By: Donald L Swanson
“[T]his Court finds that the exceptions to discharge under §523(a) only apply to individuals in Subchapter V.”
- Spring, et al. v. Davidson and Blok Industries, Inc. (In re Davidson; In re Blok Industries, Inc.; Jointly Administered), Adv. No. 23-3005, Doc. 87, at 15 (Bankr., N.D. Fla., decided February 14, 2025).
Facts
Both Individual and her 100% owned Corporation file voluntary Subchapter V bankruptcy—and the two cases are jointly administered.
Creditors file an adversary proceeding against both Individual and Corporation, seeking a declaration that their debts are not dischargeable under § 523(a), for false representation and actual fraud (§ 523(a)(2)), for fiduciary fraud/embezzlement (§ 523(a)(4)), and for willful and malicious injury (§ 523(a)(6)).
Corporation moves to dismiss the adversary proceeding against it on grounds that § 523(a) exceptions to discharge apply only to individual debtors—not to corporate debtors.
The Bankruptcy Court grants such motion and dismisses the § 523(a) case against Corporation—on grounds that the clear language of § 523(a) makes its discharge exceptions applicable only to individual debtors in Subchapter V (under § 1192(b))—and not to corporate debtors.
What follows is a summary of the Bankruptcy Court’s analysis in reaching its decision.
Statutory Discharge Provisions
Subchapter V’s discharge provisions are set forth in § 1192.
In a non-consensual confirmation of a Subchapter V plan (under § 1191(b)), a debtor gets a discharge at the end of the plan term. But a Subchapter V debtor cannot discharge a debt “of the kind specified in section 523(a).”
§ 523 provides (emphasis added):
- “a discharge under section . . . 1192 . . . does not discharge an individual debtor from any debt . . .” that is enumerated in the 20 categories listed in § 523(a).
Subchapter V’s § 1192 provides (emphasis added):
- “the court shall grant the debtor a discharge of all debts . . . , except any debt— . . . (2) of the kind specified in section 523(a) of this title.”
Split of Authority
Court opinions differ on whether the §523(a) discharge exceptions apply to corporate debtors in Subchapter V.
–Corporations are Included
Courts of Appeals for the Fourth and Fifth Circuits and opinions from the Northern District of Illinois ignore the “individual debtor” limitation in § 523(a) and hold that both individual and corporate debtors are subject to the discharge exceptions of §523(a) in a Subchapter V case—because of the above-quoted § 1192 language.[Fn. 1]
The Fourth Circuit focuses on the § 1192 words “except any debt . . . of the kind specified in § 523(a)” and reasons that the combination of the words “debt” and “of the kind” indicate a Congressional intent to:
- reference only the kinds of debts found in §523(a); and
- write-out the “individual debtor” limitation in 523(a)—because the more specific provision governs over the more general.
Then, the Fifth Circuit follows suit. While noting the “textual awkwardness” involved, the Fifth Circuit adds that:
- the “most natural reading” of the words “debt” and “of the kind” in § 1192 make “both corporate and individual” debtors subject to the § 523(a) discharge exceptions; and
- that’s because § 1192 does not say, “kind of debtor,” and because § 1192, not § 523(a), governs a Subchapter V discharge.
–Corporations are Excluded
Other courts construe the same statutory language differently—i.e., exactly the opposite.
The Ninth Circuit BAP and various bankruptcy courts hold that §523(a) means what it says: that § 523(a) discharge exceptions apply only to individual debtors—even in Subchapter V.[Fn. 2]
These courts find that §1192 incorporates, into Subchapter V, §523(a)’s limited applicability: i.e., to individuals only. They reason that:
- when a statute’s language is plain, the sole function of the courts is to enforce that language—at least where the disposition required by the texts is not absurd;
- courts may look to other sources to determine congressional intent, such as the canons of construction or the statute’s legislative history; and
- effect should be given to all provisions of a statute, so that no part will be inoperative or superfluous, void or insignificant.
The Ninth Circuit BAP declares:
- § 523(a) applies, unambiguously, only to individual debtors—even in Subchapter V; and
- nothing in §1192 eliminates the express “individual” limitation from §523(a) or expands § 523(a) to corporate debtors.
