Taking Exception to the New Corporate Discharge Exceptions

Abstract

This article critiques the new corporate discharge exceptions enacted as part of the 2005 bankruptcy amendments that preclude a corporate debtor’s Chapter 11 plan confirmation from discharging certain fraud debts. This provision misperceives the fundamental nature of the Chapter 11 corporate discharge, erroneously equating it with bankruptcy’s “fresh start” for the “honest but unfortunate” individual debtor. The Chapter 11 discharge, however, is simply a (mundane) finality mechanism for ensuring the integrity of creditors’ relative distribution rights and ensuring the comprehensiveness of a Chapter 11 restructuring. The new corporate discharge exceptions, therefore, simply afford fraud creditors an oblique distribution priority and one that can actually threaten the ability of a viable entity to effectively restructure in the face of significant fraud liability. Moreover, sophisticated counsel will be able to entirely moot the applicability of the new corporate discharge provisions by effectuating a reorganization through an asset sale structure, in lieu of a traditional plan structure. Nonetheless, the very existence of that provision will perpetuate the misguided reflex to equate bankruptcy’s individual and corporate discharge provisions.