Another Court Holds that Debts of Corporate Sub V Debtors Can’t Be Nondischargeable
Contrary to the Fourth Circuit, five bankruptcy courts have now held there’s no such thing as nondischargeability for corporate Sub V debtors. The question is now before the Fifth Circuit.
Five bankruptcy courts have now held that debts of corporate debtors in Subchapter V of chapter 11 cannot be nondischargeable under Section 523(a).
On the other side of the fence, the Fourth Circuit has held that corporate debtors in Subchapter V may not discharge debts “of the kind” specified in Section 523(a). Cantwell-Cleary Co. v. Cleary Packaging LLC (In re Cleary Packaging LLC), 36 F.4th 509 (4th Cir. June 7, 2022).
Bankruptcy Judge Craig A. Gargotta of San Antonio disagreed with Cleary and held that “corporate debtors proceeding under Subchapter V cannot be made defendants in § 523 dischargeability actions.” Avion Funding LLC v. GFS Industries LLC (In re GFS Industries LLC), 647 B.R. 337, 344 (Bankr. W.D. Tex. Nov. 10, 2022). The Fifth Circuit recently accepted a direct appeal in GFS.
The Corporate Debtor’s Motion to Dismiss
Affiliated corporate debtors filed petitions under Subsection V of chapter 11. Having litigated against the debtors before bankruptcy, a creditor lodged a complaint against the debtors contending that a $3 million debt was nondischargeable under Section 523(a). The debtors filed a motion to dismiss for failure to state a claim.
To resolve the motion to dismiss, Bankruptcy Judge Jason A. Burgess of Jacksonville, Fla., was faced with deciding whether Section 523(a) is applicable to corporate debtors in Subchapter V.
The statutes aren’t clear. Section 523(a) says, “A discharge under section 727, 1141, 1192, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt” for money obtained by false pretenses or fraud.” [Emphasis added.]
Governing discharge for Subchapter V debtors, Section 1192 states that “the court shall grant the debtor a discharge of all debts provided in section 1141(d)(1)(A).” Subsection (2) of Section 1192 goes on to say that a discharge in Subchapter V does not cover “any debt . . . of the kind specified in section 523(a) of this title.”
Finally, Section 1141(d)(1)(A) says that a “discharge under this chapter [11] does not discharge a debtor who is an individual from any debt excepted from discharge under section 523 of this title.” [Emphasis added.]
The Analysis by Judge Burgess
In his opinion on April 13, Judge Burgess said that the law “is still evolving,” but he agreed with the bankruptcy courts by holding that “exceptions to discharge under § 523(a) do not apply to corporate debtors receiving a discharge under § 1192.”
Judge Burgess cited the five bankruptcy courts holding that there’s no such thing as nondischargeability for a small business debtor in Subchapter V. See, e.g., Gaske v. Satellite Rests. Inc. (In re Satellite Rests. Inc.), 626 B.R. 871 (Bankr. D. Md. 2021).
Although he said that the Fourth Circuit’s opinion was “well-written,” Judge Burgess devoted most of his opinion to exposing flaws in the appeals court’s logic and statutory interpretation.
Judge Burgess said he disagreed with the Fourth Circuit “primarily because” the Small Business Reorganization Act “amended the language of § 523(a) to add a reference to § 1192. If Congress intended for § 523(a) exceptions to apply to corporations receiving a discharge under § 1192, then this addition was unnecessary.”
Judge Burgess went on to say that the Fourth Circuit’s logic “would render that addition superfluous and violate a canon of statutory construction.”
As Judge Burgess reads Cleary, he said that the Fourth Circuit “equates debts ‘of the kind specified in section 523(a)’ to debts under § 523(a)(1)-(19), thus disregarding the introductory language of § 523(a) that limits those discharge exceptions to individuals.”
“If Congress had intended this interpretation for § 1192,” Judge Burgess said, “it could have straightforwardly referred to paragraphs (1)-(19) of § 523(a), much like § 1141(d)(6)(A) refers to specific subsections, instead of only referring to § 523(a).”
Judge Burgess held that “Subchapter V corporate debtors that receive a discharge under § 1192 are not subject to § 523(a).”
