The first court to grapple with the new issue, Bankruptcy Judge Maria Ellena Chavez-Ruark of Greenbelt, Md., decided that corporate debtors in subchapter V of chapter 11 may discharge debts that would not be discharged under Section 523(a).
In other words, according to Judge Ruark, only individual debtors in subchapter V are unable to discharge debts that are found to be excepted from discharge under Section 523(a).
Before bankruptcy, more than a dozen former employees filed a wages and hours suit in district court against a restaurant under state law and the federal Fair Labor Standards Act. The suit was automatically stayed when the restaurant corporation filed a petition in October under subchapter V of chapter 11.
The employees sued the debtor in bankruptcy court, claiming that the wages and hours claims were nondischargeable under Section 532(a)(2)(A) and (a)(6), as debts obtained by false representations, false pretenses or actual fraud, or resulting from a willful and malicious injury.
The debtor proposed a cramdown plan. If the plan had been consensual, Section 1191(a) meant that the debtor’s discharge would have arisen under Section 1141(d). Because the plan called for cramdown, the discharge would be governed by Section 1192.
The two governing statutes therefore were Sections 1192 and 523.
Section 1192 gives the debtor “a discharge of all debts provided in section 1141(d)(1)(A) of this title, and all other debts allowed under section 503 of this title and provided for in the plan, except any debt . . . of the kind specified in section 523(a) of this title.”
With an amendment made alongside the adoption of subchapter V, Section 523(a) provides that a “discharge under section . . . 1192 . . . does not discharge an individual debtor from any debt” defined in 19 paragraphs that followed.
The debtor filed a motion to dismiss, contending that the exceptions to discharge apply only to an individual debtor in subchapter V. That is to say, the debtor took the position that corporate debtors in subchapter V receive the same broad discharge as larger corporate debtors in traditional chapter 11 cases.
The right of a corporate debtor to discharge nondischargeable debts in subchapter V would have been clearer were the debtor confirming a consensual plan. Sections 1141(d)(1) and (d)(3) together say that corporate debtors receive discharges of nondischargeable debts while individual debtors do not.
The employees latched onto the differences between Sections 1141 and 1192 to argue that any debt excepted from discharge in Section 523(a) is not discharged in subchapter V, regardless of whether the debtor is an individual or a corporation.
The Judge Ruark granted the debtor’s motion to dismiss in an opinion on March 19. It was her first published opinion since ascending to the bench four months ago.
Judge Ruark found herself bound by the plain language of the statutes. Section 523(a), she said, “is clear and unambiguous that it applies only to individual debtors.” In light of the reference to Section 1192 in Section 523(a), she said that “the only reasonable meaning is that Congress intended to continue to limit application of the Section 523(a) exceptions in a Subchapter V case to individuals.”
Judge Ruark held that “the plain language of Section 523(a) is unequivocal and confirms that the exceptions to a debtor’s discharge, including a discharge under Section 1192, apply only to an individual.”
Judge Ruark conceded that two chapter 12 cases make Section 523(a) exceptions to discharge applicable to corporate farm debtors, but she cited two courts that had refused to extend those two cases to chapter 11.
The Collier and Norton treatises both say that Section 523(a) exceptions to discharge apply to corporate debtors in subchapter V. Judge Ruark declined to follow the treatises, finding them “unpersuasive because they fail to examine the plain language of the statute and instead state unsupported conclusions.”
On the other hand, Judge Ruark cited Bankruptcy Judge Paul W. Bonapfel, who said in his treatise that Section 523(a) applies only to individuals in subchapter V.
Judge Ruark found no cause to rely on legislative history, because the statute was clear. However, she found “[n]othing in the legislative history for Section 1192 [to] support[] the conclusion that Congress intended to expand the application of Section 523(a) to a non-individual.” Had Congress intended to make “a dramatic change in existing Chapter 11 law,” she said that the “House Report most certainly would have addressed it.”
The first court to grapple with the new issue, Bankruptcy Judge Maria Ellena Chavez-Ruark of Greenbelt, Md., decided that corporate debtors in subchapter V of chapter 11 may discharge debts that would not be discharged under Section 523(a).
In other words, according to Judge Ruark, only individual debtors in subchapter V are unable to discharge debts that are found to be excepted from discharge under Section 523(a).
Before bankruptcy, more than a dozen former employees filed a wages and hours suit in district court against a restaurant under state law and the federal Fair Labor Standards Act. The suit was automatically stayed when the restaurant corporation filed a petition in October under subchapter V of chapter 11.
The employees sued the debtor in bankruptcy court, claiming that the wages and hours claims were nondischargeable under Section 532(a)(2)(A) and (a)(6), as debts obtained by false representations, false pretenses or actual fraud, or resulting from a willful and malicious injury.