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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Fourth Circuit: Corporate Subchapter V Debtors Subject to Discharge Exceptions Under Bankruptcy Code

By Lawrence J. Kotler and Elisa Hyder
June 01, 2023

In a matter of first impression not yet addressed by any circuit court, the U.S. Court of Appeals for the Fourth Circuit in the case of Cantwell-Cleary v. Cleary Packaging (In re Cleary Packaging), 36 F.4th 509 (4th Cir. 2022), addressed whether the discharge exceptions under Section 523(a) apply to corporate debtors under Subchapter V of Chapter 11 of the Bankruptcy Code. Based on the text and purposes of Subchapter V, the Cleary court held that, unlike corporate debtors in traditional Chapter 11 cases, corporate Subchapter V debtors are subject to Section 523(a) to the same extent as individual debtors and, as such, can be denied a discharge.

Background

In this case, the debtor, Cleary Packaging, LLC, filed for bankruptcy in the U.S. Bankruptcy Court for the District of Maryland and elected to proceed under Subchapter V of Chapter 11 of the Bankruptcy Code as a small business enterprise. The debtor's Subchapter V plan proposed paying just a small percentage of a prepetition $4.7 million state court judgment entered against the debtor in favor of Cantwell-Cleary Co., Inc., with the remainder of the judgment to be discharged.

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