Less than a month after Bankruptcy Judge Jerry C. Oldshue, Jr., decided that nondischargeability isn’t a “thing” for corporations in Subchapter V of chapter 11, Bankruptcy Judge Thomas B. McNamara of Denver took the opposite tack, sided with the Fourth and Fifth Circuits, and held that corporate debtors in Subchapter V can have nondischargeable debts when they confirm cramdown plans under Section 1191(b).

The corporate debtor filed a petition under Subchapter V and was preparing to confirm a cramdown plan under Section 1191(b) because a class of creditors had rejected the plan. Adding to the debtor’s problems, a creditor with a $5.5 million claim filed a complaint alleging that the debt was nondischargeable under Section 523(a)(6) as arising from willful and malicious injury.

Judge McNamara denied the debtor’s motion to dismiss the complaint for failure to state a claim under Rule 12(b)(6). His March 17 opinion is a meticulous survey of all authorities coming down both ways on nondischargeability in Subchapter V.

The Split

Judge McNamara recognized the “split of legal authority regarding whether the Section 523(a) nondischargeability provisions (such as Section 523(a)(6)) apply to corporate debtors, including limited liability companies, in Subchapter V cases where the proposed reorganization is nonconsensual.”

Disposition of the debtor’s motion to dismiss the nondischargeability complaint 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.]

As Judge McNamara put it, the “rub” arises from Section 523(a), which provides that a “discharge under section . . . 1141 . . . does not discharge an individual debtor” from 19 types of debt. [Emphasis added.]

For most courts, the question is whether the words “individual debtor” in the introductory phrase in Section 523(a) carry over onto Section 1192, which imposes nondischargeability for debtors “of the kind” specified in Section 523(a).

Citing the decision by Judge Oldshue as an example, Judge McNamara said that “most bankruptcy courts construing Sections 1192(2) and 523(a) have concluded — based mainly on the preamble to Section 523(a) as well as policy considerations — that the 20 categories (and subparts) of nondischargeable debt under Section 523(a) apply only to individual Subchapter V debtors.” He also cited Lafferty v. Off-Spec Sols. LLC (In re Off-Spec Sols. LLC), 651 B.R. 862 (B.A.P. 9th Cir. 2023), which, so far, is the only appellate court to ban nondischargeability for corporate Subchapter V debtors. To read ABI’s report on Off-Spec, click here. To read Judge Oldshue’s decision, Spring v. Davidson (In re Davidson), 2025 WL 511226 (Bankr. N.D. Fla. Feb. 14, 2025), click here.

Apart from Off-Spec, Judge McNamara said that “the analysis used by most bankruptcy courts has not fared well on appeal.” Citing the Fourth and Fifth Circuits as the only courts of appeals to confront the question, he said that both held, “as a matter of statutory interpretation, that the discharge of both individual and corporate Subchapter V debtors under Section 1192(2) is subject to the discharge limitations contained in the Section 523(a) categories.” See Avion Funding v. GFS Indus., LLC (In re GFS Indus. LLC), 99 F.4th 223 (5th Cir. 2024); and Cantwell Cleary Co. Inc. v. Cleary Packaging, LLC (In re Cleary Packaging LLC), 36 F.4th 509, 517 (4th Cir. 2022). To read ABI’s reports, click here and here.

Judge McNamara also cited a district judge in Chicago who upheld the bankruptcy court by deciding that corporate debtors in Subchapter V of chapter 11 can be saddled with nondischargeable debts. Chicago & Vicinity Laborers’ Dist. Council Pension Plan v. R&W Clark Constr. Inc. (In re R&W Clark Constr. Inc.), 2024 WL 4789403 (N.D. Ill. Nov. 14, 2024). To read ABI’s report, click here.

The Circuit’s Logic Is ‘Persuasive’

“With due respect to the various Bankruptcy Courts who have ruled otherwise,” Judge McNamara found “the traditional statutory analysis employed by the Fourth Circuit Court of Appeals . . . and the Fifth Circuit Court of Appeals . . . far more compelling and persuasive.

“[W]hile the Off-Spec Solutions decision is well-written and makes some important points,” Judge McNamara “reviewed the arguments of the parties and the case law [and found] the analysis and determination of the Cleary Packaging and GFS Industries courts to be far more compelling and persuasive than that of the Off-Spec Solutions court.”

Arriving “at the exact same place as the Fourth and Fifth Circuits,” Judge McNamara “endorse[d] those decisions” and denied the debtor’s motion to dismiss.