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Bankruptcy Litigation Regulation

Appellate Court Holds FCC Penalty Claim Survives Chapter 11 Corporate Debtor’s Discharge

A Chapter 11 corporate debtor’s monetary penalty obligation owed to the FCC, resulting from “fraud on consumers,” survived the debtor’s reorganization plan discharge, even when the FCC “was not a victim of the fraud,” the U.S. District Court for the Southern District of New York recently held.

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A Chapter 11 corporate debtor’s monetary penalty obligation owed to the Federal Communication Commission (FCC), resulting from “fraud on consumers,” survived the debtor’s reorganization plan discharge, even when the FCC “was not a victim of the fraud,” held the U.S. District Court for the Southern District of New York on Sept. 2, 2021. In re Fusion Connect, Inc., 2021 WL 3932346, 1 (S.D.N.Y. Sept. 2, 2021). On appeal, the court reversed the bankruptcy court’s dismissal of the Government’s non-dischargeability complaint under Bankruptcy Code (Code) §1146(d)(6), explaining that the fraud exception to dischargeability reaches debts owed to “creditors who were not themselves defrauded,” such as the Government here. Id., at 2. According to the court, the bankruptcy court had confirmed the debtor’s reorganization plan with a broad discharge (i.e., release) of pre-bankruptcy debt, but the plan confirmation order put “stakeholders … on notice that [the FCC Penalty] could attach to the newly constituted [reorganized] entity,” when its terms made the dischargeability of that liability “an open issue.” Id., at 12.

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