Subchapter V small business bankruptcy: can data be licensed during the case?

Can a business license its data during a Subchapter V case?#

A business in Subchapter V can license its data during the case, but the real question is how, not whether. Subchapter V is a streamlined form of chapter 11 for small businesses, and the owner usually keeps running the company as debtor in possession. That status carries duties: the company's property, including its support tickets, CRM histories and job records, now belongs to the bankruptcy estate and is managed for the benefit of creditors.

Bankruptcy law draws a line between transactions in the ordinary course of business, which the debtor can carry out without asking, and transactions outside it, which need notice to creditors and an opportunity for a hearing, and in practice a court order. A license of operating records to an AI developer is a new kind of deal for most operating companies, so counsel will usually treat it as outside the ordinary course.

The same rule governs a Subchapter V asset sale. Selling equipment, a product line or the whole business outside the ordinary course needs notice and court approval, and courts generally ask whether the deal reflects a sound business judgment at a fair price. A license is narrower than a sale, because the company keeps the records, but the court applies the same basic test.

Eligibility for Subchapter V depends on debt limits that Congress has changed more than once, so confirm the current threshold with counsel before relying on this path.

Ordinary course or court approval: where is the line?#

The ordinary course line turns on whether the transaction is something this business, and businesses like it, normally do. Courts often look at two angles: whether the deal is typical for the industry, and whether creditors would reasonably expect it given how the company operated before filing.

A software company that has licensed anonymized usage data to partners for years has a better argument than a roofing contractor licensing a decade of job records for the first time. Even then, a large historical archive license looks different from a routine renewal, and seeking approval is the safer course in most cases.

Who gets a say before the license is signed?#

Several parties get a say before a Subchapter V debtor signs a data license, and involving them early costs less than answering an objection later. The Subchapter V trustee oversees the case and works to facilitate a consensual plan, so the trustee will want to understand the deal, the licensee and the use of proceeds.

Secured lenders often matter most in practice. Many loan agreements give the lender a lien on general intangibles and on proceeds, which can reach both the records and the license fee. If the fee is cash collateral, the company needs the lender's consent or a court order before spending it.

• 1Subchapter V trustee: reviews the transaction and its effect on plan feasibility.
• 2Secured lender: checks whether its lien covers the records and the license fee.
• 3United States Trustee: monitors reporting and compliance in the case.
• 4Unsecured creditors: receive notice of the motion and can object.
• 5Customers and vendors: may hold contract rights that restrict use of certain records.
• 6Licensee: will want the court order to confirm the debtor's authority and the approved scope.

What should the approval motion show?#

An approval motion for a data license should let the judge and creditors see exactly what leaves the company, on what terms and why the price is fair. Vague descriptions invite objections; a short, concrete schedule of systems and record families invites questions that can be answered.

The motion also needs to address privacy. Where the company's privacy policy restricts transferring consumers' personal information, bankruptcy law limits sales and leases of that information, and the court may appoint a consumer privacy ombudsman before approving one. Records that mostly concern business contacts may fall outside that rule, but they still raise contract and state privacy law questions. Removing personal and confidential details before delivery narrows the issue but does not remove the need to explain it.

• 1Scope: which systems, record families and date ranges are covered, and what is excluded.
• 2Form: non-exclusive license, permitted uses, term and deletion obligations.
• 3Rights: why the company may license the records, including a review of customer and vendor contracts.
• 4Privacy: how personal and confidential details are removed and checked.
• 5Value: how the licensee was found and why the terms reflect a fair market test.
• 6Proceeds: where the fee goes, including any lender's interest and plan funding.
• 7Reporting: how the fee will appear in monthly operating reports and plan projections.

Why a non-exclusive license fits a reorganization#

A non-exclusive license fits a reorganization because the company keeps ownership of its records while earning a fee from them. The archive stays in the estate, the business keeps using its own history, and the same records can be licensed again if they still meet buyer needs.

Selling the records, or granting an exclusive license that blocks every other use, is closer to selling an asset outright. That can make sense in a liquidating plan, but it is harder to justify when the premise of the case is that the business continues.

In what order should the owner take the steps?#

The owner should take the steps in an order that keeps the court, the trustee and the lender ahead of the deal rather than behind it. Nothing that commits company property should be signed or delivered before the court order, and informal sharing of sample files should stop once the case is filed.

Most delays come from the lender and rights steps, not from the motion itself, so start those first.

• 1Tell bankruptcy counsel about every buyer contact, past and current.
• 2Run a metadata-only fit check to learn whether the records are a realistic candidate.
• 3Read the security agreement and any cash collateral order to see what the lender's lien covers.
• 4Scope the systems, record families and date ranges, and list exclusions such as customer files.
• 5Negotiate a term sheet that is expressly conditioned on court approval.
• 6Share the draft with the Subchapter V trustee and the lender, then file the motion.
• 7After the order, finish privacy preparation, approve the release and deliver.
• 8Report the fee in monthly operating reports and reflect it in plan projections.

Illustrative: a dispatch software vendor in Subchapter V#

Illustrative: a fictional vertical software company sells dispatch and billing software to towing operators. After losing its largest reseller, it files under Subchapter V and keeps operating. Its Zendesk tickets link to Jira issues, code reviews and release notes across many years, and a model developer has asked about licensing that history.

Counsel concludes the license is outside the ordinary course because the company has never licensed data before. The company scopes a non-exclusive license of internal engineering and support records, excludes customer-uploaded files and personal details in ticket bodies, and agrees the use of proceeds with its secured lender before filing an approval motion. The Subchapter V trustee asks how the fee affects plan payments, and the plan projections show the fee as a disclosed, one-time receipt rather than recurring revenue. The motion is approved without objection, and delivery waits until the privacy preparation is verified.

How SourceX approaches a license inside a case#

SourceX treats a license inside a bankruptcy case as one more approval layer in the SourceX five-step transaction: Supply, Rights, Preparation, Approval and Delivery. Because the first fit check collects metadata only, such as systems, years of history and record families, a debtor can learn whether its records are a candidate before anything is filed with the court or shared with a buyer.

If the license proceeds, the SourceX Evidence Packet documents provenance, licensing rights, permitted use, the privacy record and release authorization. That record is written to be read by counsel, the Subchapter V trustee and the licensee, and nothing is delivered until the debtor and, where required, the court have approved the release.