subchapter V. And that makes sense, because
churches, hospitals, and other nonprofit businesses are allowed to file for
chapter 11 (or 7) relief. See JBB Holdings, LLC v. Abundant Life Worship Ctr. of
Hinesville, GA, Inc. (In re Abundant Life Worship Ctr. of Hinesville, GA, Inc.), No.
20-40959-EJC, 2020 WL 7635272, at *10 n.23 (Bankr. S.D. Ga. Dec. 16, 2020) (a
church or other nonprofit entity can be a small business debtor) (citing In re
Ellingsworth Residential Cmty. Ass'n, 619 B.R. at 521-22); In re Charles St. African
Methodist Episcopal Church of Bos., 478 B.R. 73 (Bankr. D. Mass. 2012) (religious
corporation's nonprofit status did not disqualify it as a "corporation" eligible
for chapter 11); see also § 101(27A) defining "health care business" to include
an entity "organized for profit or not for profit"); 2 COLLIER ON BANKRUPTCY
¶ 109.02 (Alan N. Resnick & Henry J. Sommer, eds. 16th ed. rev. 2021) ("a
nonprofit corporation, like a for-profit corporation, is eligible to file for relief
17
under the Code"). The only persons Congress excluded from subchapter V
eligibility (other than by debt limitations) are those whose primary activity is
the business of owning single asset real estate, corporate debtors subject to
reporting requirements under certain sections of the Securities Exchange Act
(15 U.S.C. §§ 78m or 78o(d)), or any debtor that is an affiliate of an issuer
under 15 U.S.C. § 78c. See § 1182(1)(A) & (B).
Accordingly, we conclude that no profit motive is required for a debtor
to qualify for subchapter V relief. To hold otherwise would wrongfully
exclude nonprofits and other persons that lack such a motive. That RS Air had
no profit motive did not render it ineligible for subchapter V.
B. The bankruptcy court erred by allocating the burden to NetJets to
prove that RS Air was not eligible for subchapter V.
The parties dispute who had the burden of proof as to RS Air's
subchapter V eligibility: RS Air or NetJets. The Bankruptcy Code and Rules
are silent on this issue. The bankruptcy court determined that NetJets, as the
party challenging eligibility, had the burden. NetJets contends this was error.
We agree.
The bankruptcy court rejected the Missouri bankruptcy case cited by
NetJets – In re Thurmon – as contrary to Ninth Circuit law. Thurmon held,
based on Eighth Circuit law, that the debtor has the burden to establish
subchapter V eligibility. 625 B.R. at 419 n.4. The bankruptcy court believed it
was bound by Scovis v. Henrichsen (In re Scovis), 249 F.3d 975 (9th Cir. 2001),
which it cited for the proposition that the party challenging chapter 13
eligibility under § 109(e) bears the burden of proof. However, Scovis made no
18
express, or even implied, ruling as to who has the burden of proof for
establishing eligibility under § 109(e) outside of the context of plan
confirmation. The bankruptcy court also relied on BAP cases involving
motions to dismiss under § 707 and § 1112. See Aspen Skiing Co. v. Cherrett (In
re Cherrett), 523 B.R. 660, 668 (9th Cir. BAP 2014) (movant bears the burden to
establish abusive chapter 7 filing under § 707(b)(1)); Sullivan v. Harnisch (In re
Sullivan), 522 B.R. 604, 614 (9th Cir BAP 2014) (movant bears the burden to
establish "cause" for dismissal of chapter 11 case under § 1112(b)).
