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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Fifth Circuit Agrees With 'Cleary': Corporate Debtors Are Subject to Section 523(a) In Subchapter V Case

By Jeffrey M. Rosenthal, Vincent J. Roldan and Joshua S. Bauchner
August 01, 2024

The goal of most corporate reorganization cases is for the company to obtain a "discharge" of its debts, and obtain a "fresh start." Though a Chapter 11 plan will discharge most types of debts, certain debts are deemed ineligible for discharge for public policy reasons. These debts are excepted from discharge under Section 523(a) of the Bankruptcy Code.

In 2019, Congress enacted subchapter V in the Small Business Reorganization Act as a streamlined, less expensive alternative to traditional Chapter 11 cases. Case law is still evolving under this relatively new law; the latest issue is whether a corporate debtor in a subchapter V case is subject to the non-dischargeability provisions of Section 523(a).

In a controversial decision, the U.S. Court of Appeals for the Fourth Circuit, in In re Cleary Packaging, ruled that corporate debtors are subject to Section 523(a). Subsequent bankruptcy courts outside the Fourth Circuit, as well as the U.S. Court of Appeals for the Ninth Circuit Bankruptcy Appellate Panel (BAP), criticized the decision. For a period of time, it appeared that practitioners did not have to worry about the Cleary Packaging decision outside the Fourth Circuit.

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