Maryland Bankruptcy Court Rules Corporate Debtors May Discharge Nondischargeable Debts in Subchapter V Chapter 11 Case

Miles & Stockbridge P.C.

The Small Business Restructuring Act of 2019, Pub. L. 116-54, 133 Stat. 1079 (Aug. 23, 2019) (“SBRA”) became effective February 19, 2020. SBRA, among other things, created a new Subchapter V under Chapter 11 of Title 11 of the United States Code, designed to provide business debtors a more streamlined bankruptcy process for reorganization. The streamlined process was expected to reduce the time and expense of small business reorganizations when compared to the current Chapter 11 process. Subchapter V is available to both individuals and business entities who have primarily business debts and subject to a number of eligibility limitations.

Among the new provisions enacted by the SBRA is Section 1192, which addresses the discharge available for Subchapter V debtors. In what appears to be a matter of first impression for any court, Judge Maria Ellena Chavez-Ruark of the United States Bankruptcy Court for the District of Maryland was presented with the issue of whether a corporate debtor may discharge debts under Section 1192 that an individual debtor could not discharge. The case is Gaske et al. v. Satellite Restaurants Inc. (In re Satellite Restaurants Inc.), 2021 WL 1096627 (March 19, 2021, Bankr. D. Md.). In that case, numerous individual plaintiffs commenced an adversary proceeding against the corporate debtor asserting claims for violations under various employment statutes and for a determination that such claims were nondischargeable based on fraud and willful and malicious injury related to such claims. The debtor filed a motion to dismiss the nondischargeability claims. Relying on a textual analysis of the provisions of Sections 523(a), 1141(d), and 1192 of the Bankruptcy Code, the Court found that corporate debtors under Subchapter V are entitled to a broader discharge than individuals and dismissed the claims. Key to the Court’s determination was that Section 523(a) provides that only individual debtors cannot discharge debts of the kind described in Section 523(a). Based on the Court’s reading of the statute, nothing in Section 1192 expanded Section 523(a)’s reach beyond individual debtors.

This case provides further guidance to debtors considering a Subchapter V election in Chapter 11 and SBRA’s more cost effective and streamlined process. Miles & Stockbridge continues to monitor the evolving landscape in the law under Subchapter V of Chapter 11.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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