FILED JUL 6 2023 ORDERED PUBLISHED SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT OF THE NINTH CIRCUIT
In re: BAP No. ID-23-1020-GCB OFF-SPEC SOLUTIONS, LLC, Debtor. Bk. No. 22-00346-NGH
KRISTINA JAYN LAFFERTY, Adv. No. 22-06020-NGH Appellant, v. OPINION OFF-SPEC SOLUTIONS, LLC; CVF CAPITAL PARTNERS, INC.; KEVIN CHOATE; COOL MOUNTAIN TRANSPORT; CVF CAPITAL PARTNERS, INC., Appellees.
Appeal from the United States Bankruptcy Court for the District of Idaho Noah G. Hillen, Bankruptcy Judge, Presiding
APPEARANCES: Ronald Walter Brilliant argued for appellant; Matthew T. Christensen of Johnson May, PLLC argued for appellees Off-Spec Solutions, LLC and Cool Mountain Transport.
Before: GAN, CORBIT, and BRAND, Bankruptcy Judges.
GAN, Bankruptcy Judge: INTRODUCTION
This appeal requires us to decide, as a matter of first impression,
whether the nondischargeability provisions of § 523(a)1 are applicable to
corporate debtors who confirm nonconsensual plans under subchapter V of
chapter 11.
Appellant Kristina Jayn Lafferty (“Appellant”) filed a § 523(a)(6)
complaint against debtor Off-Spec Solutions, LLC (“Debtor”), and cited the
Fourth Circuit’s holding in Cantwell-Cleary Co. v. Cleary Packaging, LLC (In
re Cleary Packaging, LLC), 36 F.4th 509 (4th Cir. 2022), for the proposition
that debts specified in § 523(a) are not dischargeable by any debtor,
corporate or individual, in a subchapter V case confirmed under § 1191(b).
The bankruptcy court was not persuaded by Cleary, and relied on its
prior decision, Catt v. Rtech Fabrications, LLC (In re Rtech Fabrications, LLC),
635 B.R. 559 (Bankr. D. Idaho 2021), and Avion Funding, LLC v. GFS
Industries, LLC (In re GFS Industries, LLC), 647 B.R. 337 (Bankr. W.D. Tex.
2022), to hold that § 1192 does not make the debts specified in § 523(a)
nondischargeable for corporate debtors.
Although the bankruptcy court’s construction leads to discordance
between a discharge under § 1192 and a discharge under a consensual
confirmation, its reasoning is sound and more persuasive than that offered
1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101–1532, all “Rule” references are to the Federal Rules of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of Civil Procedure. 2 by Appellant and Cleary. We agree that the language and context of the
relevant statutes indicate Congress’s intent to make § 523(a) applicable in
subchapter V only to individual debtors. Accordingly, we AFFIRM.
FACTS 2
In August 2022, Debtor filed a chapter 11 petition as a corporate
debtor. 3 Debtor indicated it was eligible to be a debtor under § 1182(a), and
it elected to proceed under subchapter V.
In December 2022, Appellant filed a proof of claim and an adversary
complaint against Debtor, its owners, and its parent company, asserting a
nondischargeable claim under § 523(a)(6). Appellant alleged that, while
employed by Debtor, she was sexually harassed and discriminated against
by her manager. According to Appellant, despite notifying Debtor and its
owners, they took no corrective action, and instead, retaliated by firing her.
Appellant made a claim of discrimination to the Idaho Human Rights
Commission (“IHRC”) and the Equal Employment Opportunity
Commission. The IHRC found probable cause that Appellant suffered
2 We exercise our discretion to take judicial notice of documents electronically filed in the main case and adversary proceeding. See Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003). 3 The definition of “corporation” in § 101(9) includes unincorporated limited
liability companies. See Vill. at Lakeridge, LLC v. U.S. Bank N.A. (In re Vill. at Lakeridge, LLC), BAP Nos. NV-12-1456-PaKiTa, NV-12-1474-PaKiTa, 2013 WL 1397447, at *4 n.8 (9th Cir. BAP Apr. 5, 2013) (citation omitted), aff’d sub nom. U.S. Bank N.A. v. Vill. at Lakeridge, LLC (In re Vill. at Lakeridge, LLC), 814 F.3d 993 (9th Cir. 2016), aff’d sub nom. U.S. Bank N.A. ex rel. CW Cap. Asset Mgmt. LLC v. Vill. at Lakeridge, LLC, 138 S. Ct. 960 (2018). 3 sexual harassment, discharge based on retaliation, and discharge based on
sex. After Debtor filed its bankruptcy petition, the IHRC administratively
dismissed the case and gave Appellant notice of her right to bring a private
action against the defendants.
