Are the non-discharge provisions of Section 523 (a) extended to debtor companies in Chapter 11 of Subchapter V cases? | Nelson Mullins Riley & Scarborough LLP

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An emerging issue facing bankruptcy courts in subchapter V – small business reorganization cases[1] – is whether the 19 categories of debt listed in article 523 (a) of the Bankruptcy Code are likely to be released as part of a forced confirmation of the reorganization plan of a debtor company.

With respect to the legislative text, Article 1192 provides, in the relevant part, that if a debtor confirms a plan under the suppression provision of Article 1191 (b), then the Alabama bankruptcy laws “grants to the debtor a release “[2] certain debts “other than any debt … of a type specified in section 523 (a)”. Article 523 (a) in turn provides, in the relevant part, that “[a] discharge under section… 1192… of this title does not release an individual debtor from any debt – ”of a type specified in section 523 (a) (1) – (19).

The question is whether the limitation in Section 523 (a) – that only individual debtors may have non-dischargeable debts – applies to article 1192, which specifies exceptions to discharge as kind of debt, but does not expressly limit the non-discharge to a type of debtor. In other words, does a debtor business automatically receive an Section 523 (a) debt discharge under Section 1192?

The answer to this question can have a major impact in Chapter 11 cases and whether an eligible small business debtor will make a Sub-Chapter V election. Whether Section 523 (a) debts are excluded from release under of Section 1192, then a debtor may choose to proceed with a traditional Chapter 11 reorganization (where the effect of confirming the plan would be to release most of the[3] debts in section 523 (a)), if the debtor would otherwise be the subject of a claim for intentional or malicious harm or other claim that falls within the types of debt specified in section 523 (a).[4] The determination may also affect the feasibility of a debtor’s plan,[5] as a debtor, he will have to demonstrate that confirmation is not likely to be followed by liquidation or the need for further financial reorganization to confirm a plan based on unpaid debt. In addition, the cost of litigation regarding the non-discharge request can be prohibitive for a small business debtor.

As of the date of this blog post, only three Alabama bankruptcy laws cases have addressed this issue in the Subchapter V cases: In re Satellite Restaurants Inc. Crabcake Factory USA, 626 BR 871 (Bankr. D. Md. 2021), Regarding Cleary Packaging LLC, 630 BR 466 (Bankr. D. Md. 2021), and Regarding Rtech Fabrications, LLC, 2021 WL 4204800 (Bankr. D. Idaho Sept. 15, 2021), all of whom have held that the section 523 (a) discharge exceptions apply only to individual debtors in subchapter V cases. In each case, the bankruptcy courts determined that the plain language of Sections 1192 and 523 (a) controlled the outcome due to the restriction in Section 523 (a) that it only applied to individual debtors. and the inclusion in section 523 (a) of section 1192 (i.e. “[a] discharge under article… 1192… of this title does not discharge an individual debtor… ”).[6] The Cleary LLC packaging The decision is currently under direct appeal to the Fourth District Court of Appeal.

Creditors seeking to extend the non-discharge provisions of Section 523 (a) to small businesses in subchapter V cases have advanced two earlier cases in chapter 12 of the SBRA: Southwest Ga. Farm Credit, ACA v. Breezy Ridge Farms, Inc. (In re Breezy Ridge Farms, Inc.), 2009 WL 1514671 (Bankr. MD Ga. May 29, 2009) and New Venture P’ship v. JRB Consol. (Regarding JRB Consol., Inc.), 188 BR 373 (Bankr. WD Tex. 1995).[7] These cases argue that the exceptions in Section 523 (a) apply yourself discharge of non-individual debtors of Chapter 12 because the discharge provision of Chapter 12 of Article 1228 (a) excludes discharge debts of a type specified in Article 523 (a) without distinction between natural persons and entities. The Breezy Ridge Farms undertook an analysis of the types of landfills provided for in Chapters 7, 12, 11 and 13 to demonstrate how Congress has “modified[ed] the applicability of § 523 (a) ”depending on the discharge provision. 2009 WL 1514671 at * 1-2. As an example, the court explained that in Chapter 11 cases under Section 1141 (d) (6) (A), “[c]orporations… shall not be released from any debt “of a type specified in paragraph (2) (A) or (2) (B) of article 523 (a)” ”and“ ”[t]Thus, in Chapter 11, Congress applied parts of § 523 (a) to corporate debtors, even though such debtors are excluded from § 523 (a) by its terms. Identifier. * 2. The Breezy Ridge Farms the court went on to explain:

This reading of the relevant statutes adheres to the principle that “[p]provisions of a law are read to be as consistent as possible. If the two provisions cannot be harmonized, then the more specific will prevail over the general. Universal am. Mortgage Co. v. Bateman (In re Bateman), 331 F.3d 821, 825 (11th Cir. 2003) (citations omitted). In this case, § 1228 and § 523 (a) may be in harmony. Although § 523 (a) only applies to individuals, Congress has used it as a shorthand to define the scope of a Chapter 12 discharge for corporations as well as individuals. Thus, § 523 (a) should be relied on to determine whether a debt is included in the discharge, even when the debtor is a corporation. Even if the two provisions could not be harmonized, § 1228 would prevail because it is more specific, applicable only to Chapter 12, than § 523 (a), which applies regardless of the chapter.

