Ninth Circuit BAP Rules Exceptions from Discharge do not Apply in Corporate Subchapter V Cases

Lafferty v. Off-Spec Solutions, LLC (In re Off-Spec Solutions, LLC), — B.R. — (9th Cir. BAP Jul. 6, 2023)

On July 6, 2023, the U.S. Bankruptcy Appellate Panel for the Ninth Circuit entered an opinion affirming a decision by a bankruptcy court dismissing a complaint for nondischargeability under Bankruptcy Code § 523(a)(6).  The appellant had brought an adversary proceeding alleging that she was sexually harassed, discriminated against, and wrongfully terminated by the debtor’s manager.  The debtor filed a motion to dismiss for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure (incorporated in Rule 7012 of the Federal Rules of Bankruptcy Procedure).  The debtor’s motion was successful, and the appellant took an appeal.

The issue on appeal was whether the exceptions to discharge in Bankruptcy Code § 523(a) apply to a corporation in a Subchapter V bankruptcy under Bankruptcy Code § 1192.  Section 1192 provides that confirmation of a nonconsensual plan does not discharge “any debt… of the kind specified in section 523(a)….”  Section 523(a), in turn, provides that a “discharge under section… 1192… does not discharge an individual from any debt” listed in the subsequent subsections.  The court determined that the plain language of the two statutes indicates that the exceptions from discharge apply only to individuals.

The opinion departs from Cantwell-Cleary Co. v. Cleary Packaging, LLC (In re Cleary Packaging, LLC), 36 F.4th 509 (4th Cir. 2022), in which the Fourth Circuit held that the exceptions from discharge apply to both individual and corporate debtors.  To summarize, the Fourth Circuit reasoned that the language of § 1192 refers only to the list of nondischargeable debts under § 523(a) and not to the limiting language of § 523(a) itself.  The Ninth Circuit BAP disagreed, explaining that such an interpretation would render the reference to § 1192 in § 523(a) surplusage.

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