In response to Appellant’s complaint, Debtor filed a motion to
dismiss pursuant to Civil Rule 12(b)(6), made applicable by Rule 7012.
Debtor argued that Appellant failed to state a cognizable claim for relief
because, as the court previously held in Rtech Fabrications, § 523(a) applies
in subchapter V only to individual debtors. Debtor acknowledged the
Fourth Circuit’s subsequent decision in Cleary but maintained that the
reasoning and analysis in GFS Industries demonstrated that Cleary was
incorrectly decided.
Appellant opposed the motion and argued that § 1192 applies to both
corporate and individual debtors and excepts the types of debts specified
in § 523(a) without regard to the type of debtor. 4
The bankruptcy court rendered an oral ruling granting Debtor’s
motion to dismiss, holding that § 523(a) does not apply to corporate
debtors in subchapter V. The court reasoned that the interpretation offered
by Cleary fails to give effect to the plain language of § 523(a), which
4 Appellant also argued that, because Title VII of the Civil Rights Act of 1964 imposes strict liability on an employer for its supervisory employee’s sexual harassment, and the individual who perpetrates the harassment cannot be held liable, the bankruptcy court should consider Debtor to be an “individual” for purposes of the claim. Appellant does not make this argument on appeal, and we do not consider it. 4 specifically states that its provisions are applicable to individual debtors
who receive a discharge under § 1192. The bankruptcy court entered an
order dismissing the complaint, and Appellant timely appealed.5
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Did the bankruptcy court err by interpreting § 1192 to except debts
specified in § 523(a) from discharge for only individual debtors?
STANDARDS OF REVIEW
We review de novo a bankruptcy court’s order granting a motion to
dismiss under Civil Rule 12(b)(6). Movsesian v. Victoria Versicherung AG, 670
F.3d 1067, 1071 (9th Cir. 2012) (en banc). We also review de novo a
bankruptcy court’s interpretation of the Bankruptcy Code. Reswick v.
Reswick (In re Reswick), 446 B.R. 362, 365 (9th Cir. BAP 2011). De novo
means review is independent, with no deference given to the bankruptcy
court’s conclusion. See First Ave. W. Bldg., LLC v. James (In re Onecast Media,
Inc.), 439 F.3d 558, 561 (9th Cir. 2006).
5 The bankruptcy court dismissed the complaint as to all defendants after determining that the claims against non-debtors were not related to the bankruptcy case. The dismissal of claims against non-debtors is not at issue in this appeal. However, we note that, to the extent Appellant asserts claims against non-debtors, such claims will not be affected by Debtor’s discharge. 5 DISCUSSION
The bankruptcy court’s dismissal of the adversary complaint turns
purely on the legal question whether a corporate debtor under subchapter
V can be liable for debts specified in § 523(a). Neither this Panel nor the
Ninth Circuit Court of Appeals has addressed the question.
Bankruptcy courts that have confronted the issue have uniformly
concluded, as the court did here, that § 1192 does not make § 523(a)
applicable to corporate debtors. See, e.g., BenShot, LLC v. 2 Monkey Trading,
LLC (In re 2 Monkey Trading, LLC), 650 B.R. 521 (Bankr. M.D. Fla. 2023);
Nutrien Ag Sols., Inc. v. Hall (In re Hall), 651 B.R. 62 (Bankr. M.D. Fla. 2023);
In re GFS Indus., 647 B.R. 337; Jennings v. Lapeer Aviation, Inc. (In re Lapeer
Aviation, Inc.), Case No. 21-31500-jda, 2022 WL 1110072 (Bankr. E.D. Mich.
