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Bankrupt Md. company’s $4.7M debt for damages likely can’t be discharged, 4th Circuit says

A Savage-based supplier of packaging products likely cannot discharge through bankruptcy the $4.7 million in damages owed a competitor for intentional interference with contracts and tortious interference with business relations, a federal appeals court ruled last week.

In its published decision, the 4th U.S. Circuit Court of Appeals said Cleary Packaging LLC’s actions if found on remand to have caused “willful and malicious injury” to Cantwell-Cleary Company Inc. would not be a dischargeable debt under the U.S. Bankruptcy Code.

“This fight is not over,” said Cleary Packaging’s attorney, Paul Sweeney. “We have options in the bankruptcy court that we are considering.”

Among those options is trying to convince the judge that Cleary Packaging’s actions against Cantwell-Cleary did not rise to a willful and malicious injury, said Sweeney.

The 4th Circuit’s decision marked the latest chapter in a story that began with a son’s alleged desire to crush the family business — Cantwell-Cleary in Elkridge — after he was denied ownership of the company for less than the fair market price charged by his mother.

Vincent Cleary Jr. left Cantwell-Cleary on June 18, 2018, and filed papers four days later with the Maryland State Department of Assessments and Taxation to establish Cleary Packaging. He subsequently poached employees from Cantwell-Cleary, including senior sales employees, who were otherwise covered under noncompete and nonsolicitation agreements, according to Cantwell-Cleary’s lawsuit.

Armed with Cantwell-Cleary’s proprietary information and client lists, Cleary Packaging solicited the older company’s customers, the lawsuit stated.

Cleary Packaging denied the allegations, but an Anne Arundel County Circuit Court jury in November 2020 found the company had intentionally and tortiously interfered with contracts and business relations.

Four months later, Cleary Packaging filed for bankruptcy under Chapter 11 of the Bankruptcy Code.

The company offered to pay 2.98% of the damages award — or $140,489.77 — as part of its reorganization plan, with the rest being discharged through bankruptcy, according to the 4th Circuit’s opinion.

Cantwell-Cleary’s challenge to the discharge bid in U.S. Bankruptcy Court in Baltimore failed when Judge Michelle M. Harner interpreted a code provision obligating “individual debtors” to pay debts resulting from willful and malicious injury as permitting small business debtors, those with debts no higher than $7.5 million, to be discharged.

But the 4th Circuit said Harner was wrong.

The appellate court said the provision pertaining to individual donors  — 11 U.S.C. § 523(a) — must be read in tandem with § 1192(2). That section states that small business debtors under Subchapter V of the code are not discharged from the 21 types of debts specified in Section 523(a), including those caused by willful and malicious injury, the 4th Circuit said in sending the case back to the bankruptcy court.

“At bottom, while we recognize that the relationship between § 523(a) and § 1192 might be a bit discordant – or perhaps more accurately, clumsy – we find more harmony from following a close textual analysis and contextual review of §1192(2) and thus conclude that it provides discharges to small business debtors, whether they are individuals or corporations, except with respect to the 21 kinds of debts listed in § 523(a),” Judge Paul V. Niemeyer wrote for the 4th Circuit.

“We would find it difficult to conceive of giving Section 523(a) the additional role of defining the debtors covered by Section 1192(2) in conflict with Section 1192(2)’s own language,” added Niemeyer, who was joined by Judges Diana Gribbon Motz and Robert B. King.

Sweeney, Cleary Packaging’s attorney, said that “we were pleased with Judge Harner’s decision. We are disappointed that the 4th Circuit has reversed and we are exploring our options,” including a potential request that the full 4th Circuit review the case “given the significance of the ruling.”

Sweeney is with Yumkas, Vidmar, Sweeney & Mulrenin LLC in Columbia.

Cantwell-Cleary’s appellate attorney, Justin P. Fasano, praised the 4th Circuit’s decision.

“It’s a big deal because small businesses will not be able to use Subchapter V to avoid liability for fraud and intentional torts,” said Fasano, of McNamee Hosea in Greenbelt.

The 4th Circuit case drew attention from the U.S. Justice Department and the Public Justice Center, which submitted briefs in support of Cantwell-Cleary’s position.

The Justice Department said permitting debts owed as a result of fraud or intentional torts to be discharged could excuse fraudulent tax returns filed by small business debtors in bankruptcy.

The PJC, which represents low-income clients, said permitting debts to be discharged through bankruptcy could enable small business debtors to avoid paying damages awarded for their failure to comply with wage and hour laws.

“Inadequate legal enforcement is one reason that wage theft has proliferated to this extent,” Baltimore-based PJC stated in its brief. “It is common practice for employers who commit wage theft to use corporate bankruptcy to avoid wage judgments won by their employees. While discharge provides honest debtors with a ‘fresh start,’ this court is equally concerned with ensuring that perpetrators of fraud are not allowed to hide behind the skirts of the Bankruptcy Code.”

The 4th Circuit rendered its decision in Cantwell-Cleary Company Inc. v. Cleary Packaging LLC, No. 21-1981.