Are Debtors in subchapter V of Chapter 11 are barred from discharging debts that are nondischargeable under Section 523(a)?

To justify holding that “corporate debtors electing to proceed under Subchapter V of Chapter 11 are not subject to complaints to determine dischargeability pursuant to § 523(a),” Bankruptcy Judge Craig A. Gargotta of San Antonio issued a 25-page, line-by-line refutation of the recent, contrary holding by the Fourth Circuit in Cantwell-Cleary Co. v. Clearly Packaging LLC (In re Cleary Packaging LLC), 36 F.4th 509 (4th Cir. June 7, 2022).

Resolving what it called a “close” question, the Fourth Circuit held in June that “fairness and equity” required making the debts nondischargeable for a corporation, since a small business debtor in Subchapter V has an easier road to confirmation given the absence of the absolute priority rule.

Is Section 523(a) applicable to corporate debtors in Subchapter V?

Of pertinence to the case at hand, 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.”

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.”

Avion Funding LLC v. GFS Industries LLC (In re GFS Industries LLC), 22-05052 (Bankr. W.D. Tex. Nov. 10, 2022).