Cite as: Keith M. Lundin, Lundin On Chapter 13, § 15.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
Only “noncontingent” debts (that are also “liquidated”1) are counted toward the secured and unsecured debt limitations for Chapter 13 eligibility in 11 U.S.C. § 109(e).2 Chapter 13 debtors, especially those who are or have been engaged in business,3 often have guaranteed the debts of other individuals or entities. There is little doubt that a guaranty enforceable under state law is a “right to payment”4 that must be scheduled as a debt by an individual guarantor. Sometimes guaranties will be quite large in relation to the debtor’s other obligations, and characterization of the guaranteed debt as contingent or noncontingent becomes outcome determinative of the debtor’s eligibility for Chapter 13.5
There is conflicting authority whether a guaranty is contingent for Chapter 13 eligibility purposes.6 State law and the wording of the guaranty often influence the proper characterization. It has been held that when a guaranty is not conditional under state law—a so-called “absolute” guaranty—the debt is not contingent for eligibility purposes.7 When the contract of guaranty provides that the debtor’s liability vests upon default and a default occurred before the petition, the guaranty has been held to be noncontingent on the date of the filing.8
Other courts applying the In re All Medias Properties, Inc.9 definition discussed above10 have concluded that guaranties are contingent debts because there is an event—the failure of the principal obligor to pay—that is a condition precedent to the debtor’s liability.11 The timing of the Chapter 13 filing and the history of efforts to collect from the principal obligor may affect whether the guaranty is a contingent debt.
Sometimes “triggering event” analysis leads deeply into state law and the precise words of a guaranty agreement. In In re Stebbins,12 the debtor guaranteed a large debt of Throg’s Neck Trading. Throg’s Neck pledged its real property to secure the debt. Throg’s Neck defaulted, and the lender foreclosed on some but not all of its collateral before Stebbins filed Chapter 13. Stebbins listed the guaranty as contingent debt on the theory that until the lender completed its foreclosure and a deficiency judgment was determined, his personal obligation was yet to be triggered. The bankruptcy court concluded otherwise based on the difference between a “guaranty of payment” and a “guaranty of collection”:
“The fundamental distinction between guaranty of payment and one of collection is, that in the first case the guarantor undertakes unconditionally that the debtor will pay, and the creditor may, upon default, proceed directly against the guarantor, without taking any steps to collect of the principal debtor, and the omission or neglect to proceed against him is not . . . any defense to the guarantor; while in the second case the undertaking is that if the demand cannot be collected by legal proceedings the guarantor will pay, and consequently legal proceedings against the principal debtor, and a failure to collect of him by those means are conditions precedent to the liability of the guarantor.” [Citation omitted.]
The Guaranty signed by Stebbins is a guaranty of payment. It is an undertaking by Stebbins to pay the guaranteed liability immediately upon default of the principal obligor, Throg’s Neck Trading. . . .
* * * *
There is no dispute that Throg’s Neck Trading, the principal obligor, was in default of its obligation to AHL at the time Stebbins filed his chapter 13 petition. . . . By the express terms of the Guaranty, Stebbins’ liability was not conditioned on the occurrence of any other event, such as the conclusion of the Foreclosure Action. . . . That AHL chose to commence the Foreclosure Action . . . does not alter the fact that Stebbins promised to pay the debt immediately upon Throg’s Neck Trading’s default without the need of AHL to exhaust the collateral. . . . [T]he obligation of Stebbins to AHL is noncontingent.13
Even if the guaranty is noncontingent for eligibility purposes, some cases suggest that the amount of the debt that will be included in the eligibility calculus is not necessarily the full amount of the principal obligation. For example, when the guaranteed debt is a lease, it has been held that § 502(b)(6) limits the amount of the guaranty to be counted toward Chapter 13 eligibility to either the rent reserved in the lease for one year or 15 percent of the entire lease, not to exceed three years.14 This outcome is not consistent with the view that debt limitations for eligibility purposes in a Chapter 13 case are determined based on debts at the petition, not based on the allowance or disallowance of claims as might be later determined after claims litigation.15 If applicable nonbankruptcy law gives a landlord a larger debt than the amount allowable under § 502(b)(6), the Chapter 13 eligibility calculus is properly based on that larger amount. Any other holding would distort the wording of § 109(e) and would require litigation of the extent to which the creditor has an allowed claim on account of its guaranty (or other relationship) as a condition to determining the debtor’s eligibility for Chapter 13 relief.
The debtor is best advised to always list the entire amount of the guaranty as a debt in the Chapter 13 schedules. If that entire amount is presently enforceable against the debtor, then it is all noncontingent. If enforcement of the debtor’s liability is conditioned on an event that has not occurred—for example, on default by the principal obligor—then the debt should be listed as contingent and not counted for eligibility purposes.
Creditor’s counsel must be prepared to prove the language of the guaranty16 and to demonstrate a right to proceed against the debtor/guarantor at the filing. It may be necessary to prove demand on the principal, default by the principal, notice of default to the guarantor17 and the extent of the debtor’s exposure on the guaranty. This proof can be complicated especially when the principal obligor is a corporation or partnership with ongoing business. In In re Hatzenbuehler,18 the absence of evidence that the bank made a prepetition demand on the debtor’s corporation to repurchase accounts receivable rendered the debtor’s guaranty contingent and not counted.
