The creditor made a loan to a limited liability corporation (the debtor) in exchange for a sum of the debtor’s future receivables. Before this agreement, the debtor claimed it “had not filed, nor did it anticipate filing, any Chapter 11 bankruptcy petition.” However, two weeks later, the debtor petitioned for Chapter 11 bankruptcy under subchapter V. The creditor then filed an adversary complaint alleging the debtor had misrepresented its plans to file bankruptcy. The creditor sought a declaration that the debtor’s debt owed to it was nondischargeable because subchapter V debtors “cannot discharge certain ‘kinds’ of debt listed in § 523(a).” Next, the debtor moved to dismiss on the grounds that 11 U.S.C. § 523(a) only applies to individuals, and because the debtor is a corporation, its debt would be dischargeable. The bankruptcy court ruled in favor of the debtor. On appeal, the creditor argued that the bankruptcy court erred in its interpretation and that the interpretation of the Fourth Circuit, that Subchapter V discharge exceptions apply to both individuals and corporations, was instead correct.
In Avion Funding, L.L.C. v. GFS Indus., L.L.C. (In re GFS Indus, L.L.C.), 99 F.4th 223 (5th Cir. 2024), the Fifth Circuit reversed the bankruptcy court’s ruling and followed the interpretation of the Fourth Circuit, holding that the § 523(a) discharge exceptions apply to both corporations and individuals in subchapter V cases. First, the court explained that interpretation of the Bankruptcy Code starts with the plain language itself. In 11 U.S.C. § 1182(1)(A), “‘debtor’ means ‘a person engaged in commercial or business activities.’” Additionally, a “person” is defined to include both individuals and corporations. 11 U.S.C. § 101(41). Second, the court applied the “precise language” of the statute as written and concluded that “the most natural reading of § 1192(2) is that it subjects both corporate and individual Subchapter V debtors to the categories of debt discharge exceptions listed in § 523(a).” Further, the court highlighted the language “kind of debt” present in the statute and noted Congress’ choice not to say “kind of debtor” in § 1192; this, the circuit court reasoned, indicated Congress’ intent to refer to the list of different debts, not to different kinds of debtors. Third, the court noted that specific sections applying to subchapter V govern over general Bankruptcy Code provisions. Thus, “to the extent §§ 523(a) and 1192(2) clash, § 1192 governs as the more specific provision.” The debtor attempted to argue that the presence of the word “individual” is “superfluous” in the statute. The court acknowledged this point but explained that the “preference for avoiding surplusage construction is not absolute,” Lamie v. U.S. Tr., 540 U.S. 526, 536 (2004), and that avoiding the surplusage language would require the court to alter Congress’ intent, which it opted not to do. Next, the court found that the debtor’s citation to a committee report was of “no help” in resolving the issue disputed in this case because of the Supreme Court’s reluctance to use legislative history over plain terms to alter a statute's meaning. The circuit court also concluded that the debtor's reasoning was a misrepresentation of how Congress counterbalanced benefits with costs in relation to 11 U.S.C. § 1192, the dischargeability statute that applies in subchapter V cases. As the court reasoned, this section allowed small business entity debtors benefits but still held them to answer to some dischargeability exceptions set forth in the Bankruptcy Code. Finally, if the court had agreed with the debtor, it would have had to rewrite the benefits and costs of the statute. It had no such power. Thus, the circuit court reversed and remanded the case, holding that both corporations and individuals are subject to the discharge exceptions listed in 11 U.S.C. § 523(a).
By Olivia Lewis: [email protected]
Edited By Callighan Ard: [email protected]
Edited By Ashley Boyce: [email protected]
Edited By Hayden Mariott: [email protected]