Maryland Bankruptcy Court Decides Upon Non-Dischargeability of Individual Debts under Subchapter V of the Bankruptcy Code

Maryland Bankruptcy Court Decides Upon Non-Dischargeability of Individual Debts under Subchapter V of the Bankruptcy Code

On February 19, 2020, the Small Business Restructuring Act of 2019 became effective. The Act brought several changes to the Bankruptcy Code. Among such changes, the Act also created a new Subchapter V under Chapter 11 of the Title 11 of the United States Code with an aim to provide business debtors a structured bankruptcy process for reorganization. The structured process brought by the Act was expected to cut down the time and expense incurred by small business reorganizations as compared to the current Chapter 11 process. The new subchapter has been added for both individuals and business entities, who have substantial primary debts and are subject to a multiple eligibility limitations.

The Act also added a new provision under the Subchapter V, that is, Section 1192[1]. The provision addresses the discharge available for Subchapter V debtors. In relation to the same, a matter came before Judge Maria Ellena Chavez-Ruark of the United States Bankruptcy Court, District of Maryland with the issue of whether a corporate debtor can discharge debts under Section 1192 that an individual debtor cannot. Gaske et al. v. Satellite Restaurants Inc. (In re Satellite Restaurants Inc.), 2021 WL 1096627 (March 19, 2021, Bankr. D. Md.).

In the stated case, several individual plaintiffs initiated an adversary proceeding against the corporate debtor, Satellite Restaurants in the year 2018. The plaintiffs contended claims for violations under several employment statutes and demanded determination that such claims were non-dischargeable based on fraud and willful and malicious injury related to such claims. Thereafter, in 2020, the Satellite Restaurants Inc. filed a voluntary bankruptcy petition and decided to elect for Subchapter V of Chapter 11 of the Code. The plaintiffs then filed a complaint asserting non-dischargeability of certain debts pursuant to Section 523(a)(2)(A)[2] and 523(a)(6)[3] of the Code. They claimed that the new Subchapter V discharge provision under Section 1192 expanded the application of Section 523(a). In reply to the same, the debtor herein filed a motion to dismiss the non-dischargeability claims. The Court took into consideration the Sections 523(a), 1141(d), and 1192 of the Bankruptcy Code, and found that the corporate debtors under Subchapter V are entitled to a broader discharge than what is available for individuals, and therefore dismissed the claims of the plaintiffs. The Court stated that Section 523(a) provides that only an individual debtor cannot discharge his/her debt of the kind described in the section. Therefore, the newly added section 1192 did not expand Section 523(a)’s reach beyond individual debtors. The aforesaid discussed case has provided a much-needed guidance to debtors considering a Subchapter V election in Chapter 11 and SBRA’s supposed more cost-effective and streamlined process.

[1] 11 USC § 1192

[2] 11 U.S.C. § 523(a)(2)(A)

[3] 11 U.S.C. § 523(a)(6)