Gaske v. Satellite Rests. Inc. Crabcake Factory USA (In re Satellite Rests. Inc. Crabcake Factory USA)

• Decision Date: 19 March 2021
• Docket Number: Case Number: 20-19282-MCR,Adversary Number: 21-00012-MCR
• Parties: IN RE: SATELLITE RESTAURANTS INC. CRABCAKE FACTORY USA, Debtor. Deborah Gaske, et al., Plaintiffs, v. Satellite Restaurants Inc. Crabcake Factory USA, Defendant.
• Court: U.S. Bankruptcy Court — District of Maryland

626 B.R. 871

IN RE: SATELLITE RESTAURANTS INC. CRABCAKE FACTORY USA, Debtor.

Deborah Gaske, et al., Plaintiffs,

v.Satellite Restaurants Inc. Crabcake Factory USA, Defendant.

Case Number: 20-19282-MCR

Adversary Number: 21-00012-MCR

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

Signed March 19, 2021

Paul Sweeney, Yumkas Vidmar Sweeney and Mulrenin, Columbia, MD, for Debtor.

MEMORANDUM OPINION IN CONNECTION WITH ORDER GRANTING DEFENDANT'S MOTION TO DISMISS COMPLAINT

MARIA ELLENA CHAVEZ-RUARK, U.S. BANKRUPTCY JUDGE

In a Subchapter V proceeding filed by Satellite Restaurants Inc. Crabcake Factory USA, debtor and debtor-in-possession (the "Defendant"), 19 alleged former employees (as defined below, the "Plaintiffs") filed a complaint seeking a determination that the debts owed to them by the Defendant are non-dischargeable under Section 523(a)(2)(A) of the Bankruptcy Code because the debts arise from the Defendant's false pretenses, a false representation or actual fraud and under Section 523(a)(6) because the debts arise from a willful and malicious injury by the Defendant.¹ The Defendant filed a motion to dismiss the complaint, arguing that Section 523(a) does not apply because it is a non-individual debtor. The Plaintiffs opposed the motion, arguing that the new Subchapter V discharge provision in Section 1192 expands the application of Section 523(a), and the discharge exceptions therein, to non-individual debtors. Neither the Court nor the parties were able to locate a written decision on point; this case appears to be one of first impression since the enactment of the Small Business Reorganization Act.

For the reasons set forth below, the Court holds that the discharge exceptions in Section 523(a) apply only to individual Subchapter V debtors. Therefore, the Court will grant the motion to dismiss.

I. BACKGROUND

On August 25, 2018, Plaintiffs Deborah Gaske, Daniel Ames, Jessica Ames, Jacob Becker, Jessica Burke, Tamara Cavanaugh, Christine Cirnigliaro, Ryan Davey, Cindy Dennsteadt, Sam Donato, John Gallagher, Steven Hannon, Peyton Hynla, Brittney Mueller, Demetrisu Shockley, Ashley Smith, Ryan Stoia, Brittany Warfield and Tanya Whitlock (the "Plaintiffs") filed a complaint against the Defendant and others in the United States District Court for the District of Maryland (the "District Court"), asserting claims for violations of the Fair Labor Standards Act of 1938, 29 U.S.C. §§ 201 et seq. , the Maryland Wage and Hour Law, Md. Code Ann., Lab. & Empl. §§ 3-401 et seq. , and the Maryland Wage Payment and Collection Law, Md. Code Ann., Lab. & Empl. §§ 3-501 et seq. (collectively, the "FLSA Claims"). The District Court action is stayed pursuant to Section 362 of the Bankruptcy Code.

On October 14, 2020, the Defendant filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. The Defendant elected to proceed under Subchapter V of Chapter 11 of the Bankruptcy Code. On January 6, 2021, the Debtor filed its Chapter 11, Subchapter V Plan of Reorganization [Dkt. No. 75] (the "Plan"), and on March 4, 2021, the Debtor filed its Modified Chapter 11, Subchapter V Plan of Reorganization [Dkt. No. 135] (the "Modified Plan"). Both the Plan and the Modified Plan seek to invoke the Subchapter V cramdown provision.

On January 11, 2021, the Plaintiffs commenced this adversary proceeding by filing a Complaint Asserting Non-Dischargeability of Certain Debts Pursuant to Sections 523(a)(2)(A), 523(a)(6) of the Bankruptcy Code [Dkt. No. 1] (the "Complaint") against the Defendant, the Plaintiffs' alleged former employer. The Complaint sets forth three causes of action. In Count I, the Plaintiffs allege that the debt owed by the Defendant to the Plaintiffs on account of the FLSA Claims arises from false pretenses, a false representation or actual fraud and seek a determination that the alleged debt is not dischargeable under Section 523(a)(2)(A). In Counts II and III, the Plaintiffs allege that the debt owed by the Defendant to the Plaintiffs on account of the FLSA Claims is for a willful and malicious injury and seek a determination that the alleged debt is not dischargeable under Section 523(a)(6).

