Attention lenders: The effect of bankruptcy on personal guarantees – Insolvency / Bankruptcy / Restructuring


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A well-written personal payment and performance guarantee provides peace of mind for the diligent lender. It is not only irrevocable, but also covers future credit extensions and includes broad waivers of defenses. Even when a lender faces bankruptcy proceedings, the guarantor’s promise to pay the full amount of a debt is inviolable: a claim against the guarantor does not need to be reduced to account for collections from the guarantor. ‘other sources unless and until the creditor is paid in full. As long as the creditor does not collect more than what is owed to him, he can pursue his bankruptcy claim for the full amount of a guarantee obligation, regardless of the current debt balance. See, for example, Reconstruction Finance Corp. vs. Denver & RGWR Co., 328 US 495, 529 (1946) (“The rule is established in bankruptcy proceedings that a creditor secured by the property of another need not deduct the value of that security or its proceeds to prove his debt. ”) (citing Ivanhoé building. & Loan Assoc. v. Orr, 295 US 243 (1935)).

Usually, a claim against a personal guarantor is just that: a cause of action against the one who promised to pay; an unsecured debt. And like most unsecured debt, a guarantee obligation can be discharged in bankruptcy proceedings. But what about new credit extensions, advances made to the principal debtor after the discharge of the guarantor in bankruptcy? The answer lies in a recent ruling by Judge Beth E. Hanan, of the United States Bankruptcy Court for the Eastern District of Wisconsin, confirming what lenders may have feared from the start: These debts are also discharged.

In Reinhart Food Service LLC v. Schlundt (In re Schlundt), Adv. No. 20-2091-beh (Bankr. ED Wis. August 19, 2021), Judge Hanan used the “test of conduct” to determine whether the personal guarantee signed by Mr. Schlundt in 2003 created a pre-petition debt who was acquitted in Schlundts Chapter 7 bankruptcy in 2014, or “set the stage” for post-bankruptcy debt incurred when Reinhart Food Service granted credit in 2018. According to the conduct test, “the date of” a claim is determined by the date of the conduct giving rise to the claim. Identifier. (citing Sainte-Catherine Hospital. of Ind., LLC v. Ind. Family and Soc. Serves. Admin., 800 F.3d 312, 315 (7th Cir. 2015)). The test can be contrasted with the “accumulation theory”, according to which the date of a claim was determined by reference to the law of the state which dictates when liability for the claim arose.

The conduct giving rise to a contractual claim is usually the signing of the contract, so liability usually arises on the date the contract is signed. This is true even though the contractual obligation may or may not be conditional at the time of signing the contract (a bankrupt “claim” is broadly defined as a “right to payment, whether or not that right is subject to judgment, liquidated or not. , unliquidated, fixed, contingent, past due, unmatured, disputed, undisputed, legal, fair, secured or unsecured. ”11 USC § 101 (5) (A)). This is a clear expression of the intention of Congress to settle as many claims as possible in bankruptcy proceedings, in order to ensure a “fresh start” for the debtor.

Any concerns that the conduct test is too broad – potentially causing a debt to be discharged before a creditor has reason to know it exists – was mitigated, Judge Hanan concluded, by the contractual relationship prior to the request between Reinhart Food Service and Mr. Schlundt. . The guarantee expressly provided for future indebtedness, and Mr. Schlundt assumed a contingent liability when he signed the guarantee. Therefore, Schlundt’s collateral was released in the 2014 bankruptcy and did not extend to Reinhart Food’s new credit in 2018.

The Reinhart Food The ruling is a reminder that lenders should not assume that personal collateral obligations “will pass” through bankruptcy, even for new post-bankruptcy credit extensions. The advice here seems simple: get a new personal guarantee. But lenders should be cautious when obtaining new collateral that is arguably tied to discharged debt. Some courts have ruled the new post-release guarantees inapplicable as unlawful reaffirmations of debts in violation of Bankruptcy Code § 524 (c) and even ruled that the lenders violated the release order by obtaining such guarantees, subjecting them to the responsibility. See, for example, Americorp Fin. LLC v. Schwarz (In re Schwarz), n ° 15-00044, 2016 WL 7413478 (Bankr. EDNC December 22, 2016). Lenders should work with legal counsel to avoid this liability.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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