Neither this Panel nor the Ninth Circuit Court of Appeals has decided
the issue of who has the burden on subchapter V eligibility. However, in an
objection to the debtor's eligibility for chapter 9 relief, we held that the debtor
has the burden of establishing eligibility under § 109(c). In re City of Vallejo,
408 B.R. at 289 (citing In re Valley Health Sys., 383 B.R. 156, 161 (Bankr. C.D.
Cal. 2008)). Other circuit courts, as well as courts within this circuit, have held
that the debtor has the burden of establishing eligibility for chapter 12 relief
under § 109(f). See First Nat'l Bank of Durango v. Woods (In re Woods), 743 F.3d
689, 705 (10th Cir. 2014) (citing cases); Tim Wargo & Sons, Inc. v. Equitable Life
Assurance Soc'y of the U.S. (In re Tim Wargo & Sons, Inc.), 869 F.2d 1128, 1130
(8th Cir. 1989); Baker v. Rosenberger (In re Rosenberger), No. 20-50093, 2020 WL
6940926, at *3 (Bankr. W.D. Va. Sept. 29, 2020) (debtor must put forward
sufficient evidence to allow the court to find that she satisfies § 109(f)
eligibility requirements, including the definitional § 101(18) requirement that
she was "engaged in a farming operation" on the petition date); In re Cooper,
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No. 10-66447-fra12, 2011 WL 3882278, at *1 (Bankr. D. Or. Sept. 2, 2011); In re
Powers, No. 10-14557, 2011 WL 3663948, at *1 (Bankr. N.D. Cal. Aug. 12, 2011)
("The party filing a petition under Chapter 12 bears the burden of proving
eligibility."); In re Pandol, No. 10-19733-B-12, 2010 WL 9488147, at *1 (Bankr.
E.D. Cal. Sept. 29, 2010) (debtor has the burden to establish that he is a "family
farmer"). Finally, in involuntary cases, our circuit places the burden of
proving eligibility on the petitioning creditors. Cunningham v. Rothery (In re
Rothery), 143 F.3d 546, 548 (9th Cir. 1998) ("The filing of an involuntary case
requires the petitioning creditor to meet the burden of proof on the main
elements under § 303."); Hayden v. QDOS, Inc. (In re QDOS, Inc.), 607 B.R. 338,
343 (9th Cir. BAP 2019).
The reasoning of the courts placing the burden on the debtor to establish
eligibility for relief in a chapter 12 case is persuasive for our purposes here,
considering that chapter 12 contains the analogous requirement that a "family
farmer" be "engaged in a farming operation" to be eligible. See § 101(18).
Nearly every court deciding the issue of who bears the burden of proving
eligibility for subchapter V has held that it is the debtor. See In re Rickerson,
636 B.R. at 422; In re Family Friendly Contracting LLC, 2021 WL 5540887, at *2;
In re Vertical Mac Constr., 2021 WL 3668037, at *2; In re Port Arthur Steam
Energy, L.P., 629 B.R. at 235; In re Blue, 630 B.R. at 187; In re Offer Space, LLC,
629 B.R. at 304; In re Ikalowych, 629 B.R. at 275; In re Sullivan, 626 B.R. 326, 330
(Bankr. D. Colo. 2021); In re Johnson, 2021 WL 825156, at *4; In re Thurmon, 625
B.R. at 419 n.4; In re Blanchard, 2020 WL 4032411, at *2; In re Wright, 2020 WL
202193240, at *2; but see In re Body Transit, Inc., 613 B.R. 400, 409 n.15 (Bankr. E.D.
Pa. 2020) (objecting party is the de facto moving party bearing the burden to
prove the debtor is not entitled to subchapter V relief); Hall L.A. WTS, LLC v.
Serendipity Labs, Inc. (In re Serendipity Labs, Inc.), 620 B.R. 679, 680 n.3 (Bankr.
N.D. Ga. 2020). We agree with the majority view and hold that the burden to
prove eligibility for subchapter V should be placed on the debtor, especially
considering the many advantages subchapter V offers debtors over a
"traditional" chapter 11: total plan exclusivity (including modifications) and
no disclosure statement requirement; the ability to obtain a discharge on the
effective date; and the inapplicability of the absolute priority rule. It also
makes sense to place the burden on the debtor because debtors are in the best
position to prove that they are qualified to be in subchapter V.6
Nevertheless, the bankruptcy court's error in allocating the burden to
NetJets in the objection to eligibility was harmless because RS Air met its
burden. RS Air demonstrated that it was engaged in commercial or business
activities on the petition date, which was the only criterion challenged by
NetJets on eligibility.
