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Personal Guaranty of Commercial Lease Held Discharged in Guarantor's Bankruptcy
As we work remotely and prepare for the anticipated increase in bankruptcy filings caused by the COVID-19 pandemic impact on the economy, many practitioners are trying to compare this cycle to cycles past, going back all the way to the savings and loan crisis of the late 1980s. One of the co-authors never ceases to be amazed by issues that keep coming up in bankruptcy cases cycle after cycle. One of them is whether a personal guaranty of a commercial lease is discharged in the bankruptcy of the individual guarantor. Court decisions have split on this issue for years.
The issue was recently considered by the bankruptcy appellate panel for the U.S. Court of Appeals for the Sixth Circuit in Orlandi v. Leavitt Family Limited Partnership (In re Orlandi), Case No. 19-8001 (Feb. 28, 2020). The court held that a prepetition guaranty given by the debtor was a contingent claim discharged by the bankruptcy. The court also analyzed and interpreted a recent U.S. Supreme Court ruling on what constitutes a willful violation of the discharge injunction.
Pre-Bankruptcy Guaranty, Post-Bankruptcy Collection Efforts
The opinion recited the relatively straightforward facts of the case. The debtor owned a salon in Mayfield Heights, OH. In 2005, the debtor signed a shopping center lease on behalf of the business salon entity and executed a personal guaranty of the salon's lease obligations.
Three years later, the debtor and his wife filed a joint Chapter 7 bankruptcy petition. They received a discharge in November 2008. The shopping center landlord was listed as a creditor and received notice of the bankruptcy and discharge. The landlord did not request that the debtor reaffirm on his obligations under the guaranty in the bankruptcy case.
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