In an article published by Law360 on September 21, 2022, David Swan and Allison Klena discussed a ruling by the Fourth Circuit that overturned a previous decision by the U.S. Bankruptcy Court for the District of Maryland related to dischargeability of debt in Subchapter V bankruptcy filings.
“One of the most significant advantages for a small business debtor in Subchapter V bankruptcy is the ability to confirm a nonconsensual plan by paying all of the debtor’s projected disposable income to creditors for a three- to five-year period,” Swan and Klena wrote. “The discharge that comes with this nonconsensual plan in Subchapter V does not extend, however, to certain types of debt that would be dischargeable in a traditional case, at least according to the U.S. Court of Appeals for the Fourth Circuit in its June ruling in Cantwell-Cleary Co. v. Cleary Packaging LLC.”
At issue in the case was the “discordant – or perhaps more accurately, clumsy” relationship between Sections 523(a) and 1192 of the Bankruptcy Code, as Section 523(a) lists 19 categories of debt that are nondischargeable by a debtor who is an individual and cross-references six other discharge-related provisions of the Bankruptcy Code, including Section 1192. “Section 1192 allows a discharge to a Subchapter V debtor – individual or corporate – under a nonconsensual confirmed plan except for debt ‘of the kind specified in Section 523(a) of this title.’”
In its findings, the Fourth Circuit decided that a corporate Subchapter V debtor is not able to discharge debt under Section 1192 that is nondischargeable by individual debtors under Section 523(a). In the article, Swan and Klena detailed the case, previous arguments and decisions at the bankruptcy court and the textual review that contributed to the Fourth Circuit’s decision, much of which was also addressed in an earlier Hirschler client alert.
Swan and Klena concluded the Law360 article with practical considerations and other observations based on the decision, which to date is the only circuit-level decision on the issue. “Considering there are two completely different ways to interpret the text, as evidenced by the bankruptcy court and Fourth Circuit opinions in Cleary Packaging, one can imagine lines of decision that will result in a circuit split,” the attorneys said. “Ideally, Congress would revise the language in Section 1192(2) of the Bankruptcy Code to eliminate its ‘clumsy relationship’ with Section 523(a).”
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Luis F. Ruiz