6 We note the case of Ho v. Dowell (In re Ho), 274 B.R. 867 (9th Cir. BAP 2002), cited
by RS Air. The thrust of that case was a debtor's eligibility to proceed under chapter 13
given the debt limits set by § 109(e). The concurrence noted that a creditor has the burden
to persuade the court to grant a motion to dismiss a chapter 13 case for § 109(e)
ineligibility, whereas the debtor has the burden of demonstrating § 109(e) eligibility for
purposes of plan confirmation. Id. at 882-83. The majority did not comment on this issue. In
any case, we are not bound by Ho. The statement is dicta in a concurrence. Further, the
bankruptcy court's ruling on RS Air's subchapter V eligibility was not in the context of a
motion to dismiss where one might expect the movant to have the burden.
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C. The bankruptcy court failed to recognize the exceptions to the law of
the case doctrine, but such error was harmless.
The doctrine of law of the case provides that a "court is generally
precluded from reconsidering an issue that has already been decided by the
same court, or a higher court in the identical case." Thomas v. Bible, 983 F.2d
152, 154 (9th Cir. 1993). To apply, "the issue in question must have been
decided either expressly or by necessary implication in the previous
disposition." Id. (cleaned up). But there are exceptions to this discretionary
doctrine. A court may revisit a previously resolved question when: (1) the first
decision was clearly erroneous; (2) an intervening change in the law has
occurred; (3) the evidence on remand is substantially different; (4) other
changed circumstances exist; or (5) a manifest injustice would otherwise
result. Id. at 155 (citations omitted).
NetJets argues that the bankruptcy court abused its discretion by
applying law of the case to its earlier ruling that RS Air was eligible for
subchapter V, when new evidence presented at the final confirmation hearing
defeated RS Air's eligibility. NetJets argues that the bankruptcy court failed to
consider new evidence that: (1) RS Air had not reported any income since at
least 2004; (2) Perlman's alleged tax benefit flowing from his ownership of RS
Air was not a benefit and but rather a loss because the cost of producing the
benefit exceeded the amount of the tax benefit itself; (3) the financial model
supporting RS Air's income calculations treated expenses as "income," did not
comply with GAAP, and was inconsistent with the definition of "disposable
income" under the Code; and (4) RS Air's disposable income would be
22
negative using a strict definition of "disposable income." NetJets contends that
the bankruptcy court's decision was particularly egregious because the
subchapter V designation was an interlocutory ruling. See Amarel v. Connell,
102 F.3d 1494, 1515 (9th Cir. 1996) (interlocutory orders are subject to
modification at any time prior to final judgment); Hydranautics v. FilmTec
Corp., 306 F. Supp. 2d 958, 968 (S.D. Cal. 2003) (court may reconsider and
revise an interlocutory decision for any reason, even absent new evidence or
an intervening change in the law).
The problem facing NetJets is that all of the alleged new evidence it
argues that the bankruptcy court should have considered relates to the fact
that RS Air had no net profit. As we stated above, a profit motive or net profit
is not required for subchapter V eligibility. In addition, much of this evidence
was not "new." In overruling NetJets' initial objection, the bankruptcy court
found that RS Air was created to receive a depreciation tax benefit marketed
by NetJets rather than to generate a net profit. At a prior confirmation
hearing, Perlman testified that RS Air would likely have no projected
disposable income within the next five years, if ever. We also find it
somewhat disingenuous for NetJets to complain about this purported new
evidence that was consistent with its long-standing argument that RS Air was
not a business with income, and consistent with RS Air's position that jet
share ownership's primary business value is a tax benefit, not income.
Accordingly, any failure by the bankruptcy court in not considering the
exceptions to law of the case was harmless error.
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CONCLUSION
For the reasons stated above, we AFFIRM both the Subchapter V Order
and the Confirmation Order.
24