By: Donald L Swanson

“A discharge under section 727, 1141, 1192 [Subchapter V], 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).

Bankruptcy courts applying the foregoing language in the early days of Subchapter V found such language to be clear and unambiguous: that only “an individual debtor” is affected.

In re Cleary

But then came the Fourth Circuit’s In re Cleary opinion[fn. 1], declaring that the “an individual debtor” limitation in § 523(a) does not mean what it says—that it means exactly the opposite of what it says.  In doing so, the Fourth Circuit goes through a convoluted grammatical analysis to get the result it wanted (I call this “creative grammaring”).

And the In re Cleary opinion is then followed by opinions from other courts that find it persuasive (including In re Premier Glass Services, LLC[fn. 2]).

What follows are the Fourth Circuit’s four reasons why it reached the result it did—with a comparison to the rationale given in the In re Premier Glass Services opinion on the same four reasons.

First Reason: Language clarity—or lack thereof 

Fourth Circuit Opinion.  The foundational / starting point for the Fourth Circuit’s rationale is this: the statutory language involved has “a certain lack of clarity” (36 F.4th at 513), and “the relationship between § 623(a) and § 1192 might be a bit discordant – or perhaps more accurately, clumsy” (id at 517).

Premier Opinion.  By contrast on the same point, and despite finding In re Cleary “persuasive,” the Bankruptcy Court in In re Premier declares:

• “This court does not find that there is any ambiguity but that the language of the statute is clear and straightforward” (at 5);
• “The words of Subchapter V are clear and therefore there is no need to revert to policy issues or speculation as to what Congress must have meant” (at 6); and
• “Congress clearly stated that in a nonconsensual plan the claims listed in section 523(a) are not dischargeable no matter whether the debtor is an individual or entity” (at 8).

 So . . . we go from unclear and discordant and clumsy language, according to the Fourth Circuit’s “persuasive” opinion, to the same language being clear and unambiguous in the Premier opinion.

Second Reason—Elimination of absolute priority rule

Fourth Circuit Opinion.  The next rationale for the Fourth Circuit’s “persuasive” opinion is this speculation about a trade-off policy:

• “Congress deliberately altered the general provisions of traditional Chapter 11 proceedings by, among other things, eliminating the absolute priority rule and limiting the applicability of § 1141(d) to Subchapter V proceedings” (36 F.4th at 517).

Here are two observations about such a speculative trade-off idea:

1. The Fourth Circuit offered no citation or other foundation for such a speculative trade-off policy.  And the reality is that such speculation is totally unfounded and false.  Here’s a link to an article explaining why and how it is unfounded and false.
2. Such speculative trade-off policy is a major part (if not the central part) of the Fourth Circuit’s rationale, comprising nearly all of pages 514 and 517 of the Fourth Circuit’s four pages of rationale in its In re Cleary opinion.   

Premier Opinion.  By contrast, the In re Premier opinion dismisses such speculative trade-off policy of the Fourth Circuit, in a footnote 3, (again, despite finding the In re Cleary opinion to be “persuasive”) like this:

• “3 While the Fourth Circuit provides additional speculative policy as to why Congress provided the list of nondischargeable claims—suggesting this was because the absolute priority rule was eliminated and this promotes ‘fairness and equity’, this policy consideration is not necessary.”

Third Reason—Chapter 12

Fourth Circuit & Premier Opinions. Both opinions agree on this point: the use of language in Subchapter V that is “conceptually similar” (Fourth Circuit) or “nearly identical” (In re Premier) [fn. 3] to language in Chapter 12 means that Subchapter V must be construed in the same way as Chapter 12.

Here is one of the fallacies in that:

• Chapter 12 is an outgrowth of Chapter 13, not an outgrowth of Chapter 11—in fact, Chapter 12 was intended to undo the terrible results that Chapter 11 was foisting upon farmers;
• discharge exception rules in standard Chapter 11 apply only to individuals (with one specific exception in § 1141(d)(6)(A) that explicitly applies specified § 523(a) discharge exceptions to corporations);
• Subchapter V statutes are located in the Bankruptcy Code within and as a subpart of Chapter 11 (not as a stand-alone provision like Chapter 12) in which § 523(a) has always been construed as applying only to individuals (with the single statutory exception in § 1141(d)(6)(A) that Congress explicitly created); and
• you’d think that, if Congress wanted to change the long-standing rule in standard Chapter 11, for Subchapter V, it would have done so with greater clarity (and not with unclear or discordant or clumsy language) . . . much like it did in making specified § 523(a) discharge exceptions applicable to corporations in § 1141(d)(6)(A).  

Conclusion

Early case law on the discharge of a non-individual debtor in Subchapter V found statutory language to be clear and unequivocal in applying § 523(a) discharge exceptions only to “an individual debtor.”

The Fourth Circuit came along and used a speculative (and false) idea about a Congressional trade-off intent to support the use of creative grammaring as the basis for rejecting the previously-consistent case law.

Then the In re Premier opinion reaches the same result as the Fourth Circuit by finding it “persuasive,” while (i) rejecting the Fourth Circuit’s speculative (and false) idea about a Congressional trade-off policy, and (ii) rejecting the Fourth Circuit’s view that the statutory language involved is unclear and discordant and clumsy—in favor of a finding that the same statutory language is clear and unambiguious.

Sheesh!!!

—————-

Footnote 1: The opinion is Cantwell-Cleary C. v. Cleary Packaging, LLC (In re Cleary Packaging, LLC), 36 F.4th 509 (4th Cir. 2022).

Footnote 2:  The opinion is Christopher Glass & Aluminum, Inc. v. Permier Glass Services, LLC (In re Premier Glass Services, LLC), Adv.No. 24-00096 in the Northern Illinois Bankruptcy Court (decided July 31, 2024).

Footnote 3: Notably, the Chapter 12 discharge provision referenced here is different from the corresponding Subchapter discharge provision like this (emphases are added): (i) “of the kind specified in section 523(a)” [from Subchapter V’s § 1192(2)], and (ii) “of a kind specified in section 523(a)” [from Chapter 12’s 1228(a)(2)]. Surely, the use of the definite article “the” in Subchapter V and of the indefinite article “a” in Chapter 12 should be not-so-easily dismissed as by saying they are “conceptually similar” or “nearly identical”? For starters, “of the kind” focuses on all the limitations in § 523(a) (including the “an individual debtor” limitation) to a greater degree than does “of a kind.”

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.