In re: Off-Spec Solutions, LLC
Appeal from the United States Bankruptcy Court for the District of Idaho
Noah G. Hillen, Bankruptcy Judge, Presiding
APPEARANCES:
Ronald Walter Brilliant argued for appellant; Matthew T. Christensen of Johnson May, PLLC argued for appellees Off-Spec Solutions, LLC and Cool Mountain Transport.
Before: GAN, CORBIT, and BRAND,
GAN, Bankruptcy Judge:
INTRODUCTION
This appeal requires us to decide, as a matter of first impression, whether the nondischargeability provisions of
Appellant Kristina Jayn Lafferty (“Appellant“) filed a
Although the bankruptcy court‘s construction leads to discordance between a discharge under
FACTS2
In August 2022, Debtor filed a chapter 11 petition as a corporate debtor.3 Debtor indicated it was eligible to be a debtor under
In December 2022, Appellant filed a proof of claim and an adversary complaint against Debtor, its owners, and its parent company, asserting a nondischargeable claim under
In response to Appellant‘s complaint, Debtor filed a motion to dismiss pursuant to Civil Rule 12(b)(6), made applicable by Rule 7012. Debtor argued that Appellant failed to state a cognizable claim for relief because, as the court previously held in Rtech Fabrications,
Appellant opposed the motion and argued that
JURISDICTION
The bankruptcy court had jurisdiction under
ISSUE
Did the bankruptcy court err by interpreting
STANDARDS OF REVIEW
We review de novo a bankruptcy court‘s order granting a motion to dismiss under Civil Rule 12(b)(6). Movsesian v. Victoria Versicherung AG, 670 F.3d 1067, 1071 (9th Cir. 2012) (en banc). We also review de novo a bankruptcy court‘s interpretation of the Bankruptcy Code. Reswick v. Reswick (In re Reswick), 446 B.R. 362, 365 (9th Cir. BAP 2011). De novo means review is indeрendent, with no deference given to the bankruptcy court‘s conclusion. See First Ave. W. Bldg., LLC v. James (In re Onecast Media, Inc.), 439 F.3d 558, 561 (9th Cir. 2006).
DISCUSSION
The bankruptcy court‘s dismissal of the adversary complaint turns purely on the legal question whether a corporate debtor under subchapter V can be liable for debts specified in
Bankruptcy courts that have confronted the issue have uniformly concluded, as the court did here, that
Appellant urges us to reverse the bankruptcy court‘s decision based on the reasoning articulated in Cleary. Although the bankruptcy court‘s construction inevitably leads to a broader discharge for subchapter V debtors under nonconsensual plans than under consensual ones, we find its
A. Statutory construction of §§ 1192 and 523
To resolve a question of statutory construction, we begin “where all such inquiries must begin: with the language of the statute itself.” United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989); see also Lamie v. United States Tr., 540 U.S. 526, 534 (2004) (“[W]hen the statute‘s language is plain, the sole function of the courts—at least where the disposition required by the texts is not absurd—is to enforce it according to its terms.” (quoting Hartford Underwriters Ins. Co. v. Union Planters Bank., N.A., 530 U.S. 1, 6 (2000)). We construe a statute to give effect “to all its provisions, so that no part will be inoperative or superfluous, void or insignificant.” Hibbs v. Winn, 542 U.S. 88, 101 (2004).
If the language is ambiguous, we “may look to other sources to determine congressional intent, such as the canons of construction or the statute‘s legislative history.” United States v. Nader, 542 F.3d 713, 717 (9th Cir. 2008) (citing Jonah R. v. Carmona, 446 F.3d 1000, 1005 (9th Cir. 2006)). Statutory language is ambiguous only if it “gives rise to more than one reasonable interpretation.” Woods v. Carey, 722 F.3d 1177, 1181 (9th Cir. 2013) (quoting DeGeorge v. U.S. Dist. Ct. for Cent. Dist. of Cal., 219 F.3d 930, 939 (9th Cir. 2000)); see also United Sav. Ass‘n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 371 (1988) (“A provision that may seem ambiguous in isolation is often clarified by the remainder of the statutory scheme . . . because only one of the permissible meanings produces a substantive effect that is compatible with the rest of the law.“).
