Eleventh Circuit Resolves Split on Corporate Debtor Discharges

Deanna D. Boll, writing on McDermott Will & Schulte’s IP Update page, explains that the US Court of Appeals for the Eleventh Circuit has resolved a split on corporate debtor discharges among bankruptcy courts.

The issue was whether corporate debtors, like individual debtors, are subject to the discharge exceptions in 11 U.S.C. § 523(a) when confirming a non-consensual Subchapter V plan.

In BenShot, LLC v. 2 Monkey Trading, LLC, Lucky Shot USA, LLC, the Eleventh Circuit reversed a Middle District of Florida bankruptcy court ruling and held that § 1192’s cross-reference to § 523(a) applies to both corporate and individual debtors.

The decision aligns the Eleventh Circuit with the Fourth and Fifth Circuits.

Before filing for Subchapter V protection, 2 Monkey Trading and Lucky Shot faced a Lanham Act verdict for false advertising against competitor BenShot.

A jury awarded punitive damages, finding the debtors acted maliciously or with intentional disregard of BenShot’s rights.

The debtors sought to discharge the award in bankruptcy. BenShot argued that the debt fell under § 523(a)(6)’s exception for willful and malicious injury.

The bankruptcy court sided with the debtors, ruling that § 523(a) exceptions do not apply to corporate entities in this context.

On appeal, the Eleventh Circuit found that § 1192’s use of “debtor” encompasses both individuals and corporations. It emphasized that § 1192’s discharge provision does not differentiate between debtor types, and that Congress could have narrowed the scope had it intended to.

The court viewed § 1192(2)’s cross-reference to § 523(a) as a shorthand to list non-dischargeable debts, not to import § 523(a)’s preamble limitation to “individual debtors.”

Examination of related discharge provisions reinforced the majority’s view that Congress intended uniform application. Judge Luck dissented, siding with the majority view of bankruptcy courts that corporate debtors are excluded.

This ruling broadens the scope of non-dischargeable debts in non-consensual Subchapter V cases involving corporate debtors within the Eleventh Circuit.

Practitioners advising debtors must assess litigation liabilities, including punitive damages, in light of this expanded interpretation. Creditors may have increased leverage in contested plan confirmations, and government agencies could see new enforcement opportunities when debts involve misconduct captured by § 523(a).

The decision on debtor discharges also signals that circuit-level alignment may be emerging, potentially influencing future statutory interpretation disputes.