Apr. 13, 2022); In re Rtech Fabrications, LLC, 635 B.R. 559; Cantwell-Cleary Co.
v. Cleary Packaging LLC (In re Cleary Packaging LLC), 630 B.R. 466 (Bankr. D.
Md. 2021), rev’d, 36 F.4th 509 (4th Cir. 2022); Gaske v. Satellite Rests. Inc. (In
re Satellite Rests. Inc.), 626 B.R. 871 (Bankr. D. Md. 2021).
Appellant urges us to reverse the bankruptcy court’s decision based
on the reasoning articulated in Cleary. Although the bankruptcy court’s
construction inevitably leads to a broader discharge for subchapter V
debtors under nonconsensual plans than under consensual ones, we find
its interpretation more reasonable and more harmonious with other
bankruptcy statutes than the interpretation offered by Appellant.
6 A. Statutory construction of §§ 1192 and 523
To resolve a question of statutory construction, we begin “where all
such inquiries must begin: with the language of the statute itself.” United
States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989); see also Lamie v.
United States Tr., 540 U.S. 526, 534 (2004) (“[W]hen the statute’s language is
plain, the sole function of the courts—at least where the disposition
required by the texts is not absurd—is to enforce it according to its terms.”
(quoting Hartford Underwriters Ins. Co. v. Union Planters Bank., N.A., 530 U.S.
1, 6 (2000)). We construe a statute to give effect “to all its provisions, so that
no part will be inoperative or superfluous, void or insignificant.” Hibbs v.
Winn, 542 U.S. 88, 101 (2004).
If the language is ambiguous, we “may look to other sources to
determine congressional intent, such as the canons of construction or the
statute’s legislative history.” United States v. Nader, 542 F.3d 713, 717 (9th
Cir. 2008) (citing Jonah R. v. Carmona, 446 F.3d 1000, 1005 (9th Cir. 2006)).
Statutory language is ambiguous only if it “gives rise to more than one
reasonable interpretation.” Woods v. Carey, 722 F.3d 1177, 1181 (9th Cir.
2013) (quoting DeGeorge v. U.S. Dist. Ct. for Cent. Dist. of Cal., 219 F.3d 930,
939 (9th Cir. 2000)); see also United Sav. Ass’n of Tex. v. Timbers of Inwood
Forest Assocs., Ltd., 484 U.S. 365, 371 (1988) (“A provision that may seem
ambiguous in isolation is often clarified by the remainder of the statutory
scheme . . . because only one of the permissible meanings produces a
substantive effect that is compatible with the rest of the law.”).
7 The statutes governing discharge in a nonconsensual subchapter V
are §§ 1192 and 523(a).6 Section 1192 provides in pertinent part:
If the plan of the debtor is confirmed under section 1191(b) of this title, as soon as practicable after completion by the debtor of all [plan] payments . . . 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 . . . (2) of the kind specified in section 523(a) of this title.
Section 523(a) provides that “[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” defined in the subsequent subparagraphs of
§ 523(a).
Facially, these sections appear to conflict because § 523(a) refers to
individual debtors, while § 1192 provides for discharge of both individual
and corporate debtors and does not distinguish between them when
excepting debts “of the kind specified in section 523(a).” In Cleary, the
Fourth Circuit held that § 1192 refers to the types of debts, not the types of
debtors, and consequently, makes those types of debts nondischargeable to
all debtors under § 1192. 36 F.4th at 515.
6 If all creditor classes accept a subchapter V plan, the bankruptcy court confirms the case under § 1191(a), and the discharge provisions of § 1141 apply. Section 1181(a) makes § 1141 generally applicable under subchapter V (except for § 1141(d)(5)). Section 1181(c) clarifies that if a plan is confirmed under § 1191(b), the discharge provisions of § 1141(d) do not apply, except as provided in § 1192. Thus, under a nonconsensual confirmation, discharge is governed exclusively by § 1192.
8 Based on the language and context of the statutes, we believe that the
better interpretation is that § 1192 reiterates § 523(a)’s application to
debtors under subchapter V, and § 523(a) limits its applicability to
individuals.