On February 16, 2021, the Defendant filed a Motion to Dismiss Complaint Asserting Non-Dischargeability of Certain Debts Pursuant to Sections 523(a)(2)(A), 523(a)(6) of the Bankruptcy Code, or in the Alternative, For Summary Judgment [Dkt. No. 11] (the "Motion to Dismiss").² On March 2, 2021, the Plaintiffs filed their Opposition to Motion to Dismiss Complaint Asserting Non-Dischargeability Of Certain Debts Pursuant to Sections 523(a)(2)(A), 523(a)(6) of the Bankruptcy Code [Dkt. No. 15] (the "Opposition"), and on March 5, 2021, the Defendant filed its Reply to Opposition to Motion to Dismiss Complaint Asserting Non-Dischargeability of Certain Debts Pursuant to Sections 523(a)(2)(A), 523(a)(6) of the Bankruptcy Code [Dkt. No. 16] (the "Reply").

The Court held a hearing on the Motion to Dismiss, the Opposition and the Reply on March 9, 2021. For the reasons stated herein, the Court will grant the Motion to Dismiss.

II. STANDARD FOR DISMISSAL OF COMPLAINT

The Defendant filed its Motion to Dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7012(b), and asserts that the Complaint fails to state a claim upon which relief can be granted. To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). Stated another way, a motion to dismiss under Rule 12(b)(6) will be granted if the allegations of the complaint, construed in the light most favorable to the plaintiff, fail as a matter of law to state a claim for which relief can be granted. F.T.C. v. AmeriDebt, Inc ., 343 F.Supp.2d 451, 459 (D. Md. 2004) (citing Carter v. Burch, 34 F.3d 257, 261 (4th Cir.1994) ).

For purposes of considering a motion to dismiss, the court must accept as true all well-pleaded material allegations of the complaint and must liberally construe it as a whole. Id. (citing Edwards v. Johnston County Health Dep't, 885 F.2d 1215, 1217 n.4 (4th Cir.1989) and Jenkins v. McKeithen, 395 U.S. 411, 421, 89 S.Ct. 1843, 23 L.Ed.2d 404 (1969) ). A complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief. F.T.C. v. AmeriDebt, Inc. , 343 F.Supp.2d at 459 (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957), abrogated by Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ).

III. ANALYSIS

This case appears to be a case of first impression on the applicability of Section 523(a) to a non-individual debtor who elects to proceed under Subchapter V and seeks a discharge under Section 1192. The Court concludes that Section 523(a) does not apply to the Defendant because it is a non-individual debtor. Therefore, the Complaint fails to state a claim upon which relief can be granted and the Court will grant the Defendant's Motion to Dismiss.

A. Statutory Construction of Sections 1192 and 523

The analysis must begin with a review of the two relevant statutes – Section 1192 and Section 523.

Section 1192 is the discharge provision for cases in which the debtor elects to proceed under Chapter 11, Subchapter V, and seeks to confirm a plan under the Subchapter V cramdown provision in Section 1191(b).³ Subchapter V, codified in Sections 1181-1195 of the Bankruptcy Code, was adopted by the Small Business Reorganization Act of 2019, Pub. L. No. 116-54, 133 Stat. 1079 (the "SBRA"), and became effective on February 19, 2020. Because Subchapter V is relatively new, its application has not been well-tested, hence the instant dispute. Section 1192 provides in pertinent part:

If the plan of the debtor is confirmed under section 1191(b) of this title [the cramdown provision for Subchapter V cases], as soon as practicable after completion by the debtor of all [plan] payments ..., the court shall grant the debtor a discharge of all debts provided in section 1141(d)(1)(A) of this title, and all other debts allowed under section 503 of this title and provided for in the plan, except any debt ... of the kind specified in section 523(a) of this title.

11 U.S.C. § 1192(1).

Section 523(a), which was enacted long before the SBRA, provides in pertinent part: "A discharge under section ... 1192 ... of this title does not discharge an individual debtor from any debt" defined in the following 19 subparagraphs. 11 U.S.C. § 523(a).

The Plaintiffs focus on the phrase in Section 1192 "debt of the kind specified in section 523(a)" and argue that any debt described in the subparagraphs of Section 523(a) may be nondischargeable, regardless of whether the debtor is an individual. Plaintiffs assert that, because Section 523(a) specifies various types of debts, any debt listed in Section 523(a) may be excepted from a Section 1192 discharge so long as it falls within the scope of one of the 19 subparagraphs. The Defendant, on the other hand, focuses on the application of Section 523(a) and argues that it did not apply to non-individual debtors before the enactment of the SBRA was enacted and was not expanded to non-individual debtors under the SBRA. The Court and the parties were unable to find any case law on point.

As with any dispute regarding the application or interpretation of a statute, the first rule of statutory construction is to examine the language of the statute itself. As stated by the United States Supreme Court, "[t]he task of resolving the dispute over [the interpretation of a statute] begins where all such inquiries must begin:...