Noting split of authority, 6th Circuit BAP holds debtor's discharge precluded creditor from recovering under prepetition guaranty.
March 8th, 2020
In In re Orlandi, 19-8001 (6th Cir. BAP Feb. 28, 2020), the Sixth Circuit BAP held that a chapter 7 debtor's liability on a lease guaranty had been discharged when the guarantor/debtor filed for bankruptcy relief years earlier. Thus, the landlord could not pursue a claim against the guarantor/debtor for unpaid rent owed by the underlying tenant for occupancy years later. This case is not notable for what it held, but for its discussion (and ultimate rejection) of contrary decisions holding that a pre-petition guaranty can still obligate a debtor for some post-discharge liabilities. Because these contrary decisions are at odds with bedrock bankruptcy precepts -- i.e., a discharge cleanses a debtor of all dischargeable obligations -- a discussion of the case and the contrary decisions is in order.In Orlandi, the debtor owned a business called Studio 26 and guaranteed its obligations under a lease with LFLP. The debtor filed a chapter 7 case, disclosed the guaranty obligation and provided notice to LFLP. Studio 26 then extended the lease for 5 years and continued to occupy the premises. When Studio 26 defaulted under the lease extension, LFLP pursued collection of unpaid rent from the debtor pursuant to his guaranty, arguing that the discharge injunction was irrelevant because the 2011 lease extension resurrected the debtor’s personal guaranty and the language in the original lease and the lease extension contained a survivability clause that superseded the bankruptcy filing and discharge.The debtor then brought an action against LFLP for violating the dischargeinjunction, arguing the liability on the lease guaranty had been eliminated by the discharge the debtor received when he filed his chapter 7 case yearsearlier. The bankruptcy court ruled for the debtor and awarded over $10,000 in attorney's fees and costs. On appeal, the BAP concluded, based upon Taggart v. Lorenzen, _ U.S. _, 139 S. Ct. 1795 (2019), that damages for violating the discharge injunction were not appropriate because the caselaw did not unambiguously hold that the obligation had been discharged. That ultimate holding provided the foundation for the Orlandi court to examine the divergent views on the issue.Consistent with one's ordinary expectations in light of the Bankruptcy Code's broad definition of a claim and its goal of providing the debtor a fresh start, the BAP held the liability on the guaranty was a contingent claim and thus the debtor could not be held liable under the guaranty because that claim had been discharged. See In re Lipa, 433 B.R. 668; Russo v. HD Supply Elec., Ltd. (In re Russo), 494 B.R. 562 (Bankr. M.D. Fla. 2013); In re Stillwell, No. BK08-82997-TLS, 2012 WL 441193 (Bankr. D. Neb. Feb. 10, 2012); Fravala v. E Holdings, Ltd. (In re Fravala), Bankr. No. 3:11-bk-48-PMG, Adv. No. 3:16-ap-132-PMG, 2017 WL 3447936 (Bankr. M.D. Fla. Aug. 10, 2017); Motley v. Equity Title Co. (In re Motley), 268 B.R. 237 (Bankr. C.D. Cal. 2001). The BAP's holding was guided, in part, by the Bankruptcy Code's overarching goal of allowing the debtor to deal with all of its obligations in the case and to obtain a fresh start.The BAP expressly rejected an alternative line of cases holding that there is no contingent claim to be discharged without a post-petition right to payment. These cases indicate the contractual obligation is not discharged and survives as to post-discharge advances.Thus, absent an affirmative action by the debtor to terminate or revoke the guaranty, it may be enforced as to obligations incurred post-petition. See Weeks v. Isabella Bank Corp. (In re Weeks), 400 B.R. 117, 124 (Bankr. W.D. Mich. 2009) (“no dischargeable ‘claim’ (i.e., an enforceable obligation) can arise on account of a debtor’s guaranty of future indebtedness until a new advance has in fact been made”); Dulles Elec. & Supply Corp. v. Shaffer (In re Shaffer), 585 B.R. 224, 230 Bankr. W.D. Va. 2018) (debtor’s discharge did not discharge liability under a pre-petition continuing guaranty for post-petition credit extensions); Graybar Elec. Co. v. Brand (In re Brand), 578 B.R. 729, 734 (D. Md. 2017) (“the unpaid amounts arising from [the primary obligor’s] post-petition purchase orders, even if owed by [the debtor] pursuant to her unrevoked pre-petition guaranty, were not pre-petition debts discharged through [the debtor’s] bankruptcy”); Wuthrich v. Amer Sports Winter & Outdoor Co., No. C-14-0871 EMC, 2015 WL 1503424 at *4-5 (N.D. Cal. April 1, 2015) (debtor’s obligation under pre-petition continuing guaranty not discharged as to post-petition obligations that did not exist pre-petition, were not routinely occurring or predictable (such as a guaranty of a monthly rental obligation), and where the so-called “contingency” of the claim “did not turn on events or actions of a third party” but was completely within the debtor’s control); Nat’l Lumber Co. v. Reardon (In re Reardon), 566 B.R. 119 (Bankr. D. Mass. 2017) (same).Finally, the BAP reversed the award of damages against the landlord based upon Taggart. In this regard, the appellate tribunal held there was an objectively reasonable basis for the landlord to have concluded that pursuing the guaranty might be lawful and thus the violation of the discharge injunction was not willful.