Lafferty v. Off-Spec Sols. (In re Off-Spec Sols.)
| Docket Number | BAP ID-23-1020-GCB,Bk. 22-00346-NGH |
| Decision Date | 06 July 2023 |
| Parties | In re: OFF-SPEC SOLUTIONS, LLC, Debtor. v. OFF-SPEC SOLUTIONS, LLC; CVF CAPITAL PARTNERS, INC.; KEVIN CHOATE; COOL MOUNTAIN TRANSPORT; CVF CAPITAL PARTNERS, INC., Appellees. KRISTINA JAYN LAFFERTY, Appellant, Adv. No. 22-06020-NGH |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Appeal from the United States Bankruptcy Court for the District of Idaho Noah G. Hillen, Bankruptcy Judge, Presiding
Ronald Walter Brilliant argued for appellant;
Matthew T. Christensen of Johnson May, PLLC argued for appellees Off-Spec Solutions, LLC and Cool Mountain Transport.
Before: GAN, CORBIT, and BRAND, Bankruptcy Judges.
This appeal requires us to decide, as a matter of first impression, whether the nondischargeability provisions of § 523(a)[1] are applicable to corporate debtors who confirm nonconsensual plans under subchapter V of chapter 11.
Appellant Kristina Jayn Lafferty ("Appellant") filed a § 523(a)(6) complaint against debtor Off-Spec Solutions, LLC ("Debtor"), and cited the Fourth Circuit's holding in Cantwell-Cleary Co. v. Cleary Packaging, LLC (In re Cleary Packaging, LLC), 36 F.4th 509 (4th Cir. 2022), for the proposition that debts specified in § 523(a) are not dischargeable by any debtor, corporate or individual, in a subchapter V case confirmed under § 1191(b).
The bankruptcy court was not persuaded by Cleary, and relied on its prior decision, Catt v. Rtech Fabrications LLC (In re Rtech Fabrications, LLC), 635 B.R. 559 (Bankr. D. Idaho 2021), and Avion Funding, LLC v. GFS Industries, LLC (In re GFS Industries, LLC), 647 B.R. 337 (Bankr.W.D.Tex. 2022), to hold that § 1192 does not make the debts specified in § 523(a) nondischargeable for corporate debtors.
Although the bankruptcy court's construction leads to discordance between a discharge under § 1192 and a discharge under a consensual confirmation, its reasoning is sound and more persuasive than that offered by Appellant and Cleary. We agree that the language and context of the relevant statutes indicate Congress's intent to make § 523(a) applicable in subchapter V only to individual debtors. Accordingly, we AFFIRM.
FACTS[2]
In August 2022, Debtor filed a chapter 11 petition as a corporate debtor.[3] Debtor indicated it was eligible to be a debtor under § 1182(a), and it elected to proceed under subchapter V.
In December 2022, Appellant filed a proof of claim and an adversary complaint against Debtor, its owners, and its parent company, asserting a nondischargeable claim under § 523(a)(6). Appellant alleged that, while employed by Debtor, she was sexually harassed and discriminated against by her manager. According to Appellant, despite notifying Debtor and its owners, they took no corrective action, and instead, retaliated by firing her. Appellant made a claim of discrimination to the Idaho Human Rights Commission ("IHRC") and the Equal Employment Opportunity Commission. The IHRC found probable cause that Appellant suffered sexual harassment, discharge based on retaliation, and discharge based on sex. After Debtor filed its bankruptcy petition, the IHRC administratively dismissed the case and gave Appellant notice of her right to bring a private action against the defendants.
In response to Appellant's complaint, Debtor filed a motion to dismiss pursuant to Civil Rule 12(b)(6), made applicable by Rule 7012. Debtor argued that Appellant failed to state a cognizable claim for relief because, as the court previously held in Rtech Fabrications, § 523(a) applies in subchapter V only to individual debtors. Debtor acknowledged the Fourth Circuit's subsequent decision in Cleary but maintained that the reasoning and analysis in GFS Industries demonstrated that Cleary was incorrectly decided.
Appellant opposed the motion and argued that § 1192 applies to both corporate and individual debtors and excepts the types of debts specified in § 523(a) without regard to the type of debtor.[4]
The bankruptcy court rendered an oral ruling granting Debtor's motion to dismiss, holding that § 523(a) does not apply to corporate debtors in subchapter V. The court reasoned that the interpretation offered by Cleary fails to give effect to the plain language of § 523(a), which specifically states that its provisions are applicable to individual debtors who receive a discharge under § 1192. The bankruptcy court entered an order dismissing the complaint, and Appellant timely appealed.[5]
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
Did the bankruptcy court err by interpreting § 1192 to except debts specified in § 523(a) from discharge for only individual debtors?
