Cantwell-Cleary Co. v. Cleary Packaging, LLC (In re Cleary Packaging LLC)

• Decision Date: 29 June 2021
• Docket Number: Adv. No. 21-00056-MMH,Case No. 21-10765-MMH
• Citation: 630 B.R. 466
• Court: U.S. Bankruptcy Court — District of Maryland
• Parties: IN RE: CLEARY PACKAGING LLC, Debtor. Cantwell-Cleary Co., Inc., Plaintiff, v. Cleary Packaging, LLC, Defendant.

630 B.R. 466

IN RE: CLEARY PACKAGING LLC, Debtor.Cantwell-Cleary Co., Inc., Plaintiff,

v.Cleary Packaging, LLC, Defendant.

Case No. 21-10765-MMH

Adv. No. 21-00056-MMH

United States Bankruptcy Court, D. Maryland, at Baltimore.

Signed June 29, 2021

Steven L. Goldberg, McNamee Hosea et al., Greenbelt, MD, for Plaintiff.

Paul Sweeney, Yumkas, Vidmar, Sweeney & Mulrenin, LLC, Columbia, MD, for Defendant.

MEMORANDUM OPINION

MICHELLE M. HARNER, U.S. BANKRUPTCY JUDGE

Cantwell-Cleary Co., Inc. (the "Plaintiff") filed this adversary proceeding seeking a determination that its debt against the above-captioned debtor, Cleary Packaging, LLC (the "Defendant"), is excepted from discharge under section 523(a) of the Bankruptcy Code.¹ The Defendant has filed a motion to dismiss the Complaint (the "Motion") for failure to state a claim on which relief can be granted under Rule 12(b)(6) of the Federal Rules of Civil Procedure, made applicable to this proceeding by Rule 7012 of the Federal Rules of Bankruptcy Procedure. ECF 6. The Defendant argues that section 523(a) does not apply to an entity debtor under subchapter V of chapter 11 of the Code ("Subchapter V").

As explained below, the issue concerning the application of section 523 of the Code in a Subchapter V case arises only if the Subchapter V debtor cannot confirm a consensual plan under section 1191(a) of the Code. The parties nonetheless ask this Court to resolve the issue prior to confirmation, anticipating that a consensual plan is not possible in this particular case. Indeed, at the May 13, 2021, hearing in this proceeding, the parties presented the issue as a gating matter to the Defendant's restructuring alternatives under any Subchapter V plan.

For the reasons set forth below, the Court agrees with the Defendant that the section 523(a) exceptions to discharge do not apply to the discharge of a Subchapter V entity debtor. Because the Complaint is legally insufficient to state a claim for excepting the Plaintiff's debt from discharge, it fails to state a claim under Civil Rule 12(b)(6), and the Court will dismiss it.²

I. Relevant Background

The Defendant has operated in the packaging industry since 2018. The Defendant's founder and sole owner is Mr. Vincent Cleary, who previously worked for the Plaintiff in a variety of positions. The Plaintiff also operates in the packaging industry and appears to be or to have been owned, at least at some point in time, by Mr. Cleary's family. Mr. Cleary's departure from the Plaintiff's employ and his subsequent organization of the Defendant resulted in state court litigation. The Plaintiff secured a judgment against the Defendant and Mr. Cleary in the amount of $4,715,764.98.

On February 7, 2021, the Defendant filed a petition under chapter 11 of the Code and elected to proceed under Subchapter V. Shortly thereafter, the Plaintiff commenced this adversary proceeding seeking to have its debt against the Defendant deemed nondischargeable under sections 523(a)(2) and (a)(6) of the Code. ECF 1. Based on its judgment, the Plaintiff filed a dispositive motion, seeking summary judgment on Count II of the Complaint (nondischargeability under section 523(a)(6) ). ECF 3. The Defendant filed the Motion and an opposition to the Plaintiff's Motion for Summary Judgment. ECF 6, 7. The Plaintiff then filed an opposition to the Motion. ECF 11, 12. The Court set all matters for hearing on May 13, 2021.

II. Jurisdiction and Legal Standards

The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334. Under 28 U.S.C. § 157(a) and its Local Rule 402, the United States District Court for the District of Maryland has referred the bankruptcy case and related adversary proceeding to the Court. This proceeding is a statutorily core proceeding under 28 U.S.C. §§ 157(b)(1) and (b)(2). The Court has constitutional authority to enter final orders in this proceeding.

