‘Small business debtor’ can’t discharge $4.7M judgment

Virginia Lawyers Weekly//June 16, 2022

‘Small business debtor’ can’t discharge $4.7M judgment

Virginia Lawyers Weekly//June 16, 2022

Where the Bankruptcy Code provides that small business debtors are not entitled to discharge certain categories of debt, including debts “for willful and malicious injury by the debtor to another entity or to the property of another entity,” a debtor couldn’t discharge a $4.7 million judgment imposed for its intentional interference with contracts and tortious interference with business relations.

Background

When Cleary Packaging LLC, filed a petition in bankruptcy under subchapter V of Chapter 11 as a “small business debtor,” seeking to discharge a $4.7 million judgment that Cantwell-Cleary Co. Inc. had obtained against it for intentional interference with contracts and tortious interference with business relations, Cantwell-Cleary opposed the effort. It argued that 11 U.S.C. § 1192(2) provides that small business debtors are not entitled to discharge “any debt … of the kind specified in section 523(a) of this title,” and that § 523(a) in turn lists 21 categories of debt that are non-dischargeable, including debts “for willful and malicious injury by the debtor to another entity or to the property of another entity.”

Cleary Packaging argued, however, that because § 523(a)’s list of exceptions to dischargeability is applicable only to “individual debtor[s],” its $4.7 million debt as the debt of a corporation was not covered by the exception contained in § 1192(2) and therefore was indeed dischargeable. The bankruptcy court agreed with Cleary Packaging. It then certified a direct appeal to this court. The sole question on appeal is whether Cleary Packaging, as a subchapter V corporate debtor, can discharge its $4.7 million debt to Cantwell-Cleary “for willful and malicious injury.”

Analysis

Section 1192(2) provides for the discharge of debts for both individual and corporate debtors. Despite this, the question remains whether the exception to such discharges — based on § 1192(2)’s reference to § 523(a) — applies to both individuals and corporations or to only individuals. And that question arises because the introductory language in § 523(a) limits its discharge exceptions to individual debtors. Specifically, § 523(a) provides that § 1192 “does not discharge an individual debtor” from a list of 21 specified debts, including “any debt … for willful and malicious injury,” implying that corporations are not subject to the discharge exceptions.

To address the question, the court begins by focusing on § 1192(2) as the provision specifically governing discharges in a subchapter V proceeding and on the scope of its incorporation of § 523(a). Section 1192(2) excepts from discharge “any debt … of the kind specified in section 523(a).” The section’s use of the word “debt” is decisive as it does not lend itself to encompass the “kind” of debtors discussed in the language of § 523(a). This is confirmed yet more clearly by the phrase modifying “debt”— i.e., “of the kind.”

Thus, the combination of the terms “debt” and “of the kind” indicates that Congress intended to reference only the list of non-dischargeable debts found in § 523(a). As the government’s amicus brief notes, this interpretation of “of the kind” is in line “with the ordinary meaning of the word ‘kind’ as ‘category’ or ‘sort.’” Thus, the court concludes that the debtors covered by the discharge language of § 1192(2) — i.e., both individual and corporate debtors — remain subject to the 21 kinds of debt listed in § 523(a). 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 — that the more specific provision should govern over the more general.

The context of § 1192(2) within the Bankruptcy Code and its structure further support the court’s interpretation. It is readily apparent from a review of different Bankruptcy Code chapters that Congress conscientiously defined and distinguished the kinds of debtors covered by each provision. Finally, the court’s interpretation of § 1192(2) in subchapter V makes particular sense when considering that subchapter’s juxtaposition in Chapter 11 with traditional Chapter 11 provisions, reflecting its distinctive purpose within that chapter.

Reversed and remanded.

Cantwell-Cleary Co. Inc. v. Cleary Packaging LLC, Case No. 21-1981, June 7, 2022. 4th Cir. (Niemeyer), from DMD at Baltimore (Harner). Justin Philip Fasano for Appellant. Robert Joel Branman for Amicus United States. Paul Sweeney for Appellee. VLW 022-2-137. 16 pp.

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