There Is No Limit to the Number of Times a Chapter 11 Debtor Can Receive a Discharge within a Certain Time Frame!

I have spoken with quite a few practitioners and surprisingly, all of them have said the same thing: an individual Debtor in Chapter 11 Bankruptcy can only receive a discharge once every 8 years.

Then a good friend of mine and told me about his magic bullet: he would vacate the prior discharge to make his clients eligible for the Chapter 11 discharge. It is quite brilliant actually but it turns out not to be necessary.

First, let’s discuss the code section which seems to have caused all the confusion:

Under § 1141(d)(3),

(3) The confirmation of a plan does not discharge a debtor if—
(A) the plan provides for the liquidation of all or substantially all of the property of the estate;
(B) the debtor does not engage in business after consummation of the plan; and
(C) the debtor would be denied a discharge under section 727 (a) of this title if the case were a case under chapter 7 of this title.

Furthermore, § 727 (a)(8) provides, in pertinent part, there will be no discharge if:

(8) the debtor has been granted a discharge under this section, under section 1141 of this title … in a case commenced within 8 years before the date of the filing of the petition;

When read together, § 1141(d)(3)(c) coupled with § 727 (a)(8) state that if the Debtor has received a discharge in a case that began within the last 8 years, then there will be no discharge. This seems pretty straight forward.

The problem with this reading is that it ignored the “and” at the end of subsection (B) which turns this rule into a conjunctive test. For § 1141(d)(3) to be applicable to a case, all three tests (A), (B) and (C) must be satisfied. The purpose behind § 1141(d)(3) is not to prevent multiple bankruptcy discharges but to prevent an individual from obtaining multiple Chapter 7 discharges within an 8 year span through constantly filing liquidating Chapter 11 plans.

After I told my friend the analysis, he opened his copy of the code and could not believe his eyes. Unfortunately, there does not seem to be a lot of case law on the subject, but my friend was able to find this gem: In re Berg, 423 BR 671 (10th Cir. BAP 2010). You can find the case here.

I am trying to keep my friend anonymous but he immediately had good luck with this reading of the code as he convinced Judge Neiter and that furthermore, § 1141(d)(3) does not automatically trigger but requires an adversary proceeding!

Author’s comments. I have heard some people say that a second Chapter 11 bankruptcy is an impermissible end-run around § 1127 which governs modification of a plan. There has also been some talk that multiple Chapter 11 bankruptcies are somehow “bad faith” filings. I do not see how either of this could be true when Congress contemplated multiple filings and addressed that specific issue by limiting discharge when the filings are liquidating plans. It is noteworthy that companies may receiving multiple Chapter 11 discharges within a short period of time, even if the plans are liquidating plans, because this is a three part test that also requires the Debtor to not engage in business after consummation of the plan.

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