iMay a chapter 11 debtor who is a guarantor require a creditor to look solely to the provisions of the primary obligor’s confirmed plan for repayment? The Tenth Circuit recently held that, in many cases, guarantors will not be able to restrict creditors’ rights in this fashion.
In FB Acquisition Property I, LLC v. Larry Gentry et al, 2015 WL 8117969 (10th Cir. 2015), Larry and Susan Gentry personally guaranteed a loan made by FirstTier Bank to their company, Ball Four, Inc. Their guaranty provided they would pay “all of the principal amount” of the “Indebtedness” of Ball Four to the bank, whether that amount was barred or unenforceable against Ball Four for any reason. In addition, their guaranty contained a waiver of any defenses arising because of the “cessation of Borrower’s liability from any cause whatsoever.” Third, the Genrtrys agreed not to assert “any deductions to the amount guaranteed under this Guaranty” through setoff, counterclaim, counter demand or other method.
Ball Four defaulted on the loan and filed a chapter 11 proceeding. Ball Four filed an adversary proceeding against FirstTier Bank, asserting various breaches of the loan agreement entitling Ball F our to setoffs and reductions of amounts it owed the bank. Ball Four obtained confirmation of a plan that provided payment of the bank’s claim at interest, amortized over twenty-five years with a five year call. During the course of Ball Four’s bankruptcy proceedings, the Colorado Division of Banking closed FirstTier Bank and the FDIC was appointed receiver. Eventually the Ball Four loan was transferred to FB Acquisition.
After Ball Four filed bankruptcy, FirstTier sued the Gentrys on their guaranties. The Gentrys filed a personal chapter 11 petition. The creditor filed a proof of claim in the Gentry bankruptcy case based on the guaranties of the loan, with the amount of the claim exceeding the amount of the proof of claim filed in the Ball Four bankruptcy case by the amount of default interest accruing on the debt between the two petition dates. The Gentrys took the position that their liability under their guaranties was co-extensive with Ball Four’s liability on the debt, and that they would enjoy any reduction of the debt through the adversary proceeding in the Ball Four bankruptcy case. The Gentrys proposed a plan which provided the debt owed on the FirstTier loan would be paid by Ball Four pursuant to its confirmed plan, with the Gentrys not paying any amounts to the creditor unless and until Ball Four defaulted on its plan obligations on the debt.
FB Acquisition appealed the confirmation of the Gentry plan, arguing the bankruptcy court erred in two regards: (1) basing its analysis of the feasibility of the Gentry plan on the feasibility of the Ball Four plan and (2) confirming the Gentry plan which treated the Gentrys’ liability under their personal guaranties as co-extensive with the liability of Ball Four under its confirmed plan.
The Tenth Circuit affirmed the feasibility findings. The court rejected FB Acquisition’s argument that the bankruptcy court relied solely on the Ball Four plan’s feasibility in determining the feasibility of the Gentry plan. The Tenth Circuit held that the bankruptcy court properly determined feasibility of the Gentry plan because the Gentrys had sufficient financial wherewithal to pay the debt if Ball Four defaulted under its plan and because the Gentrys would not receive a discharge in their case until the debt was paid in full.
However, the Tenth Circuit held that the bankruptcy court erred in confirming the Gentrys’ plan, which provided their guarantor liability on the debt was co-extensive with Ball Four’s liability. First, while Colorado law provides that a guarantor’s liability is co-extensive with that of the primary obligor, the Tenth Circuit held that “this rule of equivalent liability is inapplicable in the bankruptcy context. The court noted the majority rule that the Bankruptcy Code’s discharge provisions do not affect a guarantor’s liability. The court pointed to the specific language of § 524(e), which states the “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.” The Tenth Circuit stated that “Holding otherwise would impair a guaranty. Guaranties act as a safeguard, assuring performance of a guarantor even if the borrower defaults,” and further stated “Extending this rule of equivalent liability into the bankruptcy context would destroy the value of a guaranty.”
Second, the Tenth Circuit held that the specific terms of the guaranties themselves precluded the Gentrys from asserting their liability was co-extensive with Ball Four’s. The guaranties provided contained the Gentrys’ promise to pay “all of the principle amount outstanding” whether “barred or unenforceable against Borrower for any reason whatsoever.” The guaranties also contained waivers of defenses arising from the cessation of Ball Four’s liability from any cause whatsoever.” In addition, the Gentrys in their guaranties agreed not to assert any deductions to the amount guaranteed by way of setoff or counterclaim. The Gentrys contended that, since the guaranties provided they guaranteed the “Indebtedness” of Ball Four, they were entitled to any reductions in that indebtedness which might arise from a judgment in the adversary proceeding brought by Ball Four in its case. The Tenth Circuit disagreed, concluding that while a bankruptcy court may grant a discharge, “a discharge does not extinguish the underlying debt, rather it changes a debtor’s liability for that debt.” Therefore, although the confirmation of the Ball Four plan modified Ball Four’s liability for its debt, it did not modify the indebtedness itself. Because the indebtedness remained unchanged, the Gentrys’ liability also remained unchanged.
