Guarantees and Bankruptcy

What We Will Be Covering

What We Will Be Covering

1. Automatic Stay

What We Will Be Covering

1. Automatic Stay2. Claims Issues

What We Will Be Covering

1. Automatic Stay2. Claims Issues3. Dischargeability Issues

1. Automatic Stay

1. Automatic Stay

Effective immediately upon filing

1. Automatic Stay

Effective immediately upon filing

Even if you don’t know about it!

1. Automatic Stay

Notice is anything to alerts creditor that there is a bankruptcy filed

1. Automatic Stay

Notice is anything to alerts creditor that there is a bankruptcy filed

Notice formPlea of StayPhone call/fax/email

1. Automatic Stay

So as soon as you learn about the bankruptcy

1. Automatic Stay

1. Automatic Stay

BUT – what happens if you do somethingbecause you didn’t know?

1. Automatic Stay

1. Undo what you can undo !

1. Automatic Stay

1. Undo what you can undo2. Avoid sanctions by apologizing to

the debtor’s attorney

1. Automatic Stay

OK …But what is the legal effect?

1. Automatic Stay

Void or Voidable? 1st Circuit - Void 2nd Circuit - Void 3rd Circuit - Void 4th Circuit - Hasn’t decided 5th Circuit - Voidable 6th Circuit - Voidable 7th Circuit - Hasn’t decided 8th Circuit - Void 9th Circuit - Void 10th Circuit - Void 11th Circuit - Void Fed Circuit- Void

1. Automatic Stay

Void or Voidable?

Knowing Violations WILL BE VOIDED!!(and probably sanctioned)

1. Automatic Stay

Does the Stay even apply?

1. Automatic Stay

Does the Stay even apply?

-- If the company files, you can still proceed againstthe guarantor

1. Automatic Stay

Does the Stay even apply?

-- If the company files, you can still proceed againstthe guarantor

-- If the guarantor files, you can still proceed against the company

The Wrinkles

The Wrinkles

1. Individual files bankruptcy and lists the company as a d/b/a –who is protected by the stay?

The Wrinkles

1. Individual files bankruptcy and lists the company as a d/b/a –who is protected by the stay?

-- The individual who filed (yes, obviously)

The Wrinkles

1. Individual files bankruptcy and lists the company as a d/b/a –who is protected by the stay?

-- The individual who filed (yes, obviously)-- But not the corporate debtor

The Wrinkles

1. Individual files bankruptcy and lists the company as a d/b/a –who is protected by the stay?

-- The individual who filed (yes, obviously)-- But not the corporate debtor

(Probably not collectible any more though)

The Wrinkles

1. Individual files bankruptcy and lists the company as a d/b/a –who is protected by the stay?

-- The individual who filed (yes, obviously)-- But not the corporate debtor-- Not the co-guarantor

The Wrinkles

2. Co-Debtor Stay

The Wrinkles

2. Co-Debtor Stay-- Chapter 7 - No co-debtor stay

The Wrinkles

2. Co-Debtor Stay-- Chapter 7 - No co-debtor stay-- Chapter 13 – Co-debtor stay does not apply to commercial

claims

The Wrinkles

2. Co-Debtor Stay-- Chapter 13 – Co-debtor stay does not apply to commercial

claims“to collect all or any part of a consumer debt of the

debtor”“unless such individual became liable … in the ordinary

course of such individual’s business”11 U.S.C. §521(a)(1)

The Wrinkles

2. Co-Debtor Stay-- Chapter 7 - No co-debtor stay-- Chapter 13 – Co-debtor stay does not apply to commercial

claims-- Chapter 11 – No co-debtor stay

The Wrinkles

2. Co-Debtor Stay-- Chapter 11 – No co-debtor stay

BUT guarantors will argue that stay should be put in place because they are too important to operation of the company to defend your case

An Aside

Litigation Defense based on company Chapter 11

An Aside

Litigation Defense based on company Chapter 11-- Stay case (or don’t grant judgment) because company is

going to pay

An Aside

Litigation Defense based on company Chapter 11-- Stay case (or don’t grant judgment) because company is

going to pay1. So what – gonna pay is not paid

An Aside

Litigation Defense based on company Chapter 11-- Stay case (or don’t grant judgment) because company is

going to pay1. So what – gonna pay is not paid (even if it is in the

plan)

An Aside

Litigation Defense based on company Chapter 11-- Stay case (or don’t grant judgment) because company is

going to pay1. So what – gonna pay is not paid (even if it is in the

plan2. You are entitled to one satisfaction in any order

(just like co-defendants)

An Aside

Litigation Defense based on company Chapter 11

An Aside

Litigation Defense based on company Chapter 11-- Voting to approve Chapter 11 plan

An Aside

Litigation Defense based on company Chapter 11

The good news

So … Any Questions?

2. Claims

Be consistent with the claim amount in the litigation and the proof of claim

2. Claims

Be consistent with the claim amount in the litigation and the proof of claim

Works both directions

Does guarantor claim set-off but company didn’t

2. Claims

Be consistent with the claim amount in the litigation and the proof of claim

Works both directions

2. Claims

Be consistent with the claim amount in the litigation and the proof of claim

Works both directions

Guarantor claim setoff but company didn’t?