Section 523(a) unambiguously applies only to individual debtors. The
reference in § 1192 to debts “of the kind specified in section 523(a)” can
reasonably be construed to mean the list of debts, but nothing in § 1192
obviates the express limitation in the preamble of § 523(a) or otherwise
expands its scope to corporate debtors. 7 See In re GFS Indus., Inc., 647 B.R. at
341-42; see also Pac. Gas & Elec. Co. v. California, 350 F.3d 932, 943 (9th Cir.
2003) (“[W]e presume, absent clear indications to the contrary, that
Congress did not intend to change preexisting bankruptcy law or practice
in adopting [or amending] the Bankruptcy Code . . . .“); Cohen v. de la Cruz,
523 U.S. 213, 221 (1998) (refusing to read the Bankruptcy Code as departing
7 Though our analysis does not require us to resort to legislative history, we note that bankruptcy courts and commenters who have consulted the history find no indication of congressional intent to expand the application of § 523(a) to corporate debtors. See In re Satellite Rests. Inc., 626 B.R. at 878 (discussing the Report of the Judiciary Committee of the House of Representatives, 290 H.R. Rep. No. 116-171, at p.8 (2019), which states that the new § 1192 discharge excepts “any debt that is otherwise nondischargeable” and reasoning that this phrase logically refers to the existing form of § 523(a)); In re GFS Indus., 647 B.R. at 344 n.6 (citing Hon. Paul W. Bonapfel, GUIDE TO THE SMALL BUSINESS REORGANIZATION ACT of 2019, (Rev. June 2022), https://www.ganb.uscourts.gov/sites/default/files/sbra_guide_pwb.pdf, at 204-05, and noting that if Congress “intended to make a seismic change to existing Chapter 11 law, one would expect the House Judiciary Committee Report to have pointed out this change.”). 9 from past bankruptcy practice without a clear indication that Congress
intended to do so).
Moreover, as part of the Small Business Reorganization Act of 2019
(“SBRA”), Congress amended § 523(a) to add § 1192 to the list of discharge
provisions to which it applies. Interpreting § 1192 to extract from § 523(a)
only the list of nondischargeable debts, without its limitation to
individuals, would render the amendment surplusage. See Marx v. Gen.
Revenue Corp., 568 U.S. 371, 386 (2013) (“[T]he canon against surplusage is
strongest when an interpretation would render superfluous another part of
the same statutory scheme.”); Mackey v. Lanier Collection Agency & Serv.,
Inc., 486 U.S. 825, 837 (1988) (“[W]e are hesitant to adopt an interpretation
of a congressional enactment which renders superfluous another portion of
that same law.”).
If § 1192 makes the debts specified in § 523(a) nondischargeable to all
debtors, the concurrent amendment to § 523(a) has no meaning. Appellant
offers no explanation why her interpretation does not render the
amendment surplusage.
In Cleary, the Fourth Circuit suggested that “to the extent that one
might find tension between the language of § 523(a) addressing individual
debtors and the language of § 1192(2) addressing both individual and
corporate debtors,” the more specific provision of § 1192 should govern
over the more general provision of § 523(a). 36 F.4th at 515.
10 We disagree with the Fourth Circuit’s application of the
general/specific canon for two reasons. First, while “it is a commonplace of
statutory construction that the specific governs the general,” Morales v.
Trans World Airlines, Inc., 504 U.S. 374, 384 (1992), this canon is valid only
where the statutes cannot be reconciled, see Adirondack Med. Ctr. v. Sebelius,
740 F.3d 692, 698 (D.C. Cir. 2014). “Absent clearly expressed congressional
intent to the contrary, it is our duty to harmonize the provisions and render
each effective.” Adirondack Med. Ctr., 740 F.3d at 698-99 (citing Morton v.
Mancari, 417 U.S. 535, 551 (1974)).
Our construction harmonizes the statutes. Section 1192 incorporates
the types of debts that are nondischargeable under a nonconsensual
subchapter V plan, and § 523(a) limits the scope of nondischargeability to
individual debtors.
Second, the Fourth Circuit reasoned that § 1192 is more specific
because it applies only to subchapter V debtors under nonconsensual
confirmations, while § 523(a) applies to several discharge provisions. But
“[w]hat counts for application of the general/specific canon is not the nature
of the provisions’ prescriptions but their scope.” RadLAX Gateway Hotel, LLC
v. Amalgamated Bank, 566 U.S. 639, 648 (2012). Section 523(a) limits the scope
of discharge under § 1192 by specifically excepting from discharge certain
debts for individuals. If we were unable to reconcile these statues, the
general/specific canon would countenance an interpretation that § 523(a)
controls § 1192.
