Subchapter V streamlines the Chapter 11 reorganization process and is traditionally utilized by small business debtors to retain equity over the bankruptcy estate contrary to creditors’ wishes. In the Subchapter V process a court can grant discharge of all debts after reorganization plan approval with three exceptions – one of them being debts on the “bad behavior list.” In re: Clearly Packaging made it clear that the “bad behavior list” applies to all Subchapter V debtors, no matter if it is an individual or a corporation utilizing the subchapter for bankruptcy. This means that corporate Subchapter V debtors with debts from fraud, willful injury, or other public policy violations cannot use this subchapter of the Bankruptcy Code to discharge their bad faith debts. Creditors can use the existence of debts on the “bad behavior list” to their advantage: (1) they can force Subchapter V debtors to pay the debt in full as a condition to confirmation of the debtor’s organization plan, or (2) they may even force the debtor to file under Chapter 11 and forfeit their equity in the bankruptcy estate until the debt is fully paid.
Cantwell-Cleary argued it held a kind of debt – one for willful and malicious injury – that cannot be discharged under Subchapter V. Under the Bankruptcy Code, an individual debtor can’t discharge that kind of debt. The issue was whether a corporate debtor could discharge the debt.
If a business engages in bad behavior like intentional interference with contract and tortious interference with business relations, then it may not use Subchapter V of Chapter 11 to discharge debts based on that bad behavior.
Source: Corporate Bad Behavior Is Not Dischargeable Under Subchapter V | Ward and Smith, P.A. – JDSupra