In re Ikalowych

• Decision Date: 15 April 2021
• Docket Number: Bankruptcy Case No. 20-17547 TBM
• Citation: 629 B.R. 261
• Parties: IN RE: John Matthew IKALOWYCH, Debtor.
• Court: U.S. Bankruptcy Court — District of Colorado

629 B.R. 261

IN RE: John Matthew IKALOWYCH, Debtor.

Bankruptcy Case No. 20-17547 TBM

United States Bankruptcy Court, D. Colorado.

Signed April 15, 2021

Aaron A. Garber, Littleton, CO, for Debtor.

MEMORANDUM OPINION AND ORDER ON CHAPTER 11 (SUBCHAPTER V) ELIGIBILITY

Thomas B. McNamara, United States Bankruptcy Judge

I. Introduction.

Congress recently made a major addition to Chapter 11 of the Bankruptcy Code¹ : the Small Business Reorganization Act of 2019 (the "SBRA").² The SBRA (commonly referred to as "Subchapter V"), was designed to streamline the reorganization and rehabilitation process for small business debtors. Substantively, the SBRA lowered the Chapter 11 bar for confirmation of a plan of reorganization by permitting confirmation even if all classes of creditors reject the proposed plan and by eliminating the so-called "absolute priority rule." Procedurally, Congress simplified some of the more cumbersome aspects of standard Chapter 11 cases by eliminating unsecured creditors' committees and disclosure statements. Suffice it to say that the SBRA offers many potential advantages for qualifying Chapter 11 debtors.

Last year, reacting to the Coronavirus pandemic, the Legislative Branch made further temporary changes, expanding SBRA eligibility through enactment of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act").³ Under Section 1113(a)(1) of the CARES Act, effective for the period from March 27, 2020 to March 27, 2021, a small business "debtor" means:

... [1] a person [2] engaged in commercial or business activities ... [3] that has aggregate noncontingent liquidated secured and unsecured debts ... in an amount not more than $7,500,000 ... [4] not less than 50 percent of which arose from the commercial or business activities of the debtor.

11 U.S.C. § 1182(1)(A). Last month, Congress extended the effectiveness of the foregoing SBRA eligibility provision for another year (through March 27, 2022).⁴

This dispute raises a difficult and novel issue regarding who can use the new SBRA, as modified by the CARES Act. In this bankruptcy proceeding, an individual debtor, John Matthew Ikalowych (the "Debtor"), filed for protection under Chapter 11 and elected Subchapter V. Just before he filed his bankruptcy case, the Debtor started a new job selling commercial insurance products for a company he does not own or control. But, for years, he has been an entrepreneur. He wholly-owns a limited liability company, JMI Management, LLC. ("JMI"), which he uses as a "pass-through" entity for certain business interests. JMI, in turn, owns a 30 percent interest in a second limited liability company, Lyceum Hailco, LLC ("Hailco"), which operated an automotive hail repair business. The Debtor worked for and managed Hailco. Hailco experienced financial difficulties shortly before the Debtor's bankruptcy filing. As a result, it "cease[d] operations and surrender[ed] all of its assets." The failure of Hailco triggered the Debtor's own bankruptcy because he had personally guaranteed most of Hailco's debts. Hailco's failure also forced the Debtor to switch jobs to earn a living. However, in fulfillment of his management duties to Hailco, the Debtor continued to perform a modest amount of "wind down" work for Hailco both before and after the Debtor's bankruptcy petition.

The United States Trustee (the "UST") objected to the Debtor's designation and eligibility under Subchapter V of Chapter 11. The UST contends that the Debtor is 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 contests the UST's objection and asserts that he is eligible to be a Subchapter V debtor by virtue of his full ownership of JMI and indirect ownership of Hailco, as well as his "wind down" work for Hailco. In the end, the dispute boils down to whether the Debtor qualifies as "a person engaged in commercial or business activities" within the meaning of Section 1182(1)(A) and eligible to be a debtor in Subchapter V.

II. Jurisdiction and Venue.

This Court has jurisdiction to enter final judgment on the eligibility issues presented in this bankruptcy case pursuant to 28 U.S.C. § 1334. Eligibility for relief under Chapter 11 (Subchapter V) is a core matter under 28 U.S.C. §§ 157(b)(2)(A) (matters concerning administration of the estate) and (b)(2)(O) (other proceedings affecting the liquidation of the assets of the estate). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409.

