Enacted in 2019, Subchapter V of Chapter 11 of the Bankruptcy Code allows small business debtors to reorganize and discharge their debts on special terms. A Subchapter V debtor’s discharge differs depending on whether the plan is confirmed with or without the consent of its creditors. In nonconsensually confirmed plans, discharges are governed by 11 U.S.C. § 1192(2) (Section 1192), which allows most debts to be discharged unless the debt is “of the kind specified in Section 523(a).” However, 11 U.S.C. § 523(a) (Section 523), unlike Section 1192, applies only to individual debtors and contains a list of 20 types of debts that are nondischargeable. An interpretation issue arises because some courts read debts “of the kind” to refer to the list while others believe the reference is to the type of debtor, i.e., individuals.
The U.S. Bankruptcy Court for the District of Oregon’s decision on June 11, 2024 in In re Van’s Aircraft, Inc. interpreted the cross-reference broadly to bar from discharge the 20 types of debt Section 523 lists, regardless of whether the debtor is an individual or corporation.
After Van’s Aircraft, Inc.’s plan was confirmed nonconsensually, a creditor sued Van’s alleging that the debt Van’s owed to him was not dischargeable because it was obtained through fraudulent misrepresentations, a type of nondischargeable debt pursuant to Section 523. Van’s argued that Section 523 only applies to individual debtors, so because it was a corporation, its debt was dischargeable.
The court denied Van’s motion to dismiss Ivanov’s complaint, ruling that the cross-reference refers to the types of debts specified in Section 523, and is not limited to a particular type of debtors. The court also relied on the Section 1192’s plain meaning and the broader structure of the Bankruptcy Code to determine that unlike other cross-references to Section 523, Congress did not intend to limit the cross-reference in Section 1192 to individual debtors. In other words, it does not matter whether a debtor is an individual or corporation, only that the type of debt is on the list excluded from discharge.
In Van’s Aircraft, the District of Oregon Bankruptcy Court joined the 4th and 5th Circuits, the only two Circuit Courts that have addressed the issue, in holding that the discharge exception applies to corporate debtors, not just individuals, and broadly bars discharge for the types of the debts listed in Section 523. Conversely, the Ninth Circuit Bankruptcy Appellate Panel and lower courts in the 6th, 7th, and 11th Circuits hold that the exception applies only to individual debtors, not corporate debtors. The extent to which a small business debtor can be freed of all of its debts remains unsettled and depends on where its case is filed.
Key Takeaways
- Debtors filing for bankruptcy under Subchapter V of Chapter 11 of the Bankruptcy Code should assess the nature of any potential creditor claims and whether the debt might fall under the types listed in Section 523. If so, it may impact which court a debtor chooses to file its case in, if more than one option is available.
- Creditors who believe that their debts are nondischargeable may have viable claims, sufficient to survive an initial motion to dismiss at least, depending on which court the case is in. Whether a particular debt qualifies as nondischargeable remains subject to further litigation and determination by the court. Just because the exception is available does not mean it is guaranteed to apply.
- Creditors should always remember that there may be deadlines for filing lawsuits to determine dischargeability. This is a separate process from confirmation of the plan. If the deadline is missed, the debt may be discharged, even if it is a type of debt that can be excepted from discharge.
Editor's Note: Javier Torres, a 2024 Miller Nash summer associate, contributed to this blog post.
This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.
