Attention small business owners with unfriendly creditors and potential issues considering filing a Subchapter V case and Creditors in these cases. This is an interesting recent case. I can help you navigate these situations.
Judge Matson’s entered an Order on February 3, 2025 in Halo Human Resources, LLC v. American Dental of LaGrange, LLC (In re American dental of LaGrange, LLC), 24-10485-RMM, Adv. Pro. 24-01004-RMM (Bankr. M.D.Ga. 2025)(B.J. Matson)(Albany) in a Subchapter V case. In this case Debtor, as Defendant, filed a 12(b)(6) Motion to Dismiss for failure to state a claim which was filed on the basis that Section 523 dischargeability actions don’t apply to corporate entities. There is plenty of authority to support this position, see, Judge Bonapfel’s treatise https://www.ganb.uscourts.gov/sites/default/files/sub_v_update_9-30-24_002.pdf Debtor’s plan was confirmed consensually because Debtor obtained a withdrawal of the objection to confirmation from the objecting creditor prior to confirmation.
Judge Matson in Part I thoroughly addresses the procedural background of the subchapter V case, including the fact that this particular case was confirmed consensually under 11 U.S.C. s. 1191(a) (this is critical to the court’s opinion). The Court then in Part II addresses the standards for a 12(b)(6) motion to dismiss under Ascroft v. Iqbal and Twombly. In Part II the Court addresses Plaintiff (Creditor’s) Allegations and Claims in order to apply them to the Iqbal and Twombly standards (part IV). In part V, the analysis part, the Court gets into the weeds of consensual vs. non-consensual confirmation and how that impacts the applicability of section 523 for non-individuals:
The Court agrees that the discharge provisions of s. 1192 (and thus the discharge exceptions on which Plaintiff relies) do not apply to a debtor whose plan was confirmed under s. 1191(a). As such because the Debtor’s plan was confirmed under s. 1191(a), Plaintiff fails to state any claim under s. 523(a)(2), (3) or (6) upon which relief may be granted…. As to the Debtor’s alternative arguments for dismissal, the Court also explains below (1) why the Court need not determine whether s. 523(a) applies to a corporate debtor who confirms a plan under s. 1191 (b) and (2) why s. 1141(d)(3) provides no alternative grounds for the Court to grant the Motion to Dismiss.
The Court goes into a long discussion of the differences between consensual confirmation under 1191(a) and cramdown confirmation under 1191(b)(where at least one impaired class did not accept the plan). The Court continues to address the scope of the Chapter 11 discharge and its exceptions, which are generally governed by 1141(d). 1141(d) specifically refers individuals back to 523 under 1141(d)(2), which is consistent with the language of 523 itself, which also refers to 1141. A corporate debtor’s discharge is subject to a narrow exception related to those under 523(a) owed to a government under 1141(d)(6). The Court notes that it is nearly universally held that a corporate chapter 11 debtor is not subject to 523.
On page 13 of the Order, in part V(C), the Court goes on to note exceptions to 1141(d): (1) 1141(d)(5) doesn’t apply to subchapter v cases pursuant to 1181(a) and (2) 1141(d) does not apply if the debtor confirms a plan under 1191(b) – rather 1192 applies. Section 1181(c) is a special rule for discharge for non-consensual plans. 523 may apply to the non-discharge of corporate debt pursuant to 1192(2) by the plain language of these provisions. See, page 14 of this Order.
Because the debtor in the case before the Court obtained consensual confirmation, the 523 complaint failed to state a claim upon which relief could be granted so the complaint was dismissed pursuant to 12(b)(6) but the Order is a recommended read if you’re representing small business owners with potential issues considering a subchapter v case.