By: Donald L Swanson
On April 23, 2024, the American Bankruptcy Institute’s Subchapter V Task Force issued its Final Report.
This article is the fifth in a series summarizing and condensing the Task Force’s Final Report into “a nutshell.” The subject of this article is:
- whether § 523(a) discharge exceptions apply only to individuals or also to corporations.[Fn. 1]
Recommendation
The Task Force recommends amending § 1192 to clarify that § 523(a)’s limitation on the application of its discharge exceptions to “an individual debtor” applies in Subchapter V cases.
Analysis
When a debtor’s Subchapter V plan confirmation is non-consensual, § 1192 controls the scope of debtor’s discharge—and it incorporates by reference the § 523(a) exceptions to discharge.
As to the interaction between § 1192(2) and § 523(a):
- § 1192(2) excepts from discharge, “any debt . . . of a kind specified in section 523(a)”; and
- § 523(a) says, a “discharge under section . . . 1192, . . . does does not discharge an individual debtor from any debt— . . . [multiple exceptions are enumerated]” (emphasis added).
A Disagreement
A disagreement in the case law exists on whether § 523(a) discharge exceptions applicable to “an individual debtor” also apply to corporate debtors in Subchapter V.
The Task Force finds that the plain statutory language (i.e., “an individual debtor”) means what it says and cannot be erased by grammatical manipulations or by a supposed balancing of Subchapter V purposes.
Most bankruptcy courts and the one BAP that have considered the issue reach the same conclusion: § 523(a) discharge exceptions applicable only to “an individual debtor” are incorporated as-is into Subchapter V and have no application to corporate debtors in Subchapter V.
Two courts and the Fourth Circuit, however, disagree: ruling that § 523(a) exceptions apply to both individuals and corporations under § 1192—basing their opinions on a detailed grammatical analysis, Chapter 11 policy, and legislative history
Here’s the Fourth Circuit’s textual justification for ignoring the “an individual debtor” limitation in § 523(a):
- “§ 1192(2)’s cross-reference to § 523(a) does not refer to any kind of debtor addressed by § 523(a) but rather to a kind of debt listed in § 523(a). By referring to the kind of debt listed in § 523(a), Congress used a shorthand to avoid listing all 21 types of debts, . . . Thus, we conclude that the debtors covered by the discharge language of § 1192(2) – i.e., both individual and corporate debtors – remain subject to the 21 kinds of debt listed in § 523(a).”
But wouldn’t Congress have specifically referenced and distinguished the “an individual debtor” language—if it actually intended that § 523(a)’s explicit “an individual debtor” limitation would not apply?
The Task Force agrees with the majority view and concludes that a corporation’s discharge should not be subject to § 523(a) exceptions because:
- Congress specifically chose to make § 523(a) discharge exceptions and their “an individual debtor” limitation applicable throughout the Bankruptcy Code (explicitly including § 1192); and
- the reasons for doing so apply with equal force in Subchapter V.
Policy Reasons and Explicit Statutory Language
In enacting the Bankruptcy Code, Congress provided that a corporation would receive a discharge under § 1141(d)(1) upon confirmation of a plan, without any exceptions, if the corporation remains in business.
Legislative history shows that Congress made an intentional policy choice in limiting the § 523(a) discharge to individuals. And Congress made that policy choice applicable in Subchapter V by specific reference to Subchapter V’s § 1192 in § 523(a).
The only existing exception to discharge of corporate debt is in § 1141(d)(6)—which Congress added to the Bankruptcy Code in 2005. Here’s how § 1141(d)(6) makes a § 523(a) discharge exception applicable to a corporation:
- “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)” (emphasis added).
In other words, Congress knows how to make a § 523(a) discharge exception clearly, unambiguously and unmistakably applicable to a corporation, when that is what it actually intends to do.
Proposed Statutory Change
The Task Force proposes amending § 1192 to clarify that:
- the § 523(a) limitation to individual debtors applies in Subchapter V; and
- the § 1141(d)(6) discharge exception for corporate debtors also applies in Subchapter V.
The proposed amended language for both changes is as follows (added language is in italics).
- “1192. If the plan of the debtor is confirmed under section 1191(b) of this title . . . , the court shall grant the debtor a discharge of all debts provided in section 1141(d)(1)(A) of this title, and all other debts allowed under section 503 of this title and provided for in the plan, except any debt-(1) on which the last payment is due after the first 3 years of the plan, or such other time not to exceed 5 years fixed by the court; or (2) of an individual debtor of the kind specified in section 523(a) of this title; or (3) of the kind specified in section 1141(d)(6) of this title.“
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Footnote 1. Discussion of this subject is on pages 61 to 67 of the Final Report.
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