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The Bankruptcy StrategistFeaturesBankruptcyLitigationRegulation

Ninth Circuit Bankruptcy Appellate Panel: 523(a) Discharge Exceptions Don't Apply to Corporate Debtors Under Subchapter V

By Lawrence J. Kotler and Elisa Hyder
April 01, 2024

In the case of Lafferty v. Off-Spec Solutions (In re Off-Spec Solutions), 651 B.R. 862 (9th B.A.P. 2023), the U.S. Bankruptcy Appellate Panel of the Ninth Circuit held that the discharge exceptions under Section 523(a) do not apply to corporate debtors under Subchapter V of Chapter 11 of the Bankruptcy Code. In so holding, the Lafferty court disagreed with the decision rendered by the U.S. Court of Appeals for the Fourth Circuit, the only circuit court to address this issue in the case of Cantwell-Cleary v. Cleary Packaging (In re Cleary Packaging), 36 F.4th 509 (4th Cir. 2022).

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Background

In this case, the debtor, Off-Spec Solutions LLC filed for bankruptcy in the U.S. Bankruptcy Court for the District of Idaho and elected to proceed under Subchapter V of Chapter 11 as a small business enterprise. During the case, a former employee filed a complaint against the debtor, seeking a declaration from the bankruptcy court that her claims against the debtor for sexual harassment, discrimination, retaliation, and wrongful termination were nondischargeable under Sections 1192(2) and 523(a)(6) of the Bankruptcy Code.

In support of her complaint, the former employee cited the Fourth Circuit's decision in Cleary. In that case, the Fourth Circuit held that, pursuant to Section 1192(2), the discharge exceptions set forth in Section 523(a) apply to all Subchapter V debtors. Section 1192(2) provides, in relevant part, that, "if a plan of the debtor is confirmed under Section 1191(b) … the court shall grant the debtor a discharge of all debts … except any debt … of the kind specified in Section 523(a)."

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