2. Claims

Be consistent with the claim amount in the litigation and the proof of claim

Works both directions

Company defends suit but guarantor lists as undisputed

2. Claims

1. File your claims

2. Claims

1. File your claims2. Provide supporting documentation

2. Claims

1. File your claims2. Provide supporting documentation

Guaranty document and statement

2. Claims

Check your guaranty document

2. Claims

Check your guaranty document

Make sure guaranty has its own provision for interest and attorney’s fees

2. Claims

Check your guaranty document

Make sure guaranty has its own provision for interest and attorney’s fees – bankruptcy payments are almost always pro rata

So … Any Questions?

3. Discharge

“All debts that arose before the date of the order for relief …”11 U.S.C. §727(b)

3. Discharge

“All debts that arose before the date of the order for relief …”11 U.S.C. §727(b)

Except …

3. Discharge

Company owes $100k

3. Discharge

Company owes $100kGuarantor files bankruptcy

3. Discharge

Company owes $100kGuarantor files bankruptcy

Lists the debt in schedules = discharged

3. Discharge

Company owes $100kGuarantor files bankruptcy

Lists the debt in schedules = dischargedDoesn’t list the debt = not discharged

Except it really still is

3. Discharge

Technically claims of creditors without notice are not discharged11 U.S.C. §523(a)(3)

But, really very little happens because

3. Discharge

Technically claims of creditors without notice are not discharged11 U.S.C. §523(a)(3)1. Stay is still in effect (actions voided)

3. Discharge

Technically claims of creditors without notice are not discharged11 U.S.C. §523(a)(3)1. Stay is still in effect (actions voided)2. Debtor can re-open the case and have the claim added and discharged

3. Discharge

Technically claims of creditors without notice are not discharged11 U.S.C. §523(a)(3)1. Stay is still in effect (actions voided)2. Debtor can re-open the case and have the claim added and discharged

More and more courts now presume discharge

3. Discharge

Company owes $100kGuarantor files bankruptcy

Lists the debt in schedules = dischargedDoesn’t list the debt = discharged

Exceptions to Discharge

Exceptions to Discharge(a)(2) - Fraud or fraudulent representation

Exceptions to Discharge

Exceptions to Discharge(a)(2) - Fraud or fraudulent representation(a)(4) – Defalcation by fiduciary, embezzlement

Exceptions to Discharge

Exceptions to Discharge(a)(2) - Fraud or fraudulent representation(a)(4) – Defalcation by fiduciary, embezzlement(a)(6) – Willful Injury (conversion)

Exceptions to Discharge

Exceptions to Discharge(a)(2) - Fraud or fraudulent representation

Must be the basis for the debt

Exceptions to Discharge

Exceptions to Discharge(a)(2) - Fraud or fraudulent representation

Must be the basis for the debt

Guarantor lists house as value, then conveys it to spouse

Exceptions to Discharge

Exceptions to Discharge(a)(2) - Fraud or fraudulent representation

Must be the basis for the debt

Guarantor lists house as value, then conveys it to spouseProbably still discharged because fraudulent conveyance did

not lead to extension of credit, merely prevented collection

Exceptions to Discharge

Exceptions to Discharge(a)(2) - Fraud or fraudulent representation

Must be the basis for the debtStatements of financial condition must be in writing

Exceptions to Discharge

Exceptions to Discharge(a)(2) - Fraud or fraudulent representation

Must be the basis for the debtStatements of financial condition must be in writing

Creditor must prove that guarantor’s financial condition was the sole basis for extending credit

So … Any Questions?

3. Discharge

Company owes $100k but is not in defaultGuarantor files bankruptcy

Still discharged“Claim” = right to payment whether reduced to judgment,

liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured”

11 U.S.C. §101(5)

3. Discharge

Bankruptcy filedGuaranty signedCompany owes $100kGuarantor files bankruptcy – not discharged

3. Discharge

Company owes $0Guarantor files bankruptcy

3. Discharge

Company owes $0Guarantor files bankruptcy

Guaranty is DISCHARGED!!!

3. Discharge

Company owes $0Guarantor files bankruptcy

Guaranty is DISCHARGED!!!Even if you did not get a notice of the filing at all

3. Discharge

Company owes $0Guarantor files bankruptcy

Guaranty is DISCHARGED!!!WTF?

3. Discharge

Company owes $0Guarantor files bankruptcy Guaranty is DISCHARGED!!!

“Debt” = liability on a claim

3. Discharge

Company owes $0Guarantor files bankruptcy Guaranty is DISCHARGED!!!

“Claim” = right to payment whether reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured”

11 U.S.C. §101(5)

3. Discharge

Company owes $0Guarantor files bankruptcy Guaranty is DISCHARGED!!!

Claim apparently also means “potential” and “speculative”

3. Discharge

Company owes $0Guarantor files bankruptcy Guaranty is DISCHARGED!!!

Claim apparently also means “potential” and “speculative”

The occurrence of at least two future events – principal gets credit and then principal defaults

One Last Thing

Chapter 11 wrinkle -- Remember: fully administered doesn’t usually mean fully

paid-- Make sure the plan does not try to include discharge of

additional liabilities

Beau Hays

Hays Potter & Martin, LLP770/934-8858beau@hpmlawatl.com