New England Case Summary-re Reardon, 2017 WL 1283449 (Bkrtcy. D. Mass., Judge Bailey)

Bankruptcy Court Rules That Pre-Petition Guaranties of Post-Petition Extensions of Credit Are Not Subject to Bankruptcy Discharges.  In re Reardon, 2017 WL 1283449 (Bkrtcy. D. Mass., Judge Bailey).

National Lumber Company (the “Creditor”) sought a determination by the court that James Reardon and Jeanine Reardon, husband and wife and also joint petitioners for relief under Chapter 7 of the federal Bankruptcy Code, (the “Debtors”) were liable to the Creditor under two pre-petition guaranties for post-petition extensions of credit because the guaranties were not subject to the discharge the Debtors received in their bankruptcy case.  Essentially, after the Debtors reopened their Chapter 7 bankruptcy case to amend the schedule of nonpriority unsecured creditors to include the Creditor, the Creditor filed a complaint alleging that the Debtors gave two personal guaranties for extensions of credit by the Creditor to a trust company (the “Company”).  Further, because the Creditor was neither scheduled as a creditor in the bankruptcy case nor provided with any notice thereof, the Creditor sought a judgment against the Debtors for the amount that it sold on credit to the Company in reliance on the Debtors’ two guaranties. 

 Although a discharge under 11 U.S.C. § 727 “discharges the debtor from all debts that arose before the date of the order for relief under this chapter,” the central question here was whether the debt arose when the guaranties were executed or when credit was extended to the Company.  The court relied on In re Jordan, 2006 WL 1999117, at *3 (Bankr. M.D. Ala. 2006) to resolve this question.  In Jordan, the court found that the issue of when debt arises is one of federal law, while its determination is informed by state law.  Applying the reasoning in Jordan, the court in this case found that Massachusetts law treats a restricted guaranty as concerning a single or limited number of specific transactions, whereas a continuing guaranty concerns an unspecified number of future transactions “akin to a line of credit or revolving credit account”.  By the same token, with respect to liability, each extension of credit involving a continuing guaranty should be viewed as a new transaction, with liability arising as of the time of each extension.  Conversely, for a restrictive guaranty, liability “arises upon the execution of the guaranty itself”.

The court entered a judgment in favor of the Creditor as to the first guaranty but not as to the second guaranty.  Specifically, given that the first guaranty guaranteed post-petition extensions of credit, the court held that it was continuing in nature and thus the obligations created thereunder were not subject to the discharge.  On the other hand, the court found that the second guaranty was a restrictive guaranty because it was limited to the obligations arising under the loan documents relative to the construction of a specific apartment unit; coverage of the guaranty did not in any way extend to other post-petition obligations.  Therefore, any remaining liability under the second guaranty was discharged.