Avion Funding, LLC v. GFS Industries, LLC, 647 B.R. 337

Background:

GFS Industries, LLC (cleaning/environmental services) obtained merchant cash advances (MCAs) to expand during COVID-19 and filed Subchapter V Chapter 11 on April 21, 2022.
Avion Funding, LLC (an MCA lender) filed an adversary complaint seeking a declaration that GFS’s debt is nondischargeable under 11 U.S.C. § 523(a)(2) & (4), alleging misrepresentations and nondisclosures when obtaining financing.
GFS moved to dismiss under Fed. R. Civ. P. 12(b)(6) (bankruptcy rules applicable) arguing that § 523, § 727, and § 1141(d) do not support dischargeability suits against a corporate Subchapter V debtor.
The court applied the heightened fraud pleading standard (Rule 9(b)) but focused primarily on the legal question whether the cited statutes reach corporate Subchapter V debtors.
The bankruptcy court concluded corporate debtors can receive a discharge under § 1192 in Subchapter V but held § 523(a) (and § 727 and § 1141(d)(3)) do not permit dischargeability suits against corporate Subchapter V debtors; it granted GFS’s motion and dismissed Avion’s complaint with prejudice.

Issues:

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether corporate Subchapter V debtors can receive a discharge	Avion assumed GFS could receive a discharge and sought nondischargeability relief	GFS did not dispute entitlement to a Subchapter V discharge but argued statutory limits on challenges	Court: Corporations can receive a Subchapter V discharge under § 1192 if statutory requirements met
Whether § 523(a) nondischargeability exceptions apply to corporate Subchapter V debtors	Avion: § 1192’s cross-reference to § 523(a) makes § 523 applicable to all Subchapter V debtors (including corporations)	GFS: § 523(a)’s preamble limits exceptions to "an individual debtor," so § 523 does not reach corporate debtors in Subchapter V	Court: § 523(a) exceptions apply only to individuals; § 1192(2) does not expand § 523 to corporations — § 523 claims dismissed with prejudice
Whether § 727(a) claims (denial of discharge) apply to a corporate Subchapter V debtor	Avion: § 1141(d)(3)(C) imports § 727 into Chapter 11, so § 727-based denial claims are cognizable	GFS: § 1181(c) renders § 1141 inapplicable to nonconsensual § 1191(b) plans; § 727 by its terms applies only to individuals	Court: § 727 does not apply here (and excludes non-individual debtors); § 727 claims dismissed
Whether § 1141(d)(3) supports an independent dischargeability claim	Avion: § 1141(d)(3) can be invoked to deny discharge per § 727 grounds	GFS: § 1181(c) excludes § 1141 from nonconsensual § 1191(b) Subchapter V confirmations; § 1141(d)(3) is inapplicable	Court: § 1141(d)(3) gives no independent basis here and is inapplicable; § 1141 claim dismissed

Key Cases Cited

Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standard: factual allegations must permit reasonable inference of liability)
Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard)
Gonzalez v. Kay, 577 F.3d 600 (5th Cir. 2009) (applying Iqbal/Twombly in the Fifth Circuit)
Life Partners Creditors' Tr. v. Crowley, 926 F.3d 103 (5th Cir. 2019) (Rule 9(b) requires who, what, when, where, why for fraud)
Garrie v. James L. Gray, Inc., 912 F.2d 808 (5th Cir. 1990) (reasoning that § 523(a) exceptions apply only to individuals)
Yamaha Motor Corp. v. Shadco, Inc., 762 F.2d 668 (8th Cir. 1985) (recognition that § 523 exceptions target individuals)
In re JRB Consolidated, Inc., 188 B.R. 373 (Bankr. W.D. Tex. 1995) (distinguishing Chapter 12 and Chapter 11 discharge treatments)
In re Cleary Packaging, LLC, 36 F.4th 509 (4th Cir. 2022) (held § 1192(2) makes § 523(a) exceptions applicable to Subchapter V corporations — court here disagreed)
In re Rtech Fabrications, LLC, 635 B.R. 559 (Bankr. D. Idaho 2021) (bankruptcy court holding § 523(a) exceptions limited to individuals in Subchapter V)
In re Satellite Restaurant, Inc., 626 B.R. 871 (Bankr. D. Md. 2021) (same conclusion on § 523 in Subchapter V)