Denying Corporate Debtors A Discharge Under § 523(a)’s “Individual Debtor” Exceptions? (Avion Funding v. GFS)

By: Donald L Swanson

Can a corporate debtor be denied a Subchapter V discharge under § 523(a), despite this § 523(a) language (emphasis added):

• “A discharge under section . . . 1192 [Subchapter V] . . . does not discharge an individual debtor from . . . ”?

A recent Bankruptcy Court opinion (in Avion Funding) says, essentially, this: “No! You can’t paint over explicit statutory language.”[Fn. 1]  

Such recent opinion:

• reaches an exactly-opposite conclusion from a prior Fourth Circuit Court of Appeals opinion[Fn. 2]; and
• is, therefore, on direct appeal to the Fifth Circuit Court of Appeals.

What follows is an attempt to summarize the Avion Funding facts and analysis.

Avion Funding Facts

Debtor provides sanitation and cleaning services to commercial tenants.  Because of COVID, Debtor expects demand for its services to increase and plans to grow.

Financial difficulties arise, and Debtor starts using merchant cash advance loans.  Then, Debtor runs out of cash and files Subchapter V bankruptcy.

One of the merchant cash advance lenders (Avion Funding) files a dischargeability complaint under § 523(a)(2)&(4), alleging “false representations and actual fraud.”

Debtor moves to dismiss Avion Funding’s complaint because Debtor is not an individual—and § 523(a) discharge exceptions apply only to an “individual debtor.”

The Bankruptcy Court agrees with Debtor and dismisses Avion Funding’s complaint.  Here’s why:

• § 1192 is a Subchapter V statute that excepts the following debts from discharge: “of the kind specified in section 523(a) of this title”;
• § 523(a) discharge exceptions apply only to an “individual debtor”; and
• § 1192 is included in § 523(a)’s list of statutes to which the “individual debtor” limitation applies.   

Here’s what happens next:

• 11/22/2022—Avion Funding appeals the dismissal; and
• 02/03/2023—Bankruptcy Court certifies a direct appeal to the Fifth Circuit because of the Fourth Circuit’s prior and contrary opinion.    

Avion Funding Analysis

–Interplay between § 1192 & § 523

The Bankruptcy Court’s opinion makes three points about the interplay between § 1192 and § 523.

First. § 1192(2) incorporates the § 523(a) list, without expanding it.  Since § 523(a) applies, unequivocally, only to individuals, that’s all that § 1192(2) can incorporate.  Further, Congress knows how to explicitly include corporate debtors in § 523(a) (see § 1141(d)(6)) but chose to not do so in § 1192(2).

Second. Congress added Subchapter V’s § 1192 into § 523(a), which now reads, “[a] discharge under section…1192…does not discharge an individual debtor…” (emphasis added).  Such specific inclusion shows Congress’s intent that § 523(a) cannot apply to corporate debtors in Subchapter V.

Third. It is well-settled Chapter 11 law that § 523(a) exceptions to discharge apply only to individuals, not to corporations.  And since Subchapter V is a part of Chapter 11, any intent by Congress to change that well-settled law requires explicitly clear language.   

–Chapter 12 Analogy

This same Western Texas Bankruptcy Court previously held that § 523(a)’s discharge exceptions do apply to corporate debtors in Chapter 12.[Fn. 3]  So, Avion Funding argues that the same result should apply in Subchapter V because of language similarities in § 1228(a)(2) and § 1192(2).

The Bankruptcy Court rejects such argument for these reasons:

• In the prior case, this Court’s holding that § 523(a) discharge exceptions apply to corporate debtors in Chapter 12 is based on the interplay of §§ 1228 and 523(a);  
• Chapter 11’s discharge provisions are narrower than Chapter 12’s—only excepting from discharge (i) a liquidating corporate debtor, and (ii) individual Chapter 11 debtors under § 523(a); and
• Since Subchapter V is not its own chapter of bankruptcy, but rather a part of Chapter 11, the Chapter 11 discharge standards remain applicable here.

–Other Bankruptcy Courts

The Fourth Circuit’s contrary opinion is the only one of its kind.  The Avion Funding Court rejects it conclusion as an outlier.  Here are reasons why.

Four bankruptcy courts have already decided this precise issue.  All four:

• hold that § 523(a) exceptions to discharge are applicable only to individuals—and not to corporate debtors in Subchapter V;
• grant a motion to dismiss § 523(a) discharge claims for failure to state a claim against a corporate Subchapter V debtor;
• are unanimous in pointing to the “individual debtor” language of § 523(a) as dispositive; and
• apply the rule of construction that every word in a statute must be given meaning—including the specific reference in § 523(a) to § 1192.

All four bankruptcy courts also point to the history of corporate discharge in Chapter 11:

• discharge exceptions apply to corporate debtors as far back as 1898—but in 1978’s enactment of the Bankruptcy Code, Congress eliminates dischargeability claims against corporate debtors in Chapter 11; and
• the only Bankruptcy Code exception to discharge for corporate debtors is in § 1141(d)(6) (for certain governmental claims)—an exception so controversial, it took eight years to enact.

Conclusion

It seems intuitively obvious that the “individual debtor” limitation in § 523(a) excludes corporate debtors.

The Bankruptcy Court in Western Texas agrees.  The Fourth Circuit Court of Appeals does not.

It will be interesting to seek how the Fifth Circuit Court of Appeals responds in the pending appeal.

————–

Footnote 1.  The opinion is Avion Funding, LLC v. GFS Industries, LLC (In re GFS Industries, LLC) in Adv. No. 22-05052, Western Texas Bankruptcy Court (issued 11/10/2022, Doc. 9); direct appeal to Fifth Circuit granted on 02/03/2023 (Doc. 26).  Avion Funding is a limited liability company and is referred to throughout the Avion Funding opinion and this article as a “corporate debtor.” 

Footnote 2.  Cantwell-Cleary Co., Inc. v Cleary Packaging, LLC, Fourth Circuit Case No. 21-1981, issued on June 7, 2002, and summarized in this linked article.

Footnote 3.  The same Western Texas Bankruptcy Court’s Chapter 12 opinion is JRB Consolidated, Inc., 188 B.R. 373 (Bkrtcy.W.D.Tex. 1995).

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