Eleventh Circuit Clarifies §523(a) Non-Dischargeability for Corporate Debtors Under Subchapter V

Introduction

In Benshot, LLC v. 2 Monkey Trading, LLC, the United States Court of Appeals for the Eleventh Circuit confronted a statutory puzzle that has divided bankruptcy courts since Congress added Subchapter V to Chapter 11 in 2019. The core question: When a small-business debtor confirms a non-consensual (cram-down) plan under 11 U.S.C. §1191(b), does §1192(2) prohibit all debtors—individuals and corporations—from discharging debts “of the kind specified in §523(a)” (e.g., debts for willful and malicious injury, fraud, domestic support), or is the exception limited to “an individual debtor,” as the preamble to §523(a) suggests?

The Eleventh Circuit sided with the Fourth and Fifth Circuits and against a growing minority of bankruptcy courts, holding that corporate debtors in Subchapter V cannot discharge the categories of debt listed in §523(a). The decision directly affects the strategic landscape for small-business reorganizations in Alabama, Florida and Georgia, and adds momentum toward Supreme Court resolution of the national split.

Summary of the Judgment

The panel (Branch, Luck, Lagoa, J.J.) reversed the bankruptcy court’s dismissal of BenShot’s nondischargeability complaint and remanded.
Majority opinion by Judge Lagoa; Judge Luck dissented.
Holding: Under §1192(2) “any debt … of the kind specified in §523(a)” is non-dischargeable for all Subchapter V debtors, including limited liability companies.
Rationale: Plain-language reading of §1192, reinforced by contextual clues in §1141(d) and the structure of the Code, outweighs contrary implications drawn from the preamble to §523(a).

Analysis

Precedents Cited and Their Influence

In re Cleary Packaging, LLC, 36 F.4th 509 (4th Cir. 2022) – First circuit-level decision adopting the “all debtors” view; heavily relied on for plain-language analysis.
In re GFS Industries, L.L.C., 99 F.4th 223 (5th Cir. 2024) – Reinforced Cleary; cited to show growing inter-circuit consensus.
In re Off-Spec Solutions, LLC, 651 B.R. 862 (9th Cir. BAP 2023) – Adopted the opposite reading; majority distinguishes and rejects its reasoning.
Supreme Court canons invoked: Russello v. United States (expressio unius), RadLAX Gateway Hotel (specific v. general provisions), Whitman v. ATA (no “elephants in mouseholes”).
Older Eleventh Circuit precedent In re Spring Valley Farms, 863 F.2d 832 (11th Cir. 1989) – deemed outdated post-BAPCPA and thus not controlling.

Key Elements of the Court’s Legal Reasoning

Plain Text of §1192 Controls. The term “debtor” in §1192 is defined in §§101(41) & 1182(1) to include both individuals and business entities. The phrase “of the kind specified in §523(a)” modifies “debt,” not “debtor.” Therefore, the reference merely imports the list of 21 debt categories without importing the “individual debtor” limitation.
Contextual Harmony with §1141(d). Congress expressly distinguished between individual and corporate debtors within §1141(d)(2) & (6). The absence of such limiting language in §1192 indicates an intentional choice: all Subchapter V debtors are subject to §523(a) debts.
Canon Against Surplusage Favors BenShot. If §523(a)’s “individual debtor” phrase controlled §1192, then §1141(d)(6)’s corporate exception would be meaningless. Conversely, treating the phrase as merely descriptive avoids nullifying any section.
No “Elephants in Mouseholes.” The 2019 “conforming amendment” that added §1192 to the §523(a) preamble cannot silently overturn the broader wording of §1192 itself.

Impact of the Decision

Regional Uniformity. Creditors and debtors in the Eleventh Circuit now face the same nondischargeability landscape as in the Fourth and Fifth Circuits, reducing forum-shopping within the southeastern United States.
Shift in Leverage. Corporate Subchapter V debtors lose the ability to discharge tort, fraud, willful-injury, and other §523(a) obligations through cram-down plans. Tort claimants and trademark plaintiffs (like BenShot) gain bargaining power.
Encouragement of Consensual Plans. Because §523(a) applies only in non-consensual plans under §1192, debtors are incentivized to strike deals with creditors to confirm plans under §1191(a) and obtain a broader discharge.
National Split Deepens. The Ninth Circuit BAP, several bankruptcy courts, and Judge Luck’s dissent maintain the contrary view. With three circuits now aligned, Supreme Court review becomes more likely.
Due-Diligence & Underwriting. Lenders and investors will scrutinize potential exposure to nondischargeable liabilities when assessing small business borrowers, possibly tightening credit for risk-heavy industries.

Complex Concepts Simplified

Subchapter V: A streamlined version of Chapter 11 for businesses (and individuals) with limited debt (currently $7.5 million). It removes the absolute-priority rule and provides a quicker, cheaper path to reorganization.
Cram-Down (Non-Consensual Plan): A debtor can impose a plan over the objection of a class of creditors if statutory requirements are met.
Absolute Priority Rule: Traditional Chapter 11 principle that equity holders cannot keep interests unless senior classes are paid in full. Subchapter V relaxes this rule.
Discharge: Court order wiping out personal liability for pre-petition debts.
§523(a) Debts: Twenty-one categories Congress deemed too serious to forgive (e.g., intentional torts, fraud, taxes, alimony).
“Debt” vs. “Debtor” Distinction: The Code defines “debt” broadly (liability on a claim). “Debtor” refers to the party seeking relief; can be an individual or business entity.

Conclusion

BenShot v. 2 Monkey Trading cements the Eleventh Circuit’s stance that all Subchapter V debtors—regardless of corporate form—remain bound by the nondischargeability provisions of §523(a) when they resort to cram-down plans. The decision aligns with the Fourth and Fifth Circuits, narrows the safe harbor for unscrupulous small businesses, and furthers Congress’s goal of balancing debtor rehabilitation with creditor protection. Until the Supreme Court or Congress speaks, small business debtors in three circuits must either negotiate consensual plans or accept that certain debts—especially those arising from fraud or willful misconduct—will follow them beyond bankruptcy.