• Guarantor's Discharge Not Applicable to Post-Petition Credit
  • August 11, 2017 | Authors: Ned T. Himmelrich; Lawrence D. Coppel; Marjorie A. Corwin; Christopher R. Rahl
  • Law Firm: Gordon Feinblatt LLC - Baltimore Office
  • It is common for commercial lenders and other creditors to require guarantors to execute a continuing guaranty that is applicable to existing and future extensions of credit. In a recent case, the United States Bankruptcy Court for the District of Massachusetts (Eastern Division) considered a creditor's request for a declaratory judgment that the discharge received by the debtors in a Chapter 7 case did not apply to the creditor's extension of trade credit to the primary obligor after the bankruptcy petition was filed. Under the facts, the debtors signed two guaranties prior to their bankruptcy filing. Neither one was ever revoked. One guaranty was found to be restricted to a specific pre-bankruptcy debt. Thus, under Sec. 727 of the Bankruptcy Code, the debtors were discharged for any liability under that guaranty. The second guaranty was found to be a continuing one. Although Chapter 7 debtors receive a discharge for pre-bankruptcy contingent liabilities, the Court ruled -- quoting an Alabama bankruptcy decision -- that a continuing guaranty is "'a divisible offer of a series of separate unilateral contracts, and contemplates a series of transactions between the debtor and the creditor rather than a single debt, and each transaction creates a new contract.'" As a result, the Court concluded that the debtors' liability under the continuing guaranty for unpaid credit extended by the creditor after the filing of bankruptcy did not arise until then and their discharge did not apply to the creditor's claim. While there is little authority on this issue, the Court's decision is an important development for creditors holding unrevoked continuing guaranties who are seeking to collect on their claims based on a loan or credit extension made after the individual guarantor has filed for Chapter 7 bankruptcy. Please contact Lawrence Coppel for more information concerning this topic.