Subchapter V Discharge And § 523(a): A Footnote 2 Problem (Cantwell v. Cleary)

By: Donald L Swanson

“2 There is one inconsequential difference — § 1228(a) refers to debt ‘of a kind specified,’ while § 1192(2) refers to debt ‘of the kind specified.’” [Fn. 1]

This “inconsequential difference” quotation, from footnote 2 in the Fourth Circuit’s Cantwell v. Cleary opinion, is on the application of § 523 discharge exceptions to corporations and LLCs. The “inconsequential difference” quote, is both:

• unexplained; and  
• outcome determinative.

It is also problematic.  I’ll try to explain.

Opinion

Fourth Circuit’s Cantwell v. Cleary opinion:

• reverses a Maryland Bankruptcy Court opinion; and
• declares that an LLC debtor in Subchapter V can be denied a discharge under § 523(a), even though § 523(a) applies only to “individual” debtors.

Background

–Facts

Cleary Packaging, LLC:

• is not an individual;
• is subject to a $4.7 million judgment that would be non-dischargeable for an individual under § 523; and
• is a debtor in Subchapter V.

–Statutes

11 U.S.C. § 532(a) identifies a host of exceptions to discharge and specifies that each applies only to “an individual debtor.”[Fn. 1]

11 U.S.C. § 1192 is Subchapter V’s discharge provision.  It incorporates § 523(a) exceptions to discharge as follows (emphasis added):

• “the court shall grant the debtor a discharge of all debts . . . , except any debt— . . . (2) of the kind specified in section 523(a) of this title.”

Footnote 2

The Fourth Circuit’s footnote 2 identifies a one-word difference in two related statutes, and describes such difference as “inconsequential.”  The difference is this (emphasis added):

• § 1228(a) says “of a kind specified”; and
• § 1192(2) says “of the kind specified.”

The footnote’s context is a discussion on similarities between Chapter 12 and Subchapter V, that goes like this:

• Subchapter V is conceptually similar to Chapter 12;
• § 1228(a) excepts from discharge any debt “of a kind specified in section 523(a)”;
• courts construe § 1228(a) and its § 523 discharge exception as applying to both individual and corporate debtors;
• such § 1228(a) language is virtually identical to § 1192(2)’s “of the kind specified in section 523(a)”; and
• § 523(a) specifically references discharges under both § 1192 and § 1228(a).

False Justification

To justify ignoring § 523(a)’s “individual debtor” phrase, the Fourth Circuit rejects the “a” and “the’ difference between § 1228 and § 1192 by declaring in Cantwell v. Cleary:

• “To give different interpretations to the same language in the same statute would ignore the rationality of using the same language in describing a different proceeding of the Bankruptcy Code” (at 13-14, emphasis added); and
• The “of a kind specified” (§ 1228) and “of the kind specified” (§ 1192) difference is “inconsequential.”

This justification is false.  Here are some reasons why.

–“the” v. “a”

Meanings of “the” and “a” are not the same: one is definite and the other is not.

To illustrate:

• a university in the Big Ten Conference identifies itself as “The Ohio State University”; and 
• it has even officially registered a trademark for the word “the.”

Try calling that institution, “An Ohio State University,” and see what happens.  Here’s guessing the reaction will be anything but “inconsequential.”  That’s because the meanings of “a”/”an” and “the” are not the same.

The Fourth Circuit, in Cantwell v. Cleary, seems to be saying that Congress, in using “the” and “a” in this context, either:

• made a drafting error; or
• intended “the” and “a” to be synonymous.

 Here’s suggesting that neither is true—that Congress meant exactly what it drafted and enacted:

• “of a kind specified” in § 1228 incorporates § 523(a) exceptions, without an “individual debtor” limitation; and
• “of the kind specified” in § 1192 requires, definitively, the exact exceptions specified in § 523(a), including the “individual debtor” limitation.

–§ 1141(d)(6)

Moreover, in regular Chapter 11, discharge is governed by § 1141(d)[fn. 3], which:

• distinguishes between discharges for individuals and corporations/LLCs (compare (d)(2)&(5) for individuals and (d)(6)(A) for corporations/LLCs); and
• when Congress decides to make a corporation/LLC subject to a narrow discharge exception from § 523(a), it says “of a kind specified in [specific portions of] section § 523(a)” (emphasis added)–it did NOT say “of the kind”. 

Notably, § 1141 is specifically listed, along with § 1192 and § 1228, in § 523(a).

Conclusion

The Fourth Circuit’s Cantwell v. Cleary opinion is unfortunate.  It applies statutory language having a relatively-obvious distinction by:

• rejecting the obvious language difference; and
• making an unsupported (and inaccurate) declaration that the difference is “inconsequential.”

Here’s hoping other courts will move in a different direction.

—————–

Footnote 1. This quote is of footnote 2, on page 13, of Cantwell-Cleary Co., Inc. v. Cleary Packaging, LLC (In re Cleary Packaging, LLC), Case No. 21-1981 (4th Cir., decided June 7, 2022), emphasis is added.

Footnote 2.  § 523(a) says: “(a) A discharge under section 727, 1141, 1192. 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—“

Footnote 3.  § 1141(d) provides (emphasis added): “(d)(1) Except as otherwise provided in this subsection, in the plan, or in the order confirming the plan, the  confirmation of a plan— . . . (2) A discharge under this chapter does not discharge a debtor who is an individual from any debt excepted from discharge under section 523 of this title. . . . (5) In a case in which the debtor is an individual—(A) unless after notice and a hearing the court orders otherwise for cause, confirmation of the plan does not discharge any debt provided for in the plan until the court grants a discharge on completion of all payments under the plan; . . . (6) Notwithstanding paragraph (1), the confirmation of a plan does not discharge a debtor that is a corporation from any debt—(A) of a kind specified in paragraph (2)(A) or (2)(B) of section 523(a) that is owed to a domestic governmental unit, or owed to a person as the result of an action filed under subchapter III of chapter 37 of title 31 or any similar State statute; or (B) for a tax or customs duty with respect to which the debtor—(i) made a fraudulent return; or (ii) willfully attempted in any manner to evade or to defeat such tax or such customs duty.”

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