Many of the readers of our email newsletters and blogs are aware that Subchapter V of Chapter 11 of the Bankruptcy Code was implemented to help small businesses reorganize quicker and cheaper. Debt limits for Subchapter V bankruptcy filings are currently $2,725,625 limit, but pending legislation will soon raise it to $7,500,000.00.
In these challenging economic times, Subchapter V may be a very helpful tool to help businesses reorganize.
A recent Fourth Circuit case, In re Cleary Packaging, LLC, 2022 WL 2032296 (4th Cir. June 7, 2022), clarifies which exceptions to discharge apply to business SubV debtors.
Cantwell-Cleary Co., Inc. obtained a $4 million state court judgment against Cleary Packaging, LLC, a company formed by Cantwell-Cleary's former president and CEO. A state court action alleged intentional interference with contracts, tortious interference with business relations, and related claims.
As a result of the judgment, Cleary Packaging filed for bankruptcy under Chapter 11 of the Bankruptcy Code, electing to proceed under Subchapter V. In its bankruptcy plan, Cleary Packaging proposed to pay Cantwell-Cleary only 2.98% of its judgment, with the remainder of the debt to be discharged. Cantwell-Cleary filed an adversary proceeding seeking a determination that the state court judgment was a debt resulting from "willful and malicious injury" that was not dischargeable under Sections 1192 and 523(a)(6) of the Bankruptcy Code.
Interestingly the bankruptcy court dismissed Cantwell-Cleary’s adversary proceeding, holding that the discharge exceptions in § 523(a) do not apply to corporate debtors. On appeal, the Fourth Circuit addressed the issue of whether Cleary Packaging, as a Subchapter V corporate debtor, can discharge its $4 million debt to Cantwell-Cleary “for willful and malicious injury.”
The Fourth Circuit reversed the Bankruptcy Court and held that the discharge exceptions in section 523 of the Bankruptcy Code apply to corporate debtors in Subchapter V cases where the debtor does not confirm a consensual plan.
The Fourth Circuit decision is the first to address the question of what exceptions to discharge apply in cases under Subchapter V.
A more detailed article discussing the In re Cleary Packaging can be found at National Review.com at https://www.natlawreview.com/article/fourth-circuit-decision-clarifies-application-exceptions-to-discharge-subchapter-v
Individuals with questions about Subchapter V can contact Jim Shenwick, Esq at 212 541 6224 or jshenwick@gmail.com
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