Congress provided a streamlined mechanism for small businesses to reorganize by enacting the Small Business Reorganization Act of 2019 and adding Subchapter V to Chapter 11 of the Bankruptcy Code. Subchapter V gives small businesses relief from some of the more burdensome requirements of Chapter 11, including the absolute priority rule and the requirement to have at least one consenting class of impaired creditors to confirm a plan of reorganization. In exchange for these benefits to small business debtors, Congress may have put an arrow in creditors’ quivers by allowing them to object to the discharge of certain types of debts of corporate debtors, a remedy previously applicable only to debts of individuals. Nearly every lower court to consider this question has rejected it. So far, however, appeals courts have uniformly said that Section 1192 of the Bankruptcy Code exempts debts “of the kind specified in Section 523(a)” from discharge, regardless of whether the debtor is an individual or a corporation. In a recent case, BenShot, LLC v. 2 Monkey Trading, LLC (In re 2 Monkey Trading, LLC), Case No. 23-12342 (11th Cir. July 9, 2025), the 11th U.S. Circuit Court of Appeals issued a 2-1 decision allowing creditors to challenge the dischargeability of certain debts in certain circumstances. The Court examined what happens when a small business files for bankruptcy under Subchapter V and seeks to have its repayment plan approved without all creditors agreeing, known as a “cramdown plan.” Writing for the majority, Judge Barbara Lagoa explained that in these situations, a specific part of the Bankruptcy Code, Section 1192, applies to determine which debts can be erased or “discharged.” Section 1192 states that most debts can be discharged, except those listed in Section 523(a), which include debts involving fraud or intentional harm. However, Section 523(a) generally applies only to individuals. The BenShot majority points out that Section 1192 excludes debts “of the kind specified in Section 523(a),” without saying that this only applies to individual debtors. The majority explains that “when Congress wanted to specify which kinds of debtors cannot discharge debts under Section 523(a), it has done so through express language in their respective sections.” Although the court acknowledged the decision was a “close call,” the 11th Circuit ultimately held that “based on the plain language of the statute” under Section 1192, “both individual and corporate debtors cannot discharge any debts of the kind listed in Section 523(a).” This ruling is in line with recent decisions by the 4th and 5th Circuits but diverges from nearly every bankruptcy court, district court and bankruptcy appellate panel that has addressed the issue. For comparison, see Cantwell-Cleary Co. v. Cleary Packaging, LLC (In re Cleary Packaging, LLC), 36 F.4th 509 (4th Cir. 2022), and Avion Funding, LLC v. GFS Industries, LLC (In re GFS Industries, LLC), 99 F.4th 223 (5th Cir. 2024), which agree with the 11th Circuit decision, versus Lafferty v. Off-Spec Sols., LLC (In re Off-Spec Sols., LLC), 651 B.R. 862 (B.A.P. 9th Cir. 2023), which reached a different conclusion. What does this mean for creditors of small business debtors in Subchapter V? The threat of nondischargeability is a powerful tool to bring to the negotiating table. Subchapter V is designed to be flexible and promote consensus that enables small businesses to obtain fresh starts. However, the subchapter isn’t designed to allow these debtors to steamroll their creditors. When faced with a borrower’s Subchapter V filing, banks should review their files to determine whether grounds might exist to object to the discharge of their claims. Did the borrower obtain credit under false pretenses? Did they make a false representation? Was there actual fraud? Any of these factors could be grounds for a court to find a debt is nondischargeable under Section 523(a). Banks should also be mindful of tight deadlines for objecting to the discharge of their claims — typically, an adversary proceeding objecting to discharge must be commenced no later than 60 days after the date first set for the meeting of creditors under Section 341(a). These recent decisions from the 4th, 5th and 11th Circuits represent a positive development in the protection of creditors’ rights in small business bankruptcies. Banks should use nondischargeability as one of many levers of influence they can pull to negotiate their best outcome in Subchapter V small business bankruptcy cases. J. Zachary (Zak) Balasko is a seasoned bankruptcy and corporate restructuring litigator at Steptoe & Johnson PLLC. Zak has represented clients in cases under all chapters of the bankruptcy code, including debtors, secured lenders, trustees, trade vendors, creditors’ committees, governmental units and other parties-in-interest, with significant experience in Delaware, Texas, Virginia and West Virginia. He always seeks to achieve the best outcome for his clients as he guides them through the complexities of corporate restructurings and bankruptcy cases. Shelby Turley is a first-generation college student and attorney who brings a warm and receptive touch to her client interactions. Shelby assists with a wide range of matters in banking and complex commercial transactions and has facilitated millions of dollars in commercial closings across the nation. She also brings an attentive, client-focused attitude to real estate transactions, foreclosures and estate planning. 17 WEST VIRGINIA BANKER
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