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FeaturesThe Bankruptcy StrategistBankruptcyLitigation

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.

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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.

Cantwell-Cleary challenged the plan by filing a complaint against the debtor seeking a declaration from the bankruptcy court that the entire $4.7 million judgment is nondischargeable under Sections 1192(2) and 523(a) of the Bankruptcy Code. The debtor moved to dismiss the complaint, arguing that the discharge exceptions applied only to individual debtors and not to corporate debtors. The bankruptcy court agreed with the debtor and dismissed the complaint. Cantwell-Cleary then appealed the dismissal order directly to the U.S. Court of Appeals for the Fourth Circuit.

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