Judicial Abuse Of The Bankruptcy Code (In re 2 Monkey Trading)

Abuse? (Photo by Marilyn Swanson)

By: Donald L Swanson

Nobody likes bankruptcy.

That’s a truism—and it’s true even though bankruptcy serves an essential role in our market-based and credit-based economy, in which the risk of failure is a constant companion for every business endeavor.

But when the dislike of bankruptcy finds its way into judicial rulings in improper ways—especially in appellate rulings by generalist Article III judges—it becomes what I’m calling “judicial abuse of the Bankruptcy Code.”

Judicial Abuse of the Bankruptcy Code

Here’s how judicial abuse of the Bankruptcy Code occurs:

  • Congress enacts a statute within the Bankruptcy Code, using language that appears to most bankruptcy professionals and bankruptcy judges as clear;
  • such language provides a benefit for bankruptcy debtors that generalist appellate judges don’t like;
  • the generalist appellate judges, who may even profess to being textualists, don’t want to allow the debtor-benefit as written, and so they engage in grammatical and statutory-construction gymnastics to reach a conclusion that disallows the debtor-benefit they don’t like; and
  • to assuage their conscience, for the judicial abuse in which they are engaged, the generalist judges describe the question at issue as “difficult” and a “close” call—and then reject the debtor benefit.   

2 Monkey Trading Opinion

There is no better example of judicial abuse of the Bankruptcy Code than this newly-issued opinion from the Eleventh Circuit Court of Appeals:

The 2 Monkey Trading issue is this: can a corporate debtor in Subchapter V of Chapter 11 be denied a discharge under § 523(a)?

Corporate debtors in Chapter 11 cannot be denied a discharge under § 523(a).  That’s been true since the Bankruptcy Code’s enactment—because § 523(a) specifies (emphasis added):

  • “(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— . . . “

Nothing can be more clear than the “individual” limitation within § 523(a), and that limitation has never been challenged for a Chapter 11 corporate debtor—until the Subchapter V enactment within Chapter 11 for small businesses.

Said § 523(a) has contained the same language throughout its existence (i.e., both before and after enactment of Subchapter V), with one exception: the Subchapter V discharge section (§ 1192) has been added into the § 523(a) list of “a discharge under section . . .”

It’s hard to imagine anything more simple and straightforward than the “individual” limitation in § 523(a).  And many bankruptcy judges have had no difficulty in reaching the simple and straightforward conclusion that § 523(a) applies only to individual debtors, even in Subchapter V, as explained by the Eleventh Circuit’s 2 Monkey Trading Dissent.[Fn. 1]

Gymnastics

The grammatical and statutory construction gymnastics used to overcome the plain “individual” limitation in § 523(a) are astounding. 

Consider, for example, the following effort by the Eleventh Circuit in its 2 Monkey Trading opinion (citations are removed):

  • “The natural starting point of our statutory interpretation analysis is § 1192 because we only consider § 523(a) after determining that the debtor is pursuing a non-consensual plan. And § 1192’s plain text is unambiguous—§ 1192’s discharge exception applies to both corporate and individual debtors.”
  • “To start, the statute begins by stating “[i]f the plan of the debtor is confirmed under section 1191(b) of this title,” then “the court shall grant the debtor a discharge of all debts…except any debt…of the kind specified in section 523(a) of this title.”  
  • “The Bankruptcy Code defines “debtor” as “a person engaged in commercial or business activities.” . . . And a “person” is further defined to include both individuals and corporations, with the latter covering limited liability companies. . . . So § 1192 applies to both individual and corporate debtors.”
  • “Moving to the next key word “debt,” the Bankruptcy Code does not define debt to distinguish between individual or corporate debtor. “Debt” is defined as a “liability on a claim.” . . . A “claim” is a “right to payment.” . . . Of course, there are some debts that only an individual or corporate debtor can hold, but “debt,” as defined under the Bankruptcy Code, is agnostic to who the holder is.”
  • “And when Congress intended to make a specific distinction between individual or corporate debt, it has done so. For example, the Code defines “consumer debt” as “debt incurred by an individual primarily for a personal, family, or household purpose.”
  • “After defining “debtor” and “debt,” we turn to § 1192(2), which excepts from discharge “any debt…of the kind specified in section 523(a).” . . . The most natural reading of that language is that “of the kind” modifies “debt.” The ordinary meaning of “kind” is a “category” or “a group united by common traits or interests.”
  • “And the common trait or interest shared among this category of excepted debt is that it is “specified in section 523(a)”—the twenty-one categories of non-dischargeable debt under § 523(a).”
  • “So taken all together, the court will grant the ‘debtor’—which includes individual and corporate debtors—a discharge of its debts except for the twenty-one kinds of debt found in § 523(a).”

Despite such gymnastics, the obvious fact remains:

  • § 523(a) still says, as it always has: “(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— . . .”

People Can Read

The Article III generalist judges, who can’t bring themselves to allow the bankruptcy relief Congress provided, seem to ignore these facts:

  • people can read . . . and can perceive and understand what’s actually happening; and
  • judicial abuse of the Bankruptcy Code by generalist judges provokes a sense that something is amiss within our bankruptcy appellate system!

Conclusion

Nobody likes bankruptcy.

But such dislike should never turn into a judicial abuse of the Bankruptcy Code!

——————

Footnote 1.  Here is the full dissenting opinion from the Eleventh Circuit’s Benshot, LLC v. 2 Monkey Trading, LLC (In re 2 Monkey Trading, LLC) case:

“LUCK, Circuit Judge, dissenting: The majority of our nation’s bankruptcy courts that have reached the issue, see, e.g., In re Off-Spec Sols., LLC, 651 B.R. 862, 865– 72 (B.A.P. 9th Cir. 2023); In re R&W Clark Constr., Inc., 656 B.R. 628, 633–39 (Bankr. N.D. Ill. 2024), rev’d, No. 24 CV 1463, 2024 WL 4789403 (N.D. Ill. Nov. 14, 2024); In re GFS Indus., LLC, 647 B.R. 337, 341–52 (Bankr. W.D. Tex. 2022), rev’d, 99 F.4th 223 (5th Cir. 2024); In re Lapeer Aviation, Inc., No. 21-31500-JDA, 2022 WL 1110072, at *2 (Bankr. E.D. Mich. Apr. 13, 2022); In re Cleary Packaging LLC, 630 B.R. 466, 470–76 (Bankr. D. Md. 2021), rev’d, 36 F.4th 509 (4th Cir. 2022); In re Rtech Fabrications, LLC, 635 B.R. 559, 563–66 (Bankr. D. Idaho 2021); In re Satellite Rests. Inc. Crabcake Factory USA, 626 B.R. 871, 874–79 (Bankr. D. Md. 2021), including every bankruptcy court in our circuit, see, e.g., In re Davidson, No. 23-30018, 2025 WL 511226, at *2–5 (Bankr. N.D. Fla. Feb. 14, 2025); In re Ra Custom Design, Inc., No. 23-58494-SMS, 2024 WL 607716, at *1–3 (Bankr. N.D. Ga. Feb. 13, 2024); In re Hall, 651 B.R. 62, 67–69 (Bankr. M.D. Fla. 2023), have held that the nondischargeability provisions of 11 U.S.C. section 523(a) are not applicable to corporate debtors who confirm nonconsensual plans (cramdowns) under subchapter V. Because these courts have the best reading of the bankruptcy code, I respectfully dissent.”

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