The statutes governing discharge in a nonconsensual subchapter V are
If the plan of the debtor is confirmed under section 1191(b) of this title, as soon as practicable after completion by the debtor of all [plan] payments . . . the court shall grant the debtor a discharge of all debts provided in section 1141(d)(1)(A) of this title, and all other debts allowed under section 503 of this title and provided for in the plan, except any debt . . . (2) of the kind specified in section 523(a) of this title.
Section 523(a) provides that “[a] discharge under section 727, 1141, 1192, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt” defined in the subsequent subparagraphs of
Facially, these sections appear to conflict because
Based on the language and context of the statutes, we believe that the better interpretation is that
Section 523(a) unambiguously applies only to individual debtors. The reference in
from past bankruptcy practice without a clear indication that Congress intended to do so).
Moreover, as part of the Small Business Reorganization Act of 2019 (“SBRA“), Congress amended
If
In Cleary, the Fourth Circuit suggested that “to the extent that one might find tension between the language of
We disagree with the Fourth Circuit‘s application of the general/specific
Our construction harmonizes the statutes. Section 1192 incorporates the types of debts that are nondischargeable under a nonconsensual subchapter V plan, and
Second, the Fourth Circuit reasoned that
B. Context supports our interpretation that the debts in § 523(a) are nondischargeable under subchapter V for only individual debtors.
Subchapter V of chapter 11 was created with the passage of the SBRA to create an expedited process for small business debtors to efficiently reorganize. Consistent with this policy goal, debtors under subchapter V enjoy certain benefits: they do not pay United States Trustee fees; they are not required to file a disclosure statement; and competing creditors’ plans are not permitted. Subchapter V also permits a debtor to confirm a nonconsensual plan without satisfying the “absolute priority rule” of
But subchapter V remains a part of chaрter 11, and its discharge provisions should be interpreted consistent with the overall statutory scheme in chapter 11. See Rtech Fabrications, LLC, 635 B.R. at 565-66. In establishing chapter 11 under the Bankruptcy Code in 1978, Congress made an intentional decision to depart from pre-Code practice and eliminate exceptions to discharge for corporate debtors. See In re Cleary Packaging LLC, 630 B.R. at 474 (citing Ralph Brubaker, Taking Exception to the New Corporate Discharge Exceptions, 13 Am. Bankr. Inst. L. Rev. 757, 764-65 & n.46-49 (2005)); see also In re Exide Techs., 601 B.R. 271, 280-81 (Bankr. D. Del. 2019), aff‘d, 613 B.R. 79 (D. Del. 2020) (“Congress initially intended
that all nineteen of the
Congress has limited the corporate discharge in chapter 11 once, by enacting
improbable but also contradicts years of bankruptcy law and policy.” Id. at 566 (quoting In re Cleary Packaging LLC, 630 B.R. at 475).
The Fourth Circuit found the reference in
We have no difficulty reconciling our interpretation with the language of
Unlike
The context of other discharge provisions within the overall statutory scheme of the Bankruptcy Code confirms that
granted under
Because
We recognize that the references to
Rather than resulting in a mere redundancy, the Cleary interpretation creates a “positive repugnancy” between the statutes and results in
We are also unpersuaded that “Congress‘s importation of language into Subchapter V from the conceptually similar Chapter 12 proceedings” reflects an intent to make nondischargeable debts applicable to corporate debtors. In re Cleary Packaging, LLC, 36 F.4th at 516. The Fourth Circuit suggested that the language of
as the virtually identical language in
Cleary cites two cases for the proposition that
More importantly, the phrase “of a kind specified in section 523(a)” appears to have
Notwithstanding the fact that
any debt— (2) of a kind specified in section 523(a) of this title.” Section 109(e) states that only individuals can be debtors under chapter 13, thus,
Absent some indication to the contrary, we see no reason why Congress‘s replication of
The context of other discharge provisions, including those with substantially similar language, confirm that Congress included the reference in
C. Policy considerations
In a consensual confirmation under subchapter V, discharge is governed by
under
Appellant argues that our construction leads to an absurd result because a debtor with False Clаims Act liability or tax fraud liability could discharge such debt under a nonconsensual plan, but not under a consensual plan. We too are puzzled by this result,10 but “[w]e must presume that Congress says in a statute what it means and means in a statute what it says there.” Rotkiske v. Klemm, 140 S. Ct. 355, 360 (2019) (cleaned up).