We review de novo a bankruptcy court's order granting a motion to dismiss under Civil Rule 12(b)(6). Movsesian v. Victoria Versicherung AG, 670 F.3d 1067, 1071 (9th Cir. 2012) (en banc). We also review de novo a bankruptcy court's interpretation of the Bankruptcy Code. Reswick v. Reswick (In re Reswick), 446 B.R. 362, 365 (9th Cir. BAP 2011). De novo means review is independent, with no deference given to the bankruptcy court's conclusion. See First Ave. W. Bldg., LLC v. James (In re Onecast Media, Inc.), 439 F.3d 558, 561 (9th Cir. 2006).
The bankruptcy court's dismissal of the adversary complaint turns purely on the legal question whether a corporate debtor under subchapter V can be liable for debts specified in § 523(a). Neither this Panel nor the Ninth Circuit Court of Appeals has addressed the question.
Bankruptcy courts that have confronted the issue have uniformly concluded, as the court did here, that § 1192 does not make § 523(a) applicable to corporate debtors. See e.g., BenShot, LLC v. 2 Monkey Trading, LLC (In re 2 Monkey Trading, LLC), 650 B.R. 521 (Bankr. M.D. Fla. 2023); Nutrien Ag Sols., Inc. v. Hall (In re Hall), 651 B.R. 62 (Bankr. M.D. Fla. 2023); In re GFS Indus., 647 B.R. 337; Jennings v. Lapeer Aviation, Inc. (In re Lapeer Aviation, Inc.), Case No. 21-31500-jda, 2022 WL 1110072 (Bankr. E.D. Mich. Apr. 13, 2022); In re Rtech Fabrications, LLC, 635 B.R. 559; Cantwell-Cleary Co. v. Cleary Packaging LLC (In re Cleary Packaging LLC), 630 B.R. 466 (Bankr. D. Md. 2021), rev'd, 36 F.4th 509 (4th Cir. 2022); Gaske v. Satellite Rests. Inc. ( ), 626 B.R. 871 (Bankr. D. Md. 2021).
Appellant urges us to reverse the bankruptcy court's decision based on the reasoning articulated in Cleary. Although the bankruptcy court's construction inevitably leads to a broader discharge for subchapter V debtors under nonconsensual plans than under consensual ones, we find its interpretation more reasonable and more harmonious with other bankruptcy statutes than the interpretation offered by Appellant.
To resolve a question of statutory construction, we begin "where all such inquiries must begin: with the language of the statute itself." United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989); see also Lamie v. United States Tr., 540 U.S. 526, 534 (2004) ("[W]hen the statute's language is plain, the sole function of the courts-at least where the disposition required by the texts is not absurd-is to enforce it according to its terms." (quoting Hartford Underwriters Ins. Co. v. Union Planters Bank., N.A., 530 U.S. 1, 6 (2000)). We construe a statute to give effect "to all its provisions, so that no part will be inoperative or superfluous, void or insignificant." Hibbs v. Winn, 542 U.S. 88, 101 (2004).
If the language is ambiguous, we "may look to other sources to determine congressional intent, such as the canons of construction or the statute's legislative history." United States v. Nader, 542 F.3d 713, 717 (9th Cir. 2008) (citing Jonah R. v. Carmona, 446 F.3d 1000, 1005 (9th Cir. 2006)). Statutory language is ambiguous only if it "gives rise to more than one reasonable interpretation." Woods v. Carey, 722 F.3d 1177, 1181 (9th Cir. 2013) (quoting DeGeorge v. U.S. Dist. Ct. for Cent. Dist. of Cal., 219 F.3d 930, 939 (9th Cir. 2000)); see also United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 371 (1988) ("A provision that may seem ambiguous in isolation is often clarified by the remainder of the statutory scheme . . . because only one of the permissible meanings produces a substantive effect that is compatible with the rest of the law.").
The statutes governing discharge in a nonconsensual subchapter V are §§ 1192 and 523(a).[6] Section 1192 provides in pertinent part:
If the plan of the debtor is confirmed under section 1191(b) of this title, 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 . . . (2) of the kind specified in section 523(a) of this title.
Section 523(a) provides that "[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" defined in the subsequent subparagraphs of § 523(a).
Facially these sections appear to conflict because § 523(a) refers to individual debtors, while § 1192 provides for discharge of both individual and corporate debtors and does not distinguish between them when excepting debts "of the kind specified in section 523(a)." In Cleary, the Fourth Circuit held that § 1192 refers to the types of debts, not the types of debtors, and consequently, makes those types of debts...
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