Do § 523(a) Discharge Exceptions Apply To Corporations In Subchapter V? (Better Than Logs & Satellite Restaurants)

An individual — not an entity (photo by Marilyn Swanson)

By: Donald L Swanson

Do § 523(a) discharge exceptions apply to non-individual debtors in Subchapter V?

That question has been resolved, with opposite results, in two recent opinions by two bankruptcy courts.

What follows is a summary of operative statutes and the two opinions.

Operative Statutes

  • 11 U.S.C. § 1192 is the Subchapter V discharge statute.  It provides for a discharge of “all debts . . . , except any debt— . . . (2) of the kind specified in section 523(a) of this title.”
  • 11 U.S.C. § 523(a) provides that a discharge “under section . . . 1192 . . . does not discharge an individual debtor from any debt— . . . “ (emphasis added). 

June 2021 Opinion

A recent opinion on the subject is Concrete Log Systems, Inc. v. Better Than Logs, Inc. (In re Better Than Logs, Inc.), Adv. No. 20-02013 in the Montana Bankruptcy Court (decided June 11, 2021—Doc. 36).

The adversary proceeding is against a Subchapter V corporate debtor: Better Than Logs, Inc.  In this adversary:

  • Plaintiff is suing the corporate Debtor for a declaration that its two claims cannot be discharged under § 523(a)(6) because of “willful and malicious injury”;
  • Plaintiff is asserting two claims against the corporate Debtor—Count I is for a liquidated amount of $179,116, consisting of damages identified in a pre-bankruptcy judgment, and Count II is for the same types of damages arising thereafter; and
  • Plaintiff files a motion for summary judgment on its two counts.

The Bankruptcy Court’s June 11, 2021, opinion:

  • grants summary judgment on Count I—declaring that this liquidated claim against the corporate Debtor cannot be discharged because of § 523(a)(6); and
  • grants partial summary judgment on Count II—also denying the corporate Debtor a discharge under § 523(a)(6) but finding that a fact dispute exists on the amount of the Count II damages.

The Bankruptcy Court does not mention or address the question of whether a claim under § 523(a) applies only to individual debtors.

Prior Opinion

A prior and contrasting opinion is Gaske, et al. v. Satellite Restaurants Inc. (In re Satellite Restaurants Inc.), Adv. No. 21-00012 in the Maryland Bankruptcy Court (decided March 19, 2021—Doc. 21).

This adversary proceeding is also against a Subchapter V corporate debtor, Satellite Restaurants Inc.  In this adversary:

  • Plaintiffs are suing the corporate Debtor for a denial of discharge under § 523(a)(2)(A) (for obtaining money by “false pretenses”) and under § 523(a)(6) (for “willful and malicious injury”); and
  • The corporate Debtor moves to dismiss the Complaint, alleging that discharge exceptions under § 523(a) apply only to individual debtors and cannot apply to a corporate debtor—based on the plain language of § 523(a).

The Bankruptcy Court concludes:

  • This issue is “of first impression” in the Maryland Court;
  • § 523(a) “does not apply to the Defendant because it is a non-individual debtor”; and
  • The Complaint is, therefore, dismissed.

Here’s the Bankruptcy Court’s rationale.

  1. The analysis must begin with a review of the two relevant statutes – § 1192 (the discharge provisions for Subchapter V) and § 523 (a discharge statute of general applicability);
  2. Plaintiffs focus on the § 1192 phrase, “debt of the kind specified in section 523(a),” and argue that any debt described in § 523(a) may be non-dischargeable in Subchapter V, regardless of whether the debtor is an individual or an entity;
  3. The corporate Debtor/Defendant, on the other hand, focuses on the plain language of § 523(a) and argues that, (i) it has not previously been applied to non-individual debtors, (ii) such history goes back long before enactment of Subchapter V, and (iii) Subchapter V did not overrule any of that history;
  4. In deciding this issue, the Court and the parties were unable to find any case law on point, so the Court starts with language of the statute itself and gives each word meaning;
  5. The Court finds, (i) the language of § 523(a) clearly and unambiguously applies only to individual debtors, and (ii) the § 1192 reference to § 523(a) shows that Congress intended to continue the individual-only application in Subchapter V;
  6. Many other courts (in cases decided before Subchapter V existed) have held that a corporate debtor is not an “individual debtor” under § 523(a)—such a position is even described as “well-settled law”;
  7. Plaintiffs point to two Chapter 12 cases applying § 523(a) to corporate debtors—however, the Bankruptcy Court notes, (i) one of those cases emphasized that its Chapter 12 ruling does not apply in Chapter 11 cases, (ii) the second case is not controlling here, and (iii) another court has found Chapter 12 discharge rules to be an inapplicable and a non-persuasive analogy in Chapter 11;
  8. Nothing in the legislative history of § 1192 suggests that Congress intended to make § 523(a) discharge exceptions applicable to non-individual debtors; and
  9. In four publications, commentators persuasively conclude that § 523(a) applies only to non-individual Subchapter V debtors. 

Conclusion

The question is whether the “individual debtor” limitation, in § 523(a) for discharge exceptions, applies in Subchapter V as well.

One of the two opinions described above, (i) applies § 523(a) discharge limitations to a corporate debtor in Subchapter V, but (ii) does not specifically address the question.

The other of the two opinions, (i) carefully examines the question, and (ii) refuses to apply § 523(a) discharge limitations to a corporate debtor in Subchapter V.

It will be interesting to see how other bankruptcy courts address the same question.

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