The apparent difference between the discharge provisions does not entice us to reject the language and context of the
The Fourth Circuit presumed that “[g]iven the elimination of the absolute priority rule, Congress understandably applied limitations on the discharge of debts to provide an additional layer of fairness and equity to
creditors to balance against the altered order of priority that favors the debtor.” In re Cleary Packaging, LLC, 36 F.4th at 517. We appreciate the plausibility of this idea, but we question whether elimination of the absolute priority rule is really in “balance” with making the full complement of nondischargeable debts applicable to cоrporate debtors, and we question whether doing so would comport with the purpose of facilitating reorganization of small businesses.
Small business cases where confirmation is not likely to be consensual are precisely the types of cases where the provisions of the SBRA serve their intended purpose. The absolute priority rule and the threat of competing plans have little bearing on consensual confirmations. Debtors with consenting creditors can achieve quick and efficient reorganizations without need of subchapter V and without the added administrative expense of a subchapter V trustee.
In nonconsensual confirmations, elimination of the absolute priority rule permits more small businesses reorganizations largely because equity owners are often active managers and successful reorganization depends on their continued service. See Bonapfel, supra note 7, at 231. Equity interests in insolvent small businesses typically have little value and contribution of equivalent “new value” likely provides only a marginal benefit to unsеcured creditors.
While elimination of the absolute priority rule may slightly reduce the benefit to unsecured creditors, making debts nondischargeable for
corporate debtors does not provide a commensurate benefit. Rendering certain debts nondischargeable is more likely to harm most general unsecured creditors by steering small businesses with nondischargeable debts toward liquidation. See In re GFS Indus., LLC, 647 B.R. at 349-50.
Because
Finally, even if a creditor could prove a nondischargeable claim, and cause its class to reject the plan, its claim will be nondischargeable only if the debtor obtains a noncоnsensual confirmation. Pursuant to Rule 1020(a), a small business debtor elects whether to proceed under subchapter V by making the designation in its petition. Rule 1009(a) provides that “[a] voluntary petition, list, schedule, or statement may be amended by the debtor as a matter of course at any time before the case is closed.” See also Rule 1020(b) (providing for a deadline to object to a debtor‘s designation no later than 30 days after the meeting of creditors “or within 30 days after any amendment to the statement, whichever is later.“).
Under the Cleary interpretation, a small business debtor with potentially nondischargeable debts is incentivized to elect subchapter V
and force creditors to spend resources to prove their claims, only to
The policy rationales suggested by Appellant and Cleary to support their interpretation are unavailing. Construing
It is vexing that our interpretation means that a corporate debtor gets a slightly broader discharge under
[I]t is difficult to conclude that, in enacting a statute universally proclaimed to have the purpose of facilitating reorganization of small businesses, by among other things eliminating the absolute priority rule in a cramdown situation, Congress in 2019 intended to re-introduce all the problems with exceptions to the discharge of a corporation that it eliminated over 50 years earlier.
Bonapfel, supra note 7, at 237.
CONCLUSION
We hold that
we AFFIRM the bankruptcy court‘s order dismissing Appellant‘s complaint.
GAN
Bankruptcy Judge