4 See the definition of “claim” in 11 U.S.C. § 101(5).
5 See, e.g., In re Smith, No. 11-01951-8-JRL, 2011 WL 5909430 (Bankr. E.D.N.C. Oct. 25, 2011) (Leonard) (Father and son debtors were jointly and severally liable on $700,000 personal guaranties, rendering each ineligible for Chapter 13. Guaranties were identified and incorporated into settlement agreement that capped personal liability at $700,000. Creditor had been permitted to liquidate collateral. Debtors were given 20 days to convert to Chapter 7; if not converted, cases would be dismissed.).
6 See, e.g., In re Taylor, No. 08-00526-JDP, 2008 WL 2945621 (Bankr. D. Idaho July 25, 2008) (unpublished) (Pappas) (Following “majority” view, unconditional personal guaranty of corporate obligations is noncontingent debt that renders debtor ineligible.); In re Farris, No. 02-20785 A13G, 2006 WL 3804669, at *3 (Bankr. E.D. Cal. Dec. 22, 2006) (unpublished) (McManus) (citing “conflicting authority as to whether a debt under a guaranty is contingent or unliquidated debt”).
7 In re Glaubitz, 436 B.R. 99, 106, 103 (Bankr. E.D. Wis. Aug. 19, 2010) (McGarity) (Guaranties of corporate debt were unconditional and noncontingent. Guaranties were absolute, establishing liability of debtors at time of contract execution. Agreements did not require creditor to “exhaust its remedies against the principal or its property, and the guarantor cannot enforce reimbursement by the principal borrower of any part of the loan paid by the guarantor. This shows that the guarantor is independently liable under the guaranty for any unpaid portion of the debt. Collection proceedings might be timed with default by the principal borrower, but this is only an acknowledgment by the creditor that it can expect payment to come from a particular source; other provisions made clear that both parties at all times are liable for the debt.” Wisconsin law treated guarantor liability as “separate and distinct from the liability of the borrower, arising not from the debt itself but from the terms of the [guaranty] contract.”), rev’d, No. 10-C-927, 2011 WL 147931 (E.D. Wis. Jan. 18, 2011) (unpublished) (Randa); In re Denaeyer, No. BK10-42202-TLS, 2011 WL 4047543 (Bankr. D. Neb. Sept. 12, 2011) (Saladino) (Unsecured debt limit was exceeded when debtor acknowledged that guaranties of corporate debt were absolute and unconditional.); In re Perkins, No. 08-33352, 2009 WL 2983034 (Bankr. N.D. Ohio Sept. 14, 2009) (unpublished) (Whipple) (Personal guaranty of corporate debt is not contingent or unliquidated—especially when debtor stipulated to an allowed unsecured claim of $100,000 based on the guaranty.); In re Bowes, No. 08-36417, 2009 WL 2983036 (Bankr. N.D. Ohio Sept. 14, 2009) (unpublished) (Whipple); In re Robertson, 105 B.R. 504 (Bankr. D. Minn. Sept. 22, 1989) (Dreher) (Absolute guaranty under Minnesota law was noncontingent.); In re Williams, 51 B.R. 249 (Bankr. S.D. Ind. Jan. 24, 1984) (Bayt); In re Walters, 11 B.R. 567 (Bankr. S.D. W. Va. Mar. 17, 1981) (Flowers); Dekalb Bank v. Flaherty, 10 B.R. 118 (Bankr. N.D. Ill. Mar. 18, 1981) (Eisen).
8 In re Piovanetti, 496 B.R. 57 (Bankr. D.P.R. May 16, 2013) (Lamoutte) (Guaranty was not contingent when debtor filed Chapter 13 three days after principal defaulted by filing Chapter 11.); In re Winters, No. 12-10614, 2012 WL 1067696 (Bankr. E.D. Tenn. Mar. 12, 2012) (Cook) (Debtor was ineligible because guaranty of corporate debt was not contingent. Primary obligors were in default at time of Chapter 13 filing, and guaranty liability was not conditioned on any event other than principal’s default.); In re Jordan, No. 11-01951, 2011 WL 5325460 (Bankr. N.D. Iowa Nov. 3, 2011) (Kilburg) (Debtor was ineligible when guaranty was no longer contingent; principal had already defaulted in payments.); In re Croney, No. 11-10836, 2011 WL 1656371 (Bankr. W.D. Wash. May 2, 2011) (Overstreet) (Guaranty was noncontingent, liquidated debt when liability had been triggered by default of principal. Under Washington law, guaranty without limitation or condition is construed as absolute or unconditional.); In re Kister, 453 B.R. 755 (Bankr. E.D. Mo. Apr. 7, 2011) (Surratt-States) (Guaranty became noncontingent upon default by primary obligor. Debtor exceeded limit for secured debt.); In re Pulliam, 90 B.R. 241 (Bankr. N.D. Tex. June 21, 1988) (Felsenthal) (Applying Texas law, the court held that a $10.6 million “absolute guaranty” ceased to be contingent upon the principal obligor’s prepetition default.); In re Williams, 51 B.R. 249 (Bankr. S.D. Ind. Jan. 24, 1984) (Bayt). Accord In re Heleva, Nos. CIV. A. 00-3434, 98-20358, 2001 WL 1176394, at *2 (E.D. Pa. Oct. 2, 2001) (unpublished) (Waldman) (Confessed judgment based on debtor’s guaranty was noncontingent because “[e]ven if the amount of the judgment, upon a timely petition to strike or open, could have been modified, ‘all events giving rise to the liability for the debt occurred prior to the debtor’s filing for bankruptcy.’ . . . Liability for the debt occurred when the debtor defaulted on the personal guaranty. The possibility of a challenge to the validity of a confessed judgment is not an occurrence of an extrinsic event which will trigger the liability of the debtor to the creditor, thereby making it contingent.”).