11 B. Context supports our interpretation that the debts in § 523(a) are nondischargeable under subchapter V for only individual debtors.
Subchapter V of chapter 11 was created with the passage of the SBRA
to create an expedited process for small business debtors to efficiently
reorganize. Consistent with this policy goal, debtors under subchapter V
enjoy certain benefits: they do not pay United States Trustee fees; they are
not required to file a disclosure statement; and competing creditors’ plans
are not permitted. Subchapter V also permits a debtor to confirm a
nonconsensual plan without satisfying the “absolute priority rule” of
§ 1129(b)(2)(B). 8
But subchapter V remains a part of chapter 11, and its discharge
provisions should be interpreted consistent with the overall statutory
scheme in chapter 11. See Rtech Fabrications, LLC, 635 B.R. at 565-66.
In establishing chapter 11 under the Bankruptcy Code in 1978,
Congress made an intentional decision to depart from pre-Code practice
and eliminate exceptions to discharge for corporate debtors. See In re Cleary
Packaging LLC, 630 B.R. at 474 (citing Ralph Brubaker, Taking Exception to
the New Corporate Discharge Exceptions, 13 Am. Bankr. Inst. L. Rev. 757, 764-
65 & n.46-49 (2005)); see also In re Exide Techs., 601 B.R. 271, 280-81 (Bankr.
8 Section 1129(b)(2)(B) requires that, under a nonconsensual confirmation in chapter 11, a holder of a claim or interest junior to a class of unsecured claims cannot receive or retain any property under the plan on account of such claim or interest. See also, Case v. L.A. Lumber Prods. Co., 308 U.S. 106 (1939) (discussing the new value corollary to the absolute priority rule); Norwest Bank Worthington v. Ahlers, 485 U.S. 197 (1988) (same). 12 D. Del. 2019), aff’d, 613 B.R. 79 (D. Del. 2020) (“Congress initially intended
that all nineteen of the § 523(a) discharge exceptions for individual
debtors . . . should also apply to corporate debtors. However, based on
public policy considerations, Congress ultimately limited the scope of the
discharge exceptions for corporate debtors.” (citations omitted)). Since
then, the corporate discharge has been “strenuously protected.” In re Rtech
Fabrications, LLC, 635 B.R. at 565 (citing In re Cleary Packaging LLC, 630 B.R.
at 474).
Congress has limited the corporate discharge in chapter 11 once, by
enacting § 1141(d)(6), 9 and it did so by expressly stating that certain debts
are excepted from discharge for corporate debtors. As noted by the
bankruptcy court in Rtech Fabrications, this narrow limitation to the
corporate discharge took eight years to become law. Id. at 565, n.5. We
agree that “the suggestion that Congress incorporated 19 new exceptions to
discharge for small corporations in a bill that was introduced in April 2019,
and signed into law by the President in April 2019, seems not only
9 Section 1141(d)(6) provides: Notwithstanding paragraph (1), 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) that is owed to a domestic governmental unit, or owed to a person as the result of an action filed under subchapter III of chapter 37 of title 31 or any similar State statute or; (B) for a tax or customs duty with respect to which the debtor—(i) made a fraudulent return; or (ii) willfully attempted in any manner to evade or to defeat such tax or such customs duty. 13 improbable but also contradicts years of bankruptcy law and policy.” Id. at
566 (quoting In re Cleary Packaging LLC, 630 B.R. at 475).
The Fourth Circuit found the reference in § 1141(d)(6) to debts “of a
kind specified in . . . 523(a)” supportive of its interpretation. In re Cleary
Packaging LLC, 36 F.4th at 516-17. It reasoned that the bankruptcy court’s
construction would create difficulty in reconciling § 523(a) with
§ 1141(d)(6) because § 523(a) also expressly applies to discharges under
§ 1141, and thus, it would seem to conflict with the language of § 1141(d)(6)
making debts “of a kind specified” in § 523(a) nondischargeable for
corporate debtors. Id. at 516.
