Canada’s Bankruptcy and Insolvency Act (BIA) is designed to give “honest, but unfortunate debtors” a “fresh start” by automatically staying litigation and dealing with the bankrupt’s debts and liabilities in an orderly fashion. But what if the bankrupt was dishonest? Should they be entitled to have litigation stayed and their debts discharged? The BIA contains tools to address this.

In a case of first impression in the Ninth Circuit, the US Court of Appeals recently handed bankruptcy trustees a significant power by ruling in TheLovering Tubbs Trust v. Hoffman (In re O’Gorman) that a trustee can avoid intentionally fraudulent transfers under the Federal Bankruptcy Code, even if no creditor suffered harm as a result.

On August 28, 2024, Judge Gregory B. Williams of the US District Court for the District of Delaware issued a ruling in AIG Financial Products Corporation, Civ. No. 23-573, affirming an order on appeal from the Delaware Bankruptcy Court that denied a motion to dismiss a chapter 11 petition as a bad faith filing.

Construction insolvency is not a new problem. With the continued presence of fixed price contracts, in an industry which has always been troubled with cash flow problems and low profit margins, coupled with persistent cost inflation and labour and materials issues affecting the supply chain, it is no surprise that we continue to see insolvencies. The question is, what can you do to protect yourself from insolvency?

11 U.S.C. § 1191(c)(2) provides (emphasis added):

• “(c) . . . the condition that a plan be fair and equitable . . . includes . . . (2) . . . all of the projected disposable income of the debtor to be received in the 3-year period, or such longer period not to exceed 5 years as the court may fix, . . . will be applied to make payments under the plan.”

There is little-to-no guidance in the Bankruptcy Code on what “as the court may fix” might mean. So, that meaning is left to the courts to decide.

Under 11 U.S.C. § 727(a)(2), an individual debtor may be denied a discharge, in its entirely, for making a transfer “with intent to hinder, delay, or defraud” a creditor or the trustee.

On April 17, 2023, the Bankruptcy Court for Eastern Michigan ruled:

A “silent” creditor in Subchapter V is one who does not vote on the debtor’s plan and does not object to that plan. The “silent” creditor is a problem for Subchapter V cases.

The Problem

Here’s the problem:

Here are a couple discharge-related bankruptcy questions I’ve heard of late, along with an answer.

Question 1. Why are individuals, but not corporations, eligible for a Chapter 7 discharge?

• §727(a)(1) says, “the court shall grant the debtor a discharge, unless—(1) the debtor is not an individual” (emphasis added).

Question 2. Why are individuals, but not corporations, subject to § 523(a) discharge exceptions in Chapter 11?

Can non-compete and confidentiality protections in a rejected franchise agreement be discharged in bankruptcy?

The answer is, “No,” according to In re Empower Central Michigan, Inc.[Fn. 1]

Facts

Debtor is an automotive repair shop.

Debtor operates under a Franchise Agreement with Autolab Franchising, LLC. The Franchise Agreement has a non-compete provision, and there is a separate-but-related confidentiality agreement.

The continuing effort in Congress to extend Subchapter V’s $7.5 million debt limit recently hit a snag. The result: the $7.5 million debt limit for Subchapter V eligibility expired on June 21, 2024, and the Subchapter V debt limit is now reduced to an inflation-adjusted $3,024,725.[i]