August 2025 Bankruptcy Insights
A notable circuit split is deepening in the bankruptcy world, raising critical questions for professionals handling Subchapter V (“Sub V”) cases. At issue is whether debts arising under Section 523(a) of the Bankruptcy Code—those tied to fraud, willful misconduct, fiduciary breaches, and other egregious conduct—can be discharged by corporate debtors in Sub V cases.
This once-narrow academic issue is now a real-world concern, especially following the July 2025 Eleventh Circuit decision in In re BenShot, LLC, which held that such debts are nondischargeable in Sub V cases regardless of whether the debtor is an individual or a corporation. This ruling aligns the Eleventh Circuit with earlier decisions from the Fourth and Fifth Circuits, creating a significant divide among jurisdictions.
Understanding the Legal Background
Subchapter V of Chapter 11 was introduced by the Small Business Reorganization Act of 2019 (SBRA) to streamline bankruptcy relief for small businesses. One of its unique features is Section 1192, which sets out the rules for discharge in confirmed Sub V plans. It states that debts “of the kind specified in section 523(a)” are not dischargeable.
Traditionally, courts have interpreted Section 523(a) as applying only to individual debtors. However, the language of Section 1192 does not contain a similar limitation. This difference has led courts to disagree on whether corporate Sub V debtors can also be denied discharge of these particular debts.
Where the Circuits Stand
- Eleventh Circuit (July 2025): In BenShot, the court held that Section 1192 incorporates Section 523(a) broadly, meaning even corporate Sub V debtors cannot discharge debts involving fraud, embezzlement, or other forms of intentional misconduct.
- Fourth & Fifth Circuits: These circuits previously reached the same conclusion, emphasizing the statutory language and intent to uphold creditor protections.
- Ninth Circuit BAP and others: Some bankruptcy courts have taken the opposite stance, holding that Section 523(a) applies only to individuals and thus does not restrict corporate Sub V discharges.
Practical Implications
- For Debtors: Counsel representing corporate Sub V debtors must now carefully assess any potentially nondischargeable claims under Section 523(a) before proposing a plan.
- For Creditors: Creditors with fraud or willful misconduct claims may now find greater leverage in adversary proceedings, especially in the Fourth, Fifth, and Eleventh Circuits.
- For Practitioners: This split significantly impacts plan strategy, claim litigation, and venue selection. Until resolved by the Supreme Court or legislative amendment, forum shopping may become a more prominent consideration.
Conclusion
This evolving legal landscape demands vigilance from bankruptcy professionals. Whether advising debtors or creditors, staying informed on how each circuit interprets Subchapter V dischargeability will be crucial to protecting your client’s interests.
By Deanna Rahmani
The author interacted with the following artificial intelligence tools to create or assist in the creation of content included in this blog: ChatGPT
