Delanie Fico
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff
Section 524(a) of Title 11 of the United States Code (the “Bankruptcy Code”) provides that a debtor may be discharged (i.e., relieved of personal liability) for its debts.[1] Section 524(e) provides that a discharge of a debtor’s debt does not affect the liability of a non-debtor.[2] The United States Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals, in RS Air, LLC v. NetJets Aviation, Inc, held that a debtor’s alter-ego may be liable for debts of the debtor that were discharged in the debtor’s bankruptcy case.[3] Stephen G. Perlman (“Perlman”) founded RS Air, a Delaware limited liability company, which then contracted with NetJets to purchase an interest in two private jets.[4] After one of the jets crashed, NetJets asserted that RS Air breached the contract and sought specific performance in Ohio state court.[5] Before the Ohio trial commenced, RS Air filed a voluntary petition for relief under subchapter 5 of chapter 11 of the Bankruptcy Code, where NetJets filed a proof of claim for $2,133,363 against RS Air.[6] Before the bankruptcy court entered RS Air’s discharge, NetJets filed a complaint in Ohio Federal Court (the “Alter-Ego Filing”) against Perlman seeking to recover its claim on an alter ego theory.[7] NetJets did not name RS Air as a defendant in the Alter-Ego Filing.[8] After NetJets' Alter-Ego Filing, the bankruptcy court confirmed RS Air’s chapter 11 plan pursuant to which RS Air was discharged of its debts and NetJets was entitled to a pro-rata distribution of certain proceeds.[9] In the Alter-Ego Filing, Perlman filed a motion to dismiss arguing Perlman was not an alter-ego of RS Air, and thus could not be held liable for RS Air’s debt.[10] The Ohio Federal Court denied Perlman’s motion to dismiss, holding Perlman liable for RS Air’s debt to NetJets.[11] Having lost in district court, Perlman filed a motion with the bankruptcy court for an order sanctioning NetJets for violating the discharge injunction under section 524(a)(2) of the Bankruptcy Code when NetJets sued Perlman.[12] RS Air joined the contempt motion.[13] The bankruptcy court denied the motion finding that Perlman had not violated the discharge because he was suing a non-debtor and did not name RS Air as a defendant.[14] RS Air and Perlman appealed to the Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals.[15]
On appeal, the United States Bankruptcy Appellate Panel for the Ninth Circuit affirmed the bankruptcy court, finding NetJets’ alter-ego complaint did not violate RS Air’s discharge.[16] Relying on the plain meaning of section 524, the Bankruptcy Appellate Panel held the discharge of a debt does not extinguish the debt but rather protects only the debtor from personal liability.[17] The Bankruptcy Appellate Panel stated, “RS Air continues to owe the full amount of the debt; the discharge injunction precludes collection of the debt from RS Air, but not from anyone else.”[18] Thus, NetJets can obtain payment for RS Air’s discharged debt from Perlman, RS Air’s alter-ego.[19]
According to the Bankruptcy Appellate Panel, RS Air and Perlman are not the same entity, and Perlman, as RS Air’s alter-ego, can be held liable for RS Air’s discharged debt to NetJets.[20] Thus, the Court held a discharge does not extinguish the debt, it merely releases the debtor from personal liability on the debt under the plain language of section 524.[21] Consequently, when a party breaches a contract and then obtains a discharge on their debts, the party’s alter-ego may be held liable for the discharged debt.[22] Under section 524 of the Bankruptcy Code, a debtor may receive a discharge of their debt.[23] Such a discharge will then relieve the debtor, but not the non-debtor affiliates, from liability to a creditor.[24]
[1] 11 U.S.C. § 524(a).
[2] Id. § 524(e).
[3] In re RS Air, LLC, 651 B.R. 538, 545 (B.A.P. 9th Cir. 2023).
[4] Id. at 540 (NetJets Aviation, Inc., NetJets Sales, Inc., and NetJets Services, Inc. are collectively known as “NetJets”).
[5] In re RS Air, LLC, 638 B.R. 403, 406 (B.A.P. 9th Cir. 2022).
[6] In re RS Air, LLC, 651 B.R. at 541; In re RS Air, LLC, BAP No. NC-21-1080-TBG, 2022 Bankr. LEXIS 1182, at *2 (B.A.P 9th Cir. Apr. 26, 2022).
[7] In re RS Air, LLC, 651 B.R. at 541.
[8] Id. at 541 (rather, “NetJets had a single cause of action declaring the Perlman Parties as alter egos of RS Air and liable to NetJets for $1, 767,571.51.”).
[9] Id.
[10] Id.
[11] Id.
[12] Id. at 542.
[13] Id.
[14] Id.
[15] Id.
[16] Id. at 548.
[17] Id.
[18] Id. at 545.
[19] See id. (“the discharge does not extinguish the debt; instead it protects only the debtor from personal liability on that debt.”).
[20] Id. at 544.
[21] Id.
[22] Id.
[23] Id.
[24] Id.