Doing the Splits Doing the Splits : Statutory Construction of “ Debts of the Kind ” in Section 1192 ( 2 ) and the Specific / General Canon — Non-Dischargeability of Debts in Entity Subchapter V Cases
Annette W . Jarvis , Greenberg Traurig , LLP Secretary , American College of Bankruptcy
Whether nondischargeable debt exceptions under Section 523 ( a ) apply to entity debtors in Subchapter V cases under Section 1192 ( 2 ) is not technically a Circuit split . Rather , it currently is a split between Bankruptcy Judges ( both at the bankruptcy court level and the bankruptcy appellate panel level ) and Circuit courts on the question .
Subchapter V , designed for small business reorganizations , was enacted in August 2019 and became effective in February 2020 . Subchapter V reorganizations not only allow for a streamlined process , but provide for the abrogation of the absolute priority rule generally applicable in Chapter 11 cases , thereby providing significant benefits for small business owners . Section 1192 governs discharges in a Subchapter V non-consensual plan scenario . This section provides that , upon completion of the plan , all debts provided for in the plan are discharged except for debts on which the last payment is due after completing the plan and debts “ of the kind specified in section 523 ( a ) of this title .” 11 U . S . C . § 1192 ( 2 ). Section 523 ( a ), on the other hand , provides the exceptions to discharge , but applies only to “ an individual debtor .” To further
complicate matters , in a normal Chapter 11 case , certain Section 523 ( a ) exceptions to discharge are specifically made applicable to entity debtors under Section 1141 ( d )( 6 ) which , in turn , does not apply to Subchapter V debtors .
The Bankruptcy Court for the District of Idaho was one of the early courts to address this question in In re Rtech Fabrications , LLC , 635 B . R . 559 ( Bankr . D . Idaho 2021 ). In this case , a creditor filed a complaint against a limited liability company debtor in Subchapter V based on fraud , breach of contract and violation of the Idaho Consumer Protection Act , alleging that such debts were non-dischargeable under Section 523 ( a ) of the Bankruptcy Code . The debtor responded with a motion to dismiss , which the Court granted after determining that Section 523 ( a ) only applies to individual debtors under Section 1192 ( 2 ). Relying on the language of Section 523 ( a ), the Court concluded that , “[ b ] y its own terms , § 523 ( a ) only applies to individual debtors .” Id . at 564 . While the creditor pointed out that “ debts of the kind ” specified in Section 1192 ( 2 ) should not be interpreted to mean “ debtors of the kind ,” which would follow from the court ’ s reasoning , the Court , in supporting its plain language reading , cited to the “ overall statutory scheme ” of the Bankruptcy Code , finding the corporate discharge in Chapter 11 to be “ strenuously
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