Identifier. at 2 hours. The bankruptcy court of Satellite restaurants versus Breezy Ridge Farms explaining that “Section 1192 must be read in the context of Chapter 11 cases, not Chapter 12 cases, and the plain language of Article 523 (a) rejects any argument that its exceptions to release apply to non-individual debtors ”. 626 BR at 877. [8]

For now, it remains to be seen how this issue will be decided by the courts. The lawyers of the debtor and the creditor and the trustees of subchapter V wait in advance.


[1] The Small Business Reorganization Act 2019 (the “SBRA”), which came into effect on February 19, 2020, created Subchapter V of Chapter 11, reforming the ability of small business debtors to reorganize their financial affairs through a new reorganization process. Not to be confused with a Section 101 (51 (C)) “Small Business Business Case”.

[2] The discharge is for “all debts provided for in article 1141 (d) (1) (A) of this title [title 11 of the United States Code, the Bankruptcy Code] and all other debts permitted under article 503 of this title, with the exception of any debt on which the last payment is due after the first 3 years of the plan and provided for in the plan, with the exception of any debt – (1) on which the last payment is due after the first 3 years of the plan, or any other period not exceeding 5 years fixed by the court; or (2) of the type specified in section 523 (a) of this title. 11 USC § 1192 (Added Pub. L. 116-54, § 2 (a), 23 Aug 2019, 133 Stat. 1083).

[3] See 11 USC § 1141 (d) (6) (not to discharge a debtor that is a corporation from any debt (A) of a type specified in section 523 (a) (2) (A) or (2) ( B) which is owed to a national government unit or owed to a person as a result of an action brought under subchapter III of chapter 37 of title 31 or (B) for tax or customs duty in respect of from which the debtor made a fraudulent statement or a deliberate attempt to escape)

[4] The types of debt covered by section 523 (a) include certain tax and tax-related debts (section 523 (a) (1), (7), (14) and (14A)), debts for sums obtained by actual fraud. (article 523 (a) (2)), debts for fraud or embezzlement by acting in a fiduciary capacity, embezzlement or theft (article 523 (a) (4)), debts incurred for intentional and malicious harm by the debtor to a creditor or his or her property (section 523 (a) (6)), debts for violation of securities laws and securities fraud (section 523 (a) (19). section 523 (c) and bankruptcy rule 4007 (c), which, if applicable to a debtor business in a Subchapter V case, requires an interested party to file a complaint to determine payment of a debt under section 523 (a) (2), (4) or (6) no later than 60 days after the first date fixed for the meeting of creditors.

[5] Section 1129 (a) (11), applicable under Section 1191 (b), requires the bankruptcy court to confirm a plan only if it finds that “[c]Confirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is not proposed in the plan.

[6] The courts have relied on the canon of statutory interpretation that every word of a law must have effect. The courts conclude that the necessary analysis ends with the plain language of the laws. They also provide additional analysis of the pre-SBRA application of Section 523 (a) and the historical background (that corporate Chapter 11 debtors were not previously excluded from the Section 523 (a) debt discharge. )) and the legislative history of the SBRA (which did not seem to indicate whether Section 523 (a) would be extended to corporate debtors in subchapter V cases).

[7] The discharge provision of Chapter 12 of Article 1228 (a) uses the same words that appear in the discharge provision of Subchapter V of Article 1192 (i.e. specified in Article 523 (a) … ”), And that section 523 (a) refers to both 1192 and 1228 (a) in the same way (ie“ A discharge under section… 1192…[and section] 1228 (a)… of this title does not release an individual debtor from all debt… ”).

[8] The Satellite restaurants court also noted that a bankruptcy court of United States v. Hawker Beechcraft, Inc. (In re Hawker Beechcraft, Inc.), 515 BR 416, 430-31 (SDNY 2014) considered JRB consolidated and Breeze Ridge Farms and did not extend these holdings and that he agreed with the Hawker beechcraft analysis. “The United States District Court for the Southern District of New York considered the two cases to decide whether Section 523 (c) applies to all debtors, not just individual debtors, versus the traditional Chapter 11 discharge under Article 1141 of the Bankruptcy Code. ” Identifier. “The court concluded that the lack of distinction in Chapter 12 between an individual debtor and a debtor company, combined with the narrow type of company that can be a debtor in Chapter 12, makes any analogy between the discharge provisions of Chapter 12 in Article 1228 and Chapter 11 discharge provisions under Article 1141 are inappropriate. ” Identifier. Note, however, that Hawker beechcraft preceded the SBRA and the SBRA in Section 1181 rendered inapplicable other sections of the Bankruptcy Code and provided a special rule for release, providing that if a plan is confirmed under Section 1191 (b) , then section 1141 (d) will not apply, except as provided in section 1192.

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