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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
