BANKRUPTCY CORNER
BANKRUPTCY CORNER
Is that Corporate Debt Dischargeable in Subchapter V ?
JASON S . RIGOLI
Subchapter V of chapter 11 of the Bankruptcy Code ( 11 U . S . C . §§ 101 , et seq .) has been a great tool for many small business debtors , especially in the wake of the COVID-19 legislation which upped the eligibility threshold to $ 7.5 million .
One issue that has been percolating is whether the exceptions to discharge in § 523 ( a ) apply to debt of a corporate debtor if the plan is nonconsensual . Lower courts and Ninth Circuit BAP have unanimously held that the exceptions do not apply to corporate debtors . The Fourth Circuit Court of Appeals and now the Fifth Circuit Court of Appeals feel otherwise . The Eleventh Circuit has not rendered an opinion on this issue .
The issue arises from the language in two sections of the Bankruptcy Code , Sections 523 ( a ) and 1192 .
Section 523 ( a ) sets forth the exceptions to discharge and reads : “ 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 [.]” 11 U . S . C . § 523 ( a ) ( emphasis added ).
Section 1192 governs discharge for subchapter V debtors and reads “ the court shall grant the debtor a discharge of all debts provided in section 1141 ( d )( 1 )( A ) … except any debt . . . of the kind specified in section 523 ( a ) of this title .” 11 U . S . C . § 1192 ( 2 ) ( emphasis added ).
The lower courts and Ninth Circuit B . A . P . have held that the more specific language of § 523 ( a ) controls , in that the exceptions to discharge apply only to individuals with the language of § 1192 being more generalized without including language to otherwise modify § 523 ( a ).
The Fourth Circuit ’ s Rationale
The Fourth Circuit Court of Appeals relied on the “ any debt … of the kind specified in section 523 ( a )” language of § 1192 to reach its conclusion that corporate debtors are subject to the exceptions in § 523 ( a ) when there is a nonconsensual plan . Cantwell- Cleary Co . v . Cleary Packaging LLC ( In re Cleary Packaging LLC ), 36 F . 4th 509 , 515 ( 4th Cir . June 7 , 2022 ) ( emphasis in original ). Holding that § 1192 applies to both individuals and corporate debtors , the Fourth Circuit rationalized that the language of 1192 was focused on the types of debts identified in § 523 ( a ) rather than distinguishing between the use of “ individual ” in the preamble of § 523 and lack of such distinction in 1192 .
The Fifth Circuit ’ s Rationale
The Fifth Circuit looked at the “ textual conundrum ” created by §§ 523 ( a ) and 1192 , and agreed with the appellant ’ s position , reasoned that “ placing controlling weight on the word ‘ individual ’ in § 523 ( a ) disregards the plain language of § 1192 ( 2 ).” Avion Funding , L . L . C . v . GFS Indus ., L . L . C . ( In re GFS Indus ., L . L . C .), Case No . 23- 50237 , -- F . 4th -- , 2024 U . S . App . LEXIS 9317 at * 6 ( 5th Cir . Apr . 17 , 2024 ). Section 1192 governs the discharging debts of a “ debtor ,” which under subchapter V means “ a person engaged in commercial or business activities with debts not exceeding $ 7.5 million . Id . ( citing 11 U . S . C . § 1182 ( 1 )( A )). “ Person ” is defined to include both individuals and corporations , with corporations defined to include limited liability companies . Id . ( citing 11 U . S . C . § 101 ( 9 ) and ( 41 )). The Fifth Circuit concluded “ the most natural reading of § 1192 ( 2 ) is that it subjects both corporate and individual Subchapter V debtors to the categories of debt discharge exceptions listed in § 523 ( a ).” Id . at * 6-7 . The Fifth Circuit continued on : agreeing with the rationale of the Fourth Circuit in Cleary and looking at the “ larger context of Bankruptcy Code ” and the compromises Congress made in Subchapter V ” to support its position that the exception applies to both individual and corporate Debtors . Id . at * 6-15 .
Conclusion
Until the Supreme Court rules or Congress acts , Subchapter V corporate debtors are not guaranteed a discharge of all debts and Debtors should strive to obtain the consensual confirmation of a plan to ensure a more certain reorganization .
This article was submitted by Jason S . Rigoli , Esq ., Furr and Cohen , P . A ., 2255 Glades Road , Suite 419A , Boca Raton , FL 33431 , jrigoli @ furrcohen . com
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PBCBA BAR BULLETIN 9