In re: RS AIR, LLC,

The Ninth Circuit BAP holds that litigating with the largest creditor and maintaining the corporation in good standing is sufficient to show that the debtor ‘is engaged’ in business on the filing date.

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Case Type:
Case Status:
BAP No. NC-21-1227-BGT (9th Circuit, Apr 26,2022) Published
BAP for 9th Cir. affirmed ruling of bankruptcy court (ND Cal.) overruling creditor's objection to chapter 11 debtor's subchapter V election. Bankruptcy court's ruling that burden was on creditor to prove ineligibility was harmless error because debtor met burden of establishing its eligibility. Profit motive is not required to satisfy eligibility under 11 USC 1182(1)(A). Bankruptcy court's ruling that law of the case doctrine precluded court from reconsidering debtor's eligibility was harmless error where no new evidence was presented that would have changed outcome.
Procedural context:
Bankruptcy court (ND Cal.) overruled creditor's objection to chapter 11 debtor's subchapter V election. Creditor appealed to BAP for 9th Circuit.
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 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. 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. 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. NetJets argued 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.
Brand, Gan, and Taylor

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