The relief requested by the Complaint is of particular import to the parties because it involves the proper scope of the Defendant's discharge in its Subchapter V case. The bankruptcy discharge is a hallmark of U.S. bankruptcy law. It provides a corporate debtor with a new financial structure and, in that regard, a financial fresh start, which is one of the primary policy objectives underlying the Code. See, e.g., Valley Historic Ltd. P'ship v. Bank of New York , 486 F.3d 831, 836 (4th Cir. 2007) (noting that "the very purpose of bankruptcy is to discharge or restructure the debt that has caused the bankruptcy"); In re S B Bldg. Assocs. Ltd. P'ship , 621 B.R. 330, 361 (Bankr. D.N.J. 2020) (observing that "it is indisputable that a ‘primary goal of Chapter 11 is to promote the restructuring of the debtor's obligations so as to preserve the business and avoid liquidation’ ") (internal citations omitted).³ To achieve that end, the Code broadly defines the terms "debt" and "claim" so that, "[g]enerally, ‘all legal obligations of the debtor, no matter how remote or contingent,’ are potentially dischargeable in bankruptcy." Kubota Tractor Corp. v. Strack (In re Strack) , 524 F.3d 493, 497 (4th Cir. 2008) (citations omitted); 11 U.S.C. §§ 101(5), (12).

The bankruptcy discharge is not, however, absolute. It is limited by, among others, sections 727(a), 1141, 1192, 1228, 1328, and 523(a) of the Code. The Complaint asserts that sections 523(a)(2) and (a)(6) limit the Defendant's discharge in its Subchapter V case. Those sections of Code provide, in pertinent part,

A discharge under section ... 1192 ... of this title does not discharge an individual debtor from any debt—

. . .

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition; [or]

. . .

(6) for willful and malicious injury by the debtor to another entity or to the property of another entity.

11 U.S.C. §§ 523(a)(2)(A), (a)(6).

Notably the introductory language to sections 523(a)(2) and (a)(6) speaks only of an "individual debtor." Section 523(a) itself does not purport to apply to entity debtors, such as the Defendant. The question raised by this proceeding is whether the language "of the kind specified in section 523(a) of this title," included in section 1192(2) of the Code,⁴ extends the scope of section 523(a) to entity debtors in Subchapter V cases in which the plan is confirmed under section 1191(b).

III. Analysis

Subchapter V focuses on smaller debtors engaged in commercial or business activities, which may include individuals who meet the definition of "debtor" set forth in section 1182 of the Code.⁵ Congress enacted Subchapter V, in part, to address aspects of a traditional chapter 11 case that arguably do not work as effectively or efficiently as they could for small businesses.⁶ For example, a traditional chapter 11 case often is too expensive and too lengthy, and it fails to provide sufficient restructuring flexibility for small businesses.⁷ Subchapter V thus modifies the traditional chapter 11 platform to provide a more tailored and streamlined restructuring process for small businesses.

To achieve that end, the language of various provisions in Subchapter V draws not only on provisions in chapter 11, but also those in chapters 12 and 13 of the Code. For example, the language of section 1192 at issue in this proceeding is also in sections 1228 and 1328 of the Code. Notably, only a few courts have addressed this language and whether the exceptions to discharge in section 523(a) apply to entity debtors in either chapter 12 or Subchapter V cases.

As further explained below, the Court finds the reasoning of Judge Ruark in Gaske v. Satellite Restaurants Inc. Crabcake Factory USA (In re Satellite Restaurants Inc. Crabcake Factory USA) , 626 B.R. 871 (Bankr. D. Md. 2021), not only most persuasive on this issue but also most consistent with the historical structure of the Code and the core objectives of chapter 11.⁸

A. The Plain Language of the Code

In Satellite Restaurants , Judge Ruark extensively reviewed the language of the statute and its meaning in a Subchapter V case. She focused on the phrase "of a kind specified in section 523(a)" in section 1192, and the addition of "1192" to section 523(a) at the time of Subchapter V's enactment. 626 B.R. at 874–878. Specifically, the qualifying language to all debts listed in section 523(a) now reads, "[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 ...." 11 U.S.C. § 523(a) (emphasis added).

Judge Ruark's focus on the statutory language is an appropriate starting point for the analysis. Logically, the addition of 1192 to section 532(a) would not be necessary if Congress intended the phrase "of a kind specified in section 523(a)" in section 1192 to apply to the debts of all debtors under Subchapter V. Indeed, if Congress had added only the new language of section 1192(2), that provision arguably would have been fully operative on a stand-alone basis and applicable to all debtors. But that is not what Congress chose to do.

Rather, Congress also added section 1192 to the qualifying language of section 523(a), and the only function that addition serves is to limit the application of section 523(a) to individual debtors in Subchapter V cases. This is not simply the logical reading of the statute but also, as thoughtfully explained by Judge Ruark in Satellite Restaurants , it is the result mandated by common principles of statutory interpretation. 626 B.R. at 875–867. The Court will not reiterate Judge Ruark's statutory interpretation analysis herein, but incorporates it by reference in support of this decision.

Based on the foregoing, the Court finds that the Code, read holistically and in accordance with common principles of statutory interpretation, limits the application of section 523 in Subchapter V cases...