III. Procedural Background.

A. The Bankruptcy Filing and Subchapter V Election.

The Debtor filed for protection under Chapter 11 of the Bankruptcy Code on November 20, 2020 (the "Petition Date").⁵ In Section 12 of his Petition, the Debtor checked the "No" box in response to the question: "Are you a sole proprietor⁶ of any full- or part-time business?"⁷ In Section 13 of his Petition, the Debtor checked the "Yes" box in response to the statement:

I am filing under Chapter 11, I am a debtor according to the definition in § 1182(1) of the Bankruptcy Code, and I choose to proceed under Subchapter V of Chapter 11.⁸

The Court refers to the Debtor's decision to proceed under Chapter 11 (Subchapter V) as the "Subchapter V Election." Later in his Petition, the Debtor characterized his debts as "primarily business debts."⁹ On February 5, 2021, the Debtor filed his "Sub-Chapter V Plan of Reorganization" (the "Plan").¹⁰ The Plan has not been confirmed.

B. The Eligibility Objection, Response, and Joinders.

The UST objected to the Debtor's Subchapter V Election by filing the "U.S. Trustee's Objection to Debtor's Designation as a Subchapter V Small Business Debtor" (the "Eligibility Objection").¹¹ The central thrust of the Eligibility Objection is the assertion that the Debtor is not "engaged in commercial or business activities" within the meaning of Section 1182(1)(A). The Debtor's largest creditor, Sunflower Bank N.A. ("Sunflower Bank"), joined in the UST's Eligibility Objection and also contends that the Debtor may not use Subchapter V.¹²

The Debtor filed a "Response" to the Eligibility Objection, contesting the UST's position and arguing that the Debtor correctly elected to proceed under Subchapter V since he is "engaged in commercial or business activities" within the meaning of Section 1182(1)(A) (the "Response").¹³ The Subchapter V Trustee, John C. Smiley (the "Subchapter V Trustee"), agrees with the Debtor and joined in the Debtor's Response.¹⁴

C. The Hearings.

The Court conducted a preliminary non-evidentiary hearing on the Eligibility Objection, Response, and Joinders on February 19, 2021.¹⁵ Thereafter, the parties submitted their "Statement of Stipulated Facts," listing a set of eight stipulated facts (the "Stipulated Facts").¹⁶ However, the parties noted that they were unable to agree to certain additional facts proposed by the Debtor. Accordingly, the Court conducted a second preliminary non-evidentiary hearing on March 11, 2021, during which the parties requested that the Court set the dispute for a trial.¹⁷ The Court agreed and conducted an evidentiary hearing on the eligibility issues on March 24, 2021.¹⁸ At the trial, the Court heard testimony from the Debtor and admitted into evidence the UST's Exhibits 1-7 and the Debtor's Exhibits A-D. After the trial, the Court took the dispute under advisement. The Subchapter V eligibility issues are now ripe for decision.

IV. Factual Findings.

Based upon the Stipulated Facts, the evidence presented at the trial (including the testimony of the Debtor and the admitted exhibits), as well as the Debtor's Petition, Statement of Financial Affairs, Schedules, and other record bankruptcy filings, the Court makes the following findings of fact under Fed. R. Civ. P. 52(a)(1), as incorporated by Fed. R. Bankr. P. 7052.

A. The Debtor's Employment on the Petition Date and Thereafter.

As set forth below, the Debtor was employed by Hailco for several years and also served as one of the managers of Hailco. He stopped working for Hailco sometime between September 26 and October 2, 2020¹⁹ , because Hailco was winding down its business and ceased operations. The Debtor was unemployed for most of October 2020.²⁰ Then, just weeks before the Petition Date (sometime between October 25 and November 7, 2020), he started as an employee with CCIG, an insurance brokerage company.²¹ The Debtor's role at CCIG is as a "Commercial Insurance Producer" selling commercial insurance products.²² The Debtor does not have an ownership interest in CCIG; instead, he is only an employee.²³ CCIG pays the Debtor a monthly salary of about $11,250.00.²⁴ The Debtor also may be eligible for a potential annual bonus. The Debtor has continued to work at CCIG since the Petition Date.

B. The Debtor's Relationship with Lyceum Hailco, LLC.

Hailco is a Colorado limited liability company that formerly operated as an automotive hail repair business performing paintless dent repair.²⁵ The management of Hailco is vested in managers. The Debtor is one of the managers of Hailco.²⁶ For several years prior to the Petition Date, the Debtor worked for Hailco. However, he stopped working for Hailco between September 26 and October 2, 2020, because the entity failed financially. At the same time (i.e. , in early October 2020), Hailco ceased operations and surrendered all of its assets to Sunflower Bank.²⁷

In various filings made in his bankruptcy case, the Debtor asserted that he "owned" Hailco. For example, in his "Subchapter V Status Report" and also in his Plan, the Debtor informed the Court and parties in interest that:

The Debtor owned and operated a hail repair business, Lyceum Hailco, LLC located at 2452 S. Trenton Way, Unit F, Denver, Colorado 80231. Due to COVID, a lack of hailstorms, and a significantly deficient payout on an insurance claim, Hailco was forced to cease operations and surrender its assets to its secured lender [Sunflower Bank]. The Debtor's bankruptcy filing

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