Here’s why:
- opinions of the U.S. Supreme Court declare the following principles:
- “We presume, absent clear indications to the contrary, that Congress did not intend to change preexisting bankruptcy law or practice in adopting or amending the Bankruptcy Code”; and
- the Supreme Court refuses to read the Bankruptcy Code as departing from past bankruptcy practice without a clear indication that Congress intended to do so;
- Congress explicitly included Subchapter V’s discharge provision (§ 1192) in the § 523(a) list of discharge statutes to which §523(a) applies—so, ignoring § 523(a)’s “individual debtor” limitation makes such inclusion surplusage and superfluous (something the U.S. Supreme Court has rejected);
- the preference for a specific provision over a general provision (that both the Fourth and Fifth Circuits rely upon) applies only when statutes cannot be reconciled—that preference cannot apply here because:
- the statutory language can be harmonize by finding that § 1192 “incorporates the types of debts that are nondischargeable . . . [and] limits the scope of nondischargeability to individual debtors”; and
- the U.S. Supreme Court insists that, when two statutes are capable of co-existence, a court’s duty is to harmonize them and to regard each as effective;
- further, excluding corporate debtors from the § 523(a) discharge exceptions is consistent with the purpose and scope of Subchapter V:
- Subchapter V is a part of Chapter 11—not a separate, stand-alone chapter like Chapter 12 or Chapter 13; and
- Congress made an intentional decision, when it enacted Chapter 11, to eliminate exceptions to discharge for corporate debtors based on public policy consideration—and since then, Congress has “strenuously protected” the corporate discharge . . . having limited that discharge only once (by enacting §1141(d)(6)); and
- “the suggestion that Congress incorporated 19 new exceptions to discharge for small corporations in a bill” that was introduced in 2019 and signed into law that same year “seems not only improbable but also contradicts years of bankruptcy law and policy.”
Other bankruptcy court decisions have reached the same conclusion by following the same rationale.[Fn. 3]
Northern Florida Bankruptcy Court’s Conclusion
Here’s how the February 2025 opinion from the Northern Florida Bankruptcy Court’s In re Blok Industries, Inc., concludes on the corporate discharge in Subchapter V issue:
- this Court finds persuasive the reasoning of the Ninth Circuit BAP and similar opinions, holding the exceptions to discharge under §523(a) apply only to individual debtors in Subchapter V;
- such opinions provide the best statutory interpretation of §1192’s incorporation of 523(a), by giving effect to all the statutory language, recognizing the long-standing application of §523(a) to only individual debtors, and comporting with the overall purpose of Subchapter V; and
- so, this Court finds that the exceptions to discharge under §523(a) only apply to individuals in Subchapter V.
Conclusion
Speaking of “persuasive,” that’s what describes the reasoning of the In re Blok Industries, Inc., opinion described above.
I continue to be amazed that court’s follow the Fourth Circuit’s lead on this issue. With all due respect, it seems to me that:
- the In re Blok reasoning fairly and accurately applies all the rules of statutory construction; while
- the Fourth Circuit reasoning starts with a result the court wants to achieve . . . and then works backwards to find a way to get there, doing injustice along the way to the statutory text and to rules of statutory construction.
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Footnote 1. In re Cleary Packaging, LLC, 36 F.4th 509, 517(4th Cir. 2022); Matter of GFS Indus., LLC., 99 F.4th 223 (5th Cir. 2024); and Chi. & Vicinity Laborers’ Dist. Council Pension Plan, et al., v. R & W Clark Constr., Inc., 24 CV 1463, 2024 WL 4789403 (N.D. Ill. Nov. 14, 2024).
Footnote 2. See, e.g., In re Off-Spec Sols., LLC, 651 B.R. 862 (BAP. 9th Cir. 2023); In re 2 Monkey Trading, LLC, 650 B.R. 521 (Bankr. M.D. Fla. 2023); In re Hall, 651 B.R. 62 (Bankr. M.D. Fla. 2023); In re Rtech Fabrications, LLC, 635 B.R. 559 (Bankr. D. Idaho 2021).
Footnote 3. See, e.g., In re Hall, 651 B.R. 62, 68 (Bankr. M.D. Fla. 2023)(“The Court reaches this conclusion primarily because the SBRA 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”); In re 2 Monkey Trading, LLC, 650 B.R. 521, 523 (Bankr. M.D. Fla. 2023), motion to certify appeal granted, No. 6:22-BK04099-TPG, 2023 WL 3947494 (Bankr. M.D. Fla. June 12, 2023)(agreeing with courts holding that §523(a) applies only to individuals, and not to corporations proceeding under Subchapter V).
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