Although the Fourth and Fifth Circuits have held that corporations in Subchapter V of chapter 11 can be saddled with nondischargeable debts in nonconsensual plans, Bankruptcy Judge Jerry C. Oldshue, Jr., sitting in Pensacola, Fla., swam against the tide by following the Ninth Circuit Bankruptcy Appellate Panel (BAP).

In his February 14 opinion, Judge Oldshue concluded that banning nondischargeability in Subchapter V for corporations “provide[s] 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 the [Small Business Reorganization Act].”

Companion Suits in State Court and Bankruptcy Court

Several creditors had sued a corporation in state court. Three years later, the corporation filed a petition under Subchapter V of chapter 11. The debtor removed the suit from state court, but Judge Oldshue had abstained because the lawsuit was far advanced, state law issues predominated, the claims were noncore, and a jury trial had been demanded.

In chapter 11, the creditors who had sued in state court filed a complaint seeking a declaration that the debt was nondischargeable under Section 523(a)(2), (4) and (6). The debtor responded with a motion to dismiss.

Sections 1192 and 523(a)

The outcome was controlled by Sections 1192 and 523(a). Applicable to nonconsensual plans, 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 19 types of debt. [Emphasis added.]

Judge Oldshue observed that the “juxtaposition of §1192(2) and the reference to ‘individual debtor’ in §523(a)’s preamble has resulted in differing opinions on the issue of whether the §523 exceptions to discharge apply to corporate debtors.” He cited the Fourth and Fifth Circuits and a district court in Illinois for holding “that both individual and corporate debtors covered by §1192 are subject to the discharge exceptions of §523(a).” Cantwell-Cleary Co. v. Cleary Packaging LLC (In re Cleary Packaging LLC), 36 F.4th 509 (4th Cir. June 7, 2022). To read ABI’s report, click here. 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 report, click here. 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). To read ABI’s report, click here.

“[T]he Fourth and the Fifth Circuits,” Judge Oldshue said, “have disregarded the reference to ‘individual debtor’ in §523’s preamble and construed the discharge exceptions to apply to both individual and corporate debtors under §1192(2).” The issue, he said, “is not well-settled as other courts have construed the same statutory provisions differently.”

Judge Oldshue cited the Ninth Circuit BAP and “other bankruptcy courts, including those in the Eleventh Circuit, [that] have held that the §523 non-dischargeability provisions apply only to individual Subchapter V debtors.” See, e.g., In re Off-Spec Sols., LLC, 651 B.R. 862 (B.A.P. 9th Cir. 2023); In re Hall, 651 B.R. 62 (Bankr. M.D. Fla. 2023). To read ABI’s reports, click here and here.

“These courts,” Judge Oldshue said, “have found that the better interpretation of §1192 is that it incorporates §523(a)’s limited applicability to individuals.” For instance, he said that the Ninth Circuit BAP decided that “adding §1192 to the list of discharge provisions to which [Section 523] applies, extracting only the list of nondischargeable debts from §523(a) without its limitation to individuals, would render the amendment surplusage.”

Judge Oldshue found “the reasoning of the Ninth Circuit BAP and the bankruptcy courts in the Eleventh Circuit, holding the exceptions to discharge under §523(a) apply only to individual debtors under §1192(2), convincing. Such decisions 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 the SBRA.”

Concluding that the exceptions to discharge in Section 523(a) “only apply to individuals in Subchapter V,” Judge Oldshue dismissed the creditors’ nondischargeability complaint for failure to state a claim.

Observations

The question is a classic case for application of rules of statutory interpretation, worthy of review by the Supreme Court. Perhaps Judge Oldshue’s case will go up on appeal, giving the Eleventh Circuit an opportunity to create a circuit split.