We have no difficulty reconciling our interpretation with the
language of § 1141(d)(6). Section 1141(d)(6) is clear that it makes certain
debts nondischargeable for corporate debtors. This express statement is
necessary because § 523(a) is plainly limited to individual debtors.
Unlike § 1141(d)(6), § 1192 does not purport to change the application
of § 523(a). Section 1192 does not refer to specific subparagraphs of § 523(a)
and it does not expressly make those types of debts applicable to corporate
debtors. Instead, it echoes what § 523(a) already says: a discharge under
§ 1192 does not discharge an individual debtor from the debts listed in
The context of other discharge provisions within the overall statutory
scheme of the Bankruptcy Code confirms that § 1192 restates § 523(a)’s
applicability without changing it. Section 523(a) applies to discharges
14 granted under §§ 727, 1141, 1192, 1228(a), 1228(b), and 1328(b), yet each of
these discharge provisions contains a similar reference to § 523. See 11
U.S.C. § 727(b) (“Except as provided in section 523 of this title, a discharge
under subsection (a) of this section discharges the debtor . . . .”); 11 U.S.C.
§ 1141(d)(2) (“A discharge under this chapter does not discharge a debtor
who is an individual from any debt excepted from discharge under section
523 of this title.”); 11 U.S.C. § 1228(a) (“the court shall grant the debtor a
discharge of all debts . . . except any debt . . . (2) of a kind specified in
section 523(a) of this title . . . .”); 11 U.S.C. § 1228(c) (“A discharge granted
under subsection (b) of this section discharges the debtor from all
unsecured debts . . . except any debt . . . (2) of a kind specified in section
523(a) of this title . . . .” ); 11 U.S.C. § 1328(c) (“A discharge granted under
subsection (b) of this section discharges the debtor from all unsecured
debts . . . except any debt . . . (2) of a kind specified in section 523(a) of this
title.”).
Because § 103(a) makes the provisions of chapter 5 applicable to
chapters 7, 11, 12, and 13, and § 523(a) specifically excepts debts from
discharge under the referenced discharge statutes, it is not strictly
necessary for any of the discharge provisions to refer to § 523 to render the
debts nondischargeable. Each of the references to § 523(a) in these
discharge provisions merely reiterates that the debts listed in § 523(a) are
not dischargeable for individual debtors under the specified discharge
provision.
15 We recognize that the references to § 523(a) are redundant, but
“redundancies are common in statutory drafting—sometimes in a
congressional effort to be doubly sure, sometimes because of congressional
inadvertence or lack of foresight, or sometimes simply because of the
shortcomings of human communication.” Barton v. Barr, 140 S. Ct. 1442,
1453 (2020); see also Rimini St., Inc. v. Oracle USA, Inc., 139 S. Ct. 873, 881
(2019) (“Redundancy is not a silver bullet . . . . Sometimes the better overall
reading of the statute contains some redundancy.”). And, “[r]edundancy in
one portion of a statute is not a license to rewrite or eviscerate another
portion of the statute contrary to its text.” Barton, 140 S. Ct. at 1453.
Rather than resulting in a mere redundancy, the Cleary interpretation
creates a “positive repugnancy” between the statutes and results in § 523(a)
having no effect under § 1192 despite its express applicability to that
section. See Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253 (1992)
(“Redundancies across statutes are not unusual events in drafting, and so
long as there is no ‘positive repugnancy’ between two laws, a court must
give effect to both” (internal citation omitted)).
We are also unpersuaded that “Congress’s importation of language
into Subchapter V from the conceptually similar Chapter 12 proceedings”
reflects an intent to make nondischargeable debts applicable to corporate
debtors. In re Cleary Packaging, LLC, 36 F.4th at 516. The Fourth Circuit
suggested that the language of § 1228(a), which excepts from discharge
debts “of a kind specified in section 523(a),” should be interpreted the same
16 as the virtually identical language in § 1192(2). Id. at 516-17. We agree the
phrases should be interpreted similarly, but neither provision expands the
scope of § 523(a) to apply to corporate debtors.
Cleary cites two cases for the proposition that § 523(a) applies to
corporate debtors under chapter 12: Southwest Georgia Farm Credit, Aca v.
