638 B.R. 403
9th Cir. BAP2022Background
- RS Air, LLC (Delaware LLC) owned fractional interests in NetJets aircraft; primary business value came from providing flights to its sole member and obtaining depreciation tax benefits.
- RS Air stopped normal flight operations after a 2017 runway crash involving a NetJets-operated aircraft and was not operating commercially when it filed Chapter 11 in November 2020 and elected Subchapter V.
- NetJets (largest non-insider creditor, ~98% of non-insider debt) objected to RS Air’s Subchapter V election, arguing RS Air was not "engaged in commercial or business activities" on the petition date and lacked any profit motive.
- The bankruptcy court overruled the objection, concluding RS Air was engaged in business activities (litigation with NetJets, maintaining corporate formalities, paying registry and taxes, pursuing sale/negotiations) and incorrectly placed the burden on NetJets to prove ineligibility.
- At confirmation the court invoked law of the case to refuse reconsideration and confirmed the plan; NetJets appealed.
- The Ninth Circuit BAP affirmed: profit motive is not required for §1182(1)(A) eligibility; the debtor bears the burden to prove Subchapter V eligibility (but the court’s earlier misallocation of burden was harmless here); and any law-of-the-case error was harmless because no new admissible evidence would have changed the result.
Issues
| Issue | NetJets' Argument | RS Air's Argument | Held |
|---|---|---|---|
| Whether RS Air was "engaged in commercial or business activities" on the petition date under §1182(1)(A) | RS Air had no operations, revenue since years earlier, no employees, and no profit motive, so it was not engaged in business activities | Ongoing litigation, maintaining LLC status, paying registry/taxes, negotiating sales and intent to resume operations show present business activities | Court: "engaged in" has a contemporary focus; RS Air's litigation, corporate maintenance, tax filings, registry payments, and business plans satisfy §1182(1)(A) (no profit motive required) |
| Who bears the burden to prove Subchapter V eligibility | NetJets argued RS Air must prove eligibility; in bankruptcy court NetJets was placed with the burden and objected | RS Air contended challenger must prove ineligibility | BAP: debtor bears burden to prove Subchapter V eligibility; bankruptcy court’s misallocation to NetJets was legal error but harmless here because record shows RS Air met its burden |
| Whether the court abused discretion by applying law of the case and refusing to reconsider eligibility at confirmation | NetJets argued new evidence at confirmation (no income since 2004, flawed financial model, negative disposable income) warranted reconsideration | RS Air argued earlier ruling stands and the purported "new" evidence was not outcome-determinative | BAP: law of the case exceptions exist but no substantially different/new evidence here; any error was harmless because evidence related to profit (not required) and had been previously considered |
Key Cases Cited
- Scovis v. Henrichsen, 249 F.3d 975 (9th Cir. 2001) (cited by bankruptcy court on burden allocation but not controlling for Subchapter V eligibility)
- In re City of Vallejo, 408 B.R. 280 (9th Cir. BAP 2009) (standard for reviewing eligibility and factual findings)
- In re Ellingsworth Residential Cmty. Ass'n, 619 B.R. 519 (Bankr. M.D. Fla. 2020) (holds profit motive not required for §1182(1)(A))
- In re Rickerson, 636 B.R. 416 (Bankr. W.D. Pa. 2021) (interprets "engaged in" as requiring present business activity)
- Retz v. Samson (In re Retz), 606 F.3d 1189 (9th Cir. 2010) (clear-error standard for factual findings)
- United States v. Lummi Indian Tribe, 235 F.3d 443 (9th Cir. 2000) (law of the case doctrine and exceptions)
- United States v. Hinkson, 585 F.3d 1247 (9th Cir. 2009) (abuse-of-discretion standard for applying legal standards and factual findings)