626 B.R. 871
Bankr. D. Md.2021Background:
- Nineteen alleged former employees sued Satellite Restaurants Inc. ("Defendant") in district court for unpaid wages under FLSA and Maryland wage laws; that action is stayed by the bankruptcy filing.
- Defendant filed a Chapter 11 Subchapter V petition and sought confirmation by cramdown under §1191(b), which would produce a discharge under §1192.
- Plaintiffs commenced an adversary proceeding seeking declarations that the debts owed on their wage claims are nondischargeable under 11 U.S.C. §523(a)(2)(A) (fraud) and §523(a)(6) (willful and malicious injury).
- Defendant moved to dismiss under Fed. R. Civ. P. 12(b)(6), arguing §523(a) applies only to individual debtors and therefore cannot bar discharge for a non-individual Subchapter V debtor.
- Plaintiffs countered that the SBRA-created §1192 and its reference to debts “of the kind specified in §523(a)” extends §523(a)’s exceptions to non-individual Subchapter V debtors.
- The bankruptcy court held §523(a) applies only to individual debtors, dismissed the adversary complaint, and denied the defendant’s request for fees and costs.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether §523(a) exceptions apply to non-individual debtors in Subchapter V cases (i.e., whether §1192 makes §523(a) apply to corporations) | §1192’s phrase “debt of the kind specified in §523(a)” means any debt listed in §523(a) can be excepted from a §1192 discharge regardless of debtor type | §523(a)’s plain text limits its scope to “an individual debtor”; SBRA did not expand §523(a) to non-individuals | Court: §523(a) is unambiguous and applies only to individual debtors; §1192 reference does not change that; dismissal granted |
| Whether pre‑SBRA case law supports applying §523(a) to non-individuals (Plaintiffs rely on some Chapter 12 cases) | Some Chapter 12 decisions suggest §523 exceptions can apply to non-individual Chapter 12 debtors | Majority pre‑SBRA authority holds §523(a) applies only to individuals; Chapter 12 analogies are inapposite to Chapter 11/Subchapter V | Court: Followed pre‑SBRA precedent restricting §523(a) to individuals and distinguished Chapter 12 cases; commentary urging broader read was unpersuasive |
| Whether defendant is entitled to attorneys’ fees and costs for defending the adversary | Plaintiffs acted in good faith in bringing the first‑impression claim | Defendant sought fees as prevailing party | Court: Denied fees because matter presented a novel question and no bad faith by plaintiffs |
Key Cases Cited
- In re Spring Valley Farms, Inc., 863 F.2d 832 (11th Cir. 1989) (corporate debtor is not an "individual" for purposes of §523)
- Yamaha Motor Corp. v. Shadco, Inc., 762 F.2d 668 (8th Cir. 1985) (applying §523 only to individual debtors)
- Garrie v. James L. Gray, Inc., 912 F.2d 808 (5th Cir. 1990) (willful and malicious injury exception applies to individuals, not corporations)
- In re JRB Consol., Inc., 188 B.R. 373 (Bankr. W.D. Tex. 1995) (Chapter 12 decision recognizing §523 treatment in Chapter 12 but limited and not controlling for Chapter 11)
- In re Hawker Beechcraft, Inc., 515 B.R. 416 (S.D.N.Y. 2014) (declining to extend Chapter 12 §523 reasoning to Chapter 11 discharges)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading‑standard authority for Rule 12(b)(6) review)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (pleading‑standard precedent)
- United States v. Ron Pair Enters., Inc., 489 U.S. 235 (1989) (statutory interpretation begins with statutory text)