Breezy Ridge Farms, Inc. (In re Breezy Ridge Farms Inc.), Case No. 08-12038-
JDW, 2009 WL 1514671 (Bankr. M.D. Ga. May 29, 2009) and New Venture
Partnership v. JRB Consolidated, Inc. (In re JRB Consolidated, Inc.), 188 B.R. 373
(Bankr. W.D. Tex. 1995). Like Cleary, both cases rely on the general/specific
canon of construction, which we find inapposite for the reasons stated
above, and neither case offers an explanation why this interpretation does
not render surplusage § 523(a)’s specific application to § 1228(a).
More importantly, the phrase “of a kind specified in section 523(a)”
appears to have been taken directly from § 1328(c). See Foulston v. BDT
Farms, Inc. (In re BDT Farms, Inc.), 21 F.3d 1019, 1021 n.3 (10th Cir. 1994)
(“Chapter 12 was closely modeled after Chapter 13.”). Section 1328(b)
provides for a “hardship discharge” under chapter 13. In contrast to the
typical discharge under § 1328(a)—which incorporates some but not all the
provisions of § 523(a)—the entirety of § 523(a) is made applicable to
chapter 13 debtors receiving a hardship discharge under § 1328(b).
Notwithstanding the fact that § 523(a) expressly applies to § 1328(b),
Congress provided in § 1328(c): “A discharge granted under subsection (b)
of this section discharges the debtor from all unsecured debts . . . except
17 any debt— (2) of a kind specified in section 523(a) of this title.” Section
109(e) states that only individuals can be debtors under chapter 13, thus,
§ 1328(c)’s reference to debts “of a kind specified in section 523(a)” must be
a reiteration of § 523(a)’s applicability.
Absent some indication to the contrary, we see no reason why
Congress’s replication of § 1328(c)’s language in § 1228(a), and later in
§ 1192, would carry a different meaning or serve a different purpose. The
language in each of these sections clarifies that each discharge provision is
limited by § 523(a), which makes debts nondischargeable for individual
debtors.
The context of other discharge provisions, including those with
substantially similar language, confirm that Congress included the
reference in § 1192 to debts “of the kind specified in section 523(a)” to
reiterate § 523(a)’s application to individual debtors under subchapter V.
C. Policy considerations
In a consensual confirmation under subchapter V, discharge is
governed by § 1141. Section 1141(d)(6) also provides that a corporate
debtor cannot discharge any debt: (1) of a kind specified in § 523(a)(2)(A) or
(a)(2)(B) owed to a domestic governmental unit, or owed to a person as a
result of an action under the False Claims Act, 31 U.S.C. § 3729, or similar
state statute; or (2) for a tax or customs duty with respect to which the
debtor made a fraudulent return or willfully attempted to evade or defeat
such tax or customs duty. Because § 1141 does not apply to discharges
18 under § 1192, the limitations to corporate discharge found in §1141(d)(6)
are not applicable under nonconsensual plans in subchapter V.
Appellant argues that our construction leads to an absurd result
because a debtor with False Claims Act liability or tax fraud liability could
discharge such debt under a nonconsensual plan, but not under a
consensual plan. We too are puzzled by this result, 10 but “[w]e must
presume that Congress says in a statute what it means and means in a
statute what it says there.” Rotkiske v. Klemm, 140 S. Ct. 355, 360 (2019)
(cleaned up).
The apparent difference between the discharge provisions does not
entice us to reject the language and context of the statutes in favor of an
interpretation that alters the long-standing operation of § 523(a) without an
express indication by Congress—in the statute or otherwise—that it
intended to do so.
The Fourth Circuit presumed that “[g]iven the elimination of the
absolute priority rule, Congress understandably applied limitations on the
discharge of debts to provide an additional layer of fairness and equity to
10 We note that § 1141(d)(6) claims rarely arise in reported bankruptcy cases. Additionally, most liability under the False Claims Act does not require the specific intent to deceive necessary to render such debts nondischargeable under § 523(a)(2). Compare, § 523(a)(2)(A) and (B) (each requiring intent to deceive), with 31 U.S.C. § 3731(a), (c) (describing liability for any person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment and approval” and defining “knowingly” to “require no proof of specific intent to defraud”). Despite the relative paucity of these claims, we would expect them to be nondischargeable for corporate debtors regardless of whether confirmation is consensual or nonconsensual. 19 creditors to balance against the altered order of priority that favors the
debtor.” In re Cleary Packaging, LLC, 36 F.4th at 517. We appreciate the
plausibility of this idea, but we question whether elimination of the
absolute priority rule is really in “balance” with making the full
complement of nondischargeable debts applicable to corporate debtors,
and we question whether doing so would comport with the purpose of
facilitating reorganization of small businesses.