9 5 B.R. 126 (Bankr. S.D. Tex. June 25, 1980) (Patton), aff’d per curiam, 646 F.2d 193 (5th Cir. May 28, 1981) (Thornberry, Coleman, Ainsworth).
11 Glaubitz v. Grossman, No. 10-C-927, 2011 WL 147931 (E.D. Wis. Jan. 18, 2011) (unpublished) (Randa) (Guaranties of corporate loans were contingent liabilities notwithstanding language stating that guarantor liability was absolute, unconditional, or joint and several. Language does not alter secondary nature of guarantor liability. Order dismissing case, for exceeding statutory cap, was reversed and remanded.); In re Martz, 293 B.R. 409, 411 (Bankr. N.D. Ohio Oct. 17, 2002) (Speer) (In dicta, “[t]he quintessential [contingent debt] is the guaranty, because in such an arrangement the guarantor has no liability unless and until the principal defaults.”); In re Hatzenbuehler, 282 B.R. 828, 835 (Bankr. N.D. Tex. Aug. 26, 2002) (Lynn) (Guaranty of corporate financing was contingent because “Debtors’ obligations to the Bank under the Guaranties arose, if at all, only upon the Bank’s exercise of its option to require Cherco to repurchase accounts receivable. . . . Since the Court has no contrary evidence showing that the Bank exercised its put prior to the Petition Date, not all of the conditions precedent to Debtors’ obligations under the Guaranties were satisfied prepetition. . . . [T]he postpetition settlement of the Bank’s claim against Debtors is not relevant in determining the amount of Debtors’ unsecured debt on the Petition Date.”); In re Pennypacker, 115 B.R. 504 (Bankr. E.D. Pa. June 26, 1990) (Twardowski) (“The classic example of a contingent debt is a guaranty because the guarantor has no liability unless and until the principal defaults.”); In re Fischel, 103 B.R. 44 (Bankr. N.D.N.Y. Apr. 7, 1989) (Gerling) (Debtor as accommodation maker or “gratuitous surety” unconditionally guaranteed loan payments by nondebtor, but the debtor’s liability was contingent upon default and thus was not included in the eligibility calculation.); In re Michaelsen, 74 B.R. 245 (Bankr. D. Nev. May 13, 1987) (Thompson) (“The classic examples of contingent debts . . . are the guarantor or surety situations . . . . [T]he debtor’s liability is conditioned on default of the primary obligor.”); Craig Corp. v. Albano, 55 B.R. 363 (N.D. Ill. Nov. 7, 1985) (Shadur); In re Lambert, 43 B.R. 913 (Bankr. D. Utah Oct. 22, 1984) (Clark). See also In re Fox, 64 B.R. 148 (Bankr. N.D. Ohio July 10, 1986) (Williams).
12 No. 8-14-73357-las, 2015 WL 792095 (Bankr. E.D.N.Y. Feb. 24, 2015) (Scarcella).
13 In re Stebbins, 2015 WL 792095, at *4–*6.
14 In re Thompson, 116 B.R. 610 (Bankr. S.D. Ohio July 3, 1990) (Calhoun).
15 See § 14.2 Time for Determining Debt.
16 See, e.g., In re Jones, No. 12-04833-HB, 2013 WL 2352569 (Bankr. D.S.C. May 29, 2013) (Burris) (Unsecured debt was liquidated when there was no evidence that guaranty agreement required creditor to first liquidate collateral.); In re Sisler, No. 11-00787-8-JRL, 2011 WL 5593055 (Bankr. E.D.N.C. Nov. 16, 2011) (Leonard) (Guaranties insufficient under North Carolina law were not counted for eligibility purposes. Two $100,000 notes that included addenda, captioned “Summary of Loan Terms,” containing words “personal guaranty” underneath signature lines were not sufficient. Addenda did not include terms of personal guaranty.).
17 But see In re Reed, No. 12-5542-RLM-13, 2013 WL 2147967 (Bankr. S.D. Ind. May 14, 2013) (Moberly) (Guaranteed debt was not contingent when guaranty did not require written notice of principal’s default.).
18 In re Hatzenbuehler, 282 B.R. 828 (Bankr. N.D. Tex. Aug. 26, 2002) (Lynn).