The Tenth Circuit will not allow individuals to escape liability on personal guaranties by confirming their company’s chapter 11 plan.
A company confirmed a reorganization plan promising to pay the secured creditor in full with 6% interest on a 25-year amortization schedule with a five-year balloon. The lender retained its lien and did not object to confirmation of the plan.
While the company was in chapter 11, the lender filed suit on a guaranty given by the husband and wife who owned the business. The lender was seeking immediate payment of the debt, along with interest at a default rate not permitted under the plan.
The couple filed their own chapter 11 petition and ultimately confirmed a plan, over the lender’s objection.
The couple’s plan provided that they would have no liability on the guaranty so long as the company paid the lender in full under the company’s plan. The lender appealed and lost in district court.
On a second appeal, Circuit Judge Paul J. Kelly Jr. reversed the lower courts on Dec. 8.
In the lower courts, the couple successfully relied on Colorado law for the proposition that liability on a guaranty is the same as the primary obligor’s liability, absent language in the guaranty to the contrary. Judge Kelly said the so-called rule of equivalent liability “is inapplicable in bankruptcy.”
Modifying the guaranty, he said, “would impair” and “destroy the value of a guaranty” in bankruptcy. Judge Kelly remanded the case to the bankruptcy court to revise the secured creditor’s treatment and reassess the plan’s feasibility.
The Tenth Circuit will not allow individuals to escape liability on personal guaranties by confirming their company’s chapter 11 plan.