9^(th) Circuit BAP: Certain Small Business Debtors Are Exempt From Nondischargeability Determinations The 9^(th) Circuit BAP joined at least eight
9^(th) Circuit BAP: Certain Small Business Debtors Are Exempt From Nondischargeability Determinations The 9^(th) Circuit BAP joined at least eight
bankruptcy courts which have held that non-individual debtors proceeding under subchapter V are not subject to a determination of nondischargeability of a specific debt
if the debtor confirms a nonconsensual plan. The BAP also joined four bankruptcy courts which have expressly rejected the 4^(th) Circuit’s reasoning in Cantwell-Cleary Co. v. Cleary Packaging, LLC, where the court of appeals, reversing the bankruptcy court, held that (under a nonconsensual plan) all subchapter V debtors, both individual and corporate, are subject to determinations of nondischargeability under Sec. 523(a).
The five courts, including the BAP, that have considered Cleary Packaging’s reasoning have uniformly rejected it, based on their application of canons of statutory construction as well as for policy reasons.
First, they have found the language in Section 523(a), which on its own terms only applies to “an individual debtor”, to be dispositive since it is the specific provision which governs nondischargeability actions.
Second, these courts have also rejected Cleary Packaging based on the fact that, for decades, non-individual chapter 11 debtors have been exempt from nondischargeability actions under Sec. 523(a) and have been, instead, subject to the limited list of nondischargeable debts specified under Sec. 1141(d)(6).
Accordingly, they have reasoned that introducing such a disparate, negative, treatment of subchapter V debtors in comparison to regular chapter 11 debtors would be contrary to the goal of subchapter V which was to facilitate the reorganization of small businesses.
Although all known bankruptcy opinions which have addressed the issue have reached a conclusion that is contrary to Cleary Packaging, the 4^(th) Circuit’s view (the only circuit to have addressed the issue so far) could very well be found persuasive in future cases.
As noted by the U.S. Bankruptcy Court for the District of Maryland, leading bankruptcy treatises such as Norton Bankruptcy Law & Practice and Collier on Bankruptcy have reached conclusions similar to the 4^(th) Circuit’s. See 626 B.R. at 879. Also, the U.S. Government filed an amicus brief in Cleary Packaging, advocating for what the 4^(th) Circuit eventually concluded.
The courts which have advocated for a result that is contrary to Cleary Packaging have also had to recognize the “vexing” result under their reading of subchapter V, since a nonconsensual plan would be treated more favorably than a consensual plan, given that a non-individual which obtains a consensual plan would still be subject to a determination of nondischargeability with respect to the debts specified in Section 1141(d)(6).