In re Blanchard

Andrew and Christine Blanchard (debtors) filed a Chapter 11 bankruptcy petition in September 2019. The Blanchards’ debt included personal guarantees of certain business or commercial loans to separate entities that they controlled or held a substantial interest in. Some of these entities remained in operation, and some did not. In April 2020, the United States Trustee (UST) moved to convert the Blanchards’ case to a Chapter 7 case or, in the alternative, to dismiss the case. A few days later, the Blanchards moved to proceed under the newly adopted Small Business Reorganization Act (SBRA), which created a streamlined and specially tailored Chapter 11 process for qualifying small businesses. The UST opposed the Blanchards’ request because the Blanchards had not met their Chapter 11 deadlines, and the deadlines that would apply under the SBRA had passed; the UST also raised due-process concerns relating to creditors that would be negatively affected by proceeding under the SBRA. In addition, WBL, SPO I, LLC (WBL), a Blanchard creditor (creditor), argued that the Blanchards did not qualify for the SBRA because the separate entities that incurred the relevant loans were not themselves in bankruptcy. That is, WBL noted that the SBRA applied only to a person engaged in commercial or business activities, which WBL contended meant that an SBRA debtor currently had to be engaged in such activities. Moreover, per WBL, an individual qualified for the SBRA only if a separate business entity was in bankruptcy and the individual was an affiliate of the separate legal entity. However, WBL conceded that the Blanchards’ debt did not exceed the SBRA’s limit. The Blanchards, who did not seek (and did not qualify for) affiliate status, disputed WBL’s interpretation of the SBRA. Per the Blanchards, they were entitled to proceed under the SBRA because they had independent status as small-business debtors who engaged in commercial or business activities based on the current and past activities of the relevant separate entities. To address the UST’s due-process concerns, the court allowed any creditors that would be affected by an SBRA proceeding to come forward, but none did. The Blanchards moved to dismiss their case so that they could refile under the SBRA. The UST agreed not to object to the Blanchards’ request.