SubChapter V Small Debtor bankruptcy case under Chapter 11 of the Bankruptcy Code
offers a faster and economical procedure for small businesses to reorganize their finances and
continue in business. But as with many questions in bankruptcy law, some issues are vague
enough to offer contrary interpretations. Often the different interpretations defeat the ability to
reorganize.
Gregory Stern and Monica O’Brien helped guide a Chicago Bankruptcy Judge away from
an adverse interpretation and obtained the result that will help small businesses to successfully
reorganize.
Corporate debtors in a traditional Chapter 11 case are immune to most challenges to the
dischargeability of a debt. The question is whether the same immunity applies to a corporate
small business in a SubChapter V Chapter 11? Earlier decisions of courts have adopted the rule
that the exceptions to discharge are applicable to corporate small business debtors in a
SubChapter V Chapter 11 cases. See, Cantwell-Cleary Co. v. Cleary Packaging LLC (In Re
Cleary LLC), 36 F.4 th 509 (4 th Cir. 2022). Other courts have ruled otherwise. Lafferty v. Off-Spec
Solutions, LLC (In re Off-Spec Solutions, LLC), 651 H.R. 862 (B.A.P. 9th Cir. 2023); In re 2
Monkey Trading, LLC, 650 B.R. 521, 522–23 (Bankr. M.D. Fla. 2023).
Our firm litigated the very same issue in a Chicago SubChapter V case to a successful
conclusion for our client. A union benefit fund contended our debtor client had committed
misdeeds in reporting contributions due and making payments to the fund rendering the debt to
be non-dischargeable in bankruptcy. As to an individual debtor, the creditor would be correct.
But SubChapter V allows the debt to be discharged in order to assist the small business debtor
reorganize and continue its business operations.
The Hon. Timothy A. Barnes recognized both the seriousness of the issue and the
controversy existing as to the correct reading of the relevant statutory provisions of bankruptcy
law. The Judge termed the issue as a cause celebre in the bankruptcy world and gave serious
attention to the issue in the published Memorandum Decision in the adversary case Chicago &
Vicinity Laborers’ District Council Pension Plan, et al v. R&W Clark Construction, Inc.. Case
No. 23-00127 issued February 8, 2024. He disregarded the prior decisions as based on suspected
intent of Congress which was never stated in the specific law. Therefore, following the language
that Congress used, Judge Barnes agreed with our interpretation that a corporate debtor in a
SubChapter V small business case can discharge debts alleged to be based on wrongful acts in
order to preserve the existence and continuation of the business for the benefit of all parties
relying of the case of In re Off-Spec Solutions LLC.