Michigan Bankruptcy Blog

Bankruptcy courts split as to dischargeability of personal guaranty liability

In re Lipa, E.D. Mich., Aug. 17, 2010 (Case No. 04-74608, Hon. Steven Rhodes).

In re Weeks, W.D. Mich., Jan. 23, 2009 (Case No. 05-02298, 400 B.R. 117, Hon. Jeffrey R. Hughes).

It is not uncommon for debtors - particularly those who own businesses - to sign personal guaranties before their bankruptcy filing. Pre-petition obligations under those guaranties are generally discharged in bankruptcy. But when a post-petition obligation arises under such a guaranty, the Bankruptcy Courts for the Western and Eastern Districts of Michigan are divided as to whether a guarantor-debtor is protected by his or her discharge.

In In re Lipa, the debtors guaranteed the debts of a drywall company to a supplier and subsequently filed bankruptcy. Five years after the debtors received their discharge, the supplier sued them to enforce the personal guaranty. The debtors reopened their bankruptcy case and sought damages against the supplier for violating the discharge injunction.

The supplier argued that the personal guaranty continued to apply to post-petition extensions of credit because the debtors had not revoked the guaranty. The Bankruptcy Court for the Eastern District of Michigan disagreed and held that the entire guaranty agreement was discharged in the bankruptcy. The court reasoned that Congress gave the terms "debt" and "claim" the "broadest possible definitions" so that debtors could address all of their legal obligations in bankruptcy. The court further reasoned that "claims" discharged in bankruptcy include contingent claims, such as guaranty obligations.

In reaching its conclusion, the court rejected the Bankruptcy Court for the Western District of Michigan's 2009 decision in In re Weeks. In In re Weeks, the debtor also was sued post-petition based on personal guaranties, and he sought damages for violation of the discharge injunction. The court held that the pre-petition personal guaranties were not discharged in the debtor's bankruptcy as to post-petition indebtedness. The court reasoned that the discharge did not "exten[d] so far as to include even yet to be incurred debts of the principal obligor." 400 B.R. at 124. The court also noted that the debtor could have revoked his guaranties, but he did not do so. Thus, although the debtor's obligations for pre-petition debts under the guaranty were discharged, the personal guaranty remained in effect for post-petition debts.

In light of these cases, a debtor's obligations for post-petition debts based on a pre-petition personal guaranty may depend not only on the facts of the case, but also the court before which the case is pending. Debtors' attorneys may wish to consider advising their clients to expressly revoke personal guaranties, particularly if the case is pending in the Western District, to minimize liability exposure for post-petition debts. 

Categories: Eastern District of Michigan, Western District of Michigan