Small business cases where confirmation is not likely to be
consensual are precisely the types of cases where the provisions of the
SBRA serve their intended purpose. The absolute priority rule and the
threat of competing plans have little bearing on consensual confirmations.
Debtors with consenting creditors can achieve quick and efficient
reorganizations without need of subchapter V and without the added
administrative expense of a subchapter V trustee.
In nonconsensual confirmations, elimination of the absolute priority
rule permits more small businesses reorganizations largely because equity
owners are often active managers and successful reorganization depends
on their continued service. See Bonapfel, supra note 7, at 231. Equity
interests in insolvent small businesses typically have little value and
contribution of equivalent “new value” likely provides only a marginal
benefit to unsecured creditors.
While elimination of the absolute priority rule may slightly reduce
the benefit to unsecured creditors, making debts nondischargeable for
20 corporate debtors does not provide a commensurate benefit. Rendering
certain debts nondischargeable is more likely to harm most general
unsecured creditors by steering small businesses with nondischargeable
debts toward liquidation. See In re GFS Indus., LLC, 647 B.R. at 349-50.
Because § 1192 applies only to nonconsensual plans, and acceptance
of a plan is determined by classes of creditors, see 11 U.S.C. §§ 1191; 1126, a
creditor who asserts a claim that would be nondischargeable under § 523(a)
may nevertheless have its claim discharged if all classes accept the plan.
Thus, even the benefit to a creditor with a potentially nondischargeable
claim is diminished unless that creditor is sufficiently situated to assure a
nonconsensual confirmation.
Finally, even if a creditor could prove a nondischargeable claim, and
cause its class to reject the plan, its claim will be nondischargeable only if
the debtor obtains a nonconsensual confirmation. Pursuant to Rule 1020(a),
a small business debtor elects whether to proceed under subchapter V by
making the designation in its petition. Rule 1009(a) provides that “[a]
voluntary petition, list, schedule, or statement may be amended by the
debtor as a matter of course at any time before the case is closed.” See also
Rule 1020(b) (providing for a deadline to object to a debtor’s designation no
later than 30 days after the meeting of creditors “or within 30 days after
any amendment to the statement, whichever is later.”).
Under the Cleary interpretation, a small business debtor with
potentially nondischargeable debts is incentivized to elect subchapter V
21 and force creditors to spend resources to prove their claims, only to then
amend its election and proceed under chapter 11 where those claims will
be discharged upon confirmation.
The policy rationales suggested by Appellant and Cleary to support
their interpretation are unavailing. Construing § 1192 to make debts
nondischargeable for corporate debtors offers little benefit to unsecured
creditors in small business cases and poses serious obstacles to the stated
purpose of the SBRA to make reorganization efficient and expeditious for
small business debtors.
It is vexing that our interpretation means that a corporate debtor gets
a slightly broader discharge under § 1192 than under a consensual plan,
but it is more difficult to believe that Congress intended to make § 523(a)
applicable to corporate debtors through an opaque reference rather than an
express statement. We agree with Judge Bonapfel that:
[I]t is difficult to conclude that, in enacting a statute universally proclaimed to have the purpose of facilitating reorganization of small businesses, by among other things eliminating the absolute priority rule in a cramdown situation, Congress in 2019 intended to re-introduce all the problems with exceptions to the discharge of a corporation that it eliminated over 50 years earlier.
Bonapfel, supra note 7, at 237.
CONCLUSION
We hold that § 1192 does not make debts specified in § 523(a)
applicable to corporate debtors in subchapter V. Based on the foregoing, 22 we AFFIRM the bankruptcy court’s order dismissing Appellant’s
complaint.