The tide is turning. Bucking the trend in the lower courts, a second bankruptcy judge has held that debts can be nondischargeable as to corporations in Subchapter V of chapter 11.

This time, it’s a prominent bankruptcy judge in Chicago who believes in nondischargeability. She disagreed with another Chicago judge but took sides with the only two circuit courts to decide the question so far.

A creditor filed a complaint contending that a debt owing by the corporate Subchapter V debtor was nondischargeable under Section 523(a)(6). Allegedly, the debtor solicited employees and customers in violation of a noncompetition and nonsolicitation agreement.

To make nondischargeability an issue, the creditor contended that the plan could only be confirmed as a nonconsensual plan. The debtor filed a motion to dismiss the complaint for failure to state a claim, which Bankruptcy Judge Deborah L. Thorne denied in her July 31 opinion.

Sections 1192 and 523(a)

Judge Thorne explained that confirmation of nonconsensual plans is governed by Section 1191(b). On confirmation of a nonconsensual plan, Section 1192 provides that “the court shall grant the debtor a discharge of all debts provided in section 1141(d)(1)(A) of this title . . . except any debt — . . . (2) of the kind specified in section 523(a) of this title.” [Emphasis added.]

Section 523(a) provides that a “discharge under section . . .  1141 . . . does not discharge an individual debtor” from 21 types of debt.

Courts believing there’s no such thing as nondischargeability for Subchapter V debtors focus on the words “individual debtor” in Section 523(a) to conclude that nondischargeability applies only to individuals. Courts holding that debts can be nondischargeable as to corporations focus on “any debt . . . of the kind” in Section 1192.

Section 1192 Doesn’t Refer to the ‘Type of Debtor’

Judge Thorne fell into the nondischargeability camp because, she said, “Section 1192(2) does not refer to the preamble but only to the kinds of debts listed in the section.”

The Seventh Circuit has not taken sides, but Bankruptcy Judge Timothy A. Barnes of Chicago wrote an opinion in February holding that nondischargeability does not apply to a corporate Subchapter V debtor. Chicago & Vicinity Laborers’ District Council Pension Plan v. R&W Clark Construction Inc. (In re R&W Clark Construction Inc.), 656 B.R. 628 (Bankr. N.D. Ill. Feb. 8, 2024). To read ABI’s report on R&W, click here.

Of course, Judge Thorne cited the Fourth and Fifth Circuits, which both held that corporate Subchapter V debtors can be saddled with nondischargeable debts. Cantwell-Cleary Co. v. Cleary Packaging LLC (In re Cleary Packaging LLC), 36 F.4th 509 (4th Cir. June 7, 2022); and Avion Funding LLC v. GFS Industries LLC (In re GFS Industries LLC), 99 F.4th 223 (5th Cir. April 17, 2024). To read ABI’s reports, click here and here.

Judge Thorne found the two circuits to be “persuasive” because “Congress did not add a provision to 1192(2) instructing that the list of nondischargeable debts was limited to only certain types of debtors — entities or individuals.” Instead, what “section 1192(2) says is that discharge is not available for ‘any debt . . . of the kind specified in section 523(a).’” [Emphasis in original.]

Judge Thorne deduced that “[n]othing about the use of the phrase ‘type of debt’ suggests that the court need consider the type of debtor.” She agreed with the Fourth Circuit that “Congress used this provision as a ‘shorthand to avoid listing all 21 types of debts.’”

The language in Section 1192(2), Judge Thorne said, “closely echoes” Section 1228(a), which has been interpreted to mean that corporate family farmers can have nondischargeable debts.

Judge Thorne conceded that eight bankruptcy courts believe there is no nondischargeability. The eight include the two bankruptcy courts reversed by their circuits.

Also in Judge Thorne’s camp is Ivanov v. Van’s Aircraft Inc. (In re Van’s Aircraft Inc.), 24-06011, 2024 BL 200305 (Bankr. D. Ore. June 11, 2024). To read ABI’s story on Van’s, click here. Notably, the bankruptcy judge in Oregon disagreed with the conclusion reached on the identical topic by the Ninth Circuit Bankruptcy Appellate Panel. Evidently, the parties in the BAP settled because the appeal to the Ninth Circuit was withdrawn. Lafferty v. Off-Spec Sols., LLC (In re Off-Spec Sols., LLC), 651 B.R. 862 (B.A.P. 9th Cir. 2023), appeal dismissed per stipulation, 23-60034, 2023 WL 9291577 (9th Cir. Nov. 12, 2023). To read ABI’s report on the BAP opinion, click here.

Judge Thorne denied the debtor’s motion to dismiss, saying it “is unnecessary to resort to the preamble of section 523(a) when section 1192(2) clearly states that the discharge is limited by the kinds of debts that are of the ‘kind specified in section 523(a).’”