§ 65.4     Can Plan Enlarge Codebtor Stay?
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 65.4, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Under the former Bankruptcy Act, there was no codebtor stay, and Chapter XIII debtors would sometimes propose a stay of actions against cosigners as a provision of the plan. Even with the enactment of § 1301, there occasionally are reasons for debtors to attempt to expand the scope of § 1301 through the plan. For example, if the debtor is engaged in business and has incurred trade credit with a partner, family member or relative, the debtor may wish to enjoin collection actions against the co-obligor though the business debt is not within the scope of § 1301.

[2]

It can be argued that Congress has spoken on the scope of codebtor protection in § 1301 and debtors should be prohibited from expanding § 1301 through a provision of the plan. On the other hand, in reorganization cases under other chapters, the courts have recognized that on appropriate facts an order of confirmation can prohibit collection action against nondebtors when an expanded stay or injunction effectuates the goal of debtor rehabilitation.1

[3]

There are several reported decisions not allowing Chapter 13 debtors to expand the codebtor stay through a provision of the plan.2 When the plan proposes a broader codebtor stay and the affected creditor either affirmatively accepts the plan or fails to object to confirmation, it has been held that the expanded codebtor stay binds the creditor.3 A creditor with a co-signed debt that falls outside § 1301 should object to confirmation of a plan that expands the codebtor stay. Failure to timely object will forfeit the creditor’s argument that the debtor cannot expand the codebtor stay through the plan.

[4]

A debtor who needs an expanded codebtor stay might seek a separate injunction by filing a complaint and proceeding under Bankruptcy Rule 7065 and 11 U.S.C. § 105. An injunctive action to protect a nondebtor is difficult to win. The debtor’s best bet may be to propose full payment of the co-signed debt through the plan and negotiate a stand-still agreement with the creditor to delay collection from the codebtor while payments are made through the plan. The codebtor may have to waive notice and demand and the statute of limitations pending payments by the debtor.


 

1  See In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285 (2d Cir. 1992) (Settlement agreement enjoined actions against directors and officers, where agreement was an essential element of the debtor’s reorganization.), cert. dismissed, 506 U.S. 1088, 113 S. Ct. 1070, 122 L. Ed. 2d 497 (1993); In re A.H. Robbins Co., 880 F.2d 694 (4th Cir.) (affirming power of bankruptcy court to enjoin suits against nondebtors that had indemnification rights against the debtor), cert. denied, 493 U.S. 959, 110 S. Ct. 376, 107 L. Ed. 2d 362 (1989); MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89 (2d Cir.) (Permanent injunction may be issued to prevent suits against debtor’s insurer as part of a settlement incorporated into the Chapter 11 plan.), cert. denied, 488 U.S. 868, 109 S. Ct. 176, 102 L. Ed. 2d 145 (1988); F.T.L., Inc. v. Crestar Bank (In re F.T.L., Inc.), 152 B.R. 61 (Bankr. E.D. Va. 1993) (temporarily enjoining creditor from suing corporate debtor’s principals, who were guarantors of debtor’s obligations, where debtor could not be reorganized without the active involvement of those principals); In re Heron, Burchette, Ruckert & Rothwell, 148 B.R. 660 (Bankr. D.D.C. 1992) (permanently enjoining contribution or indemnity claims against the debtor’s partners that would be funding debtor’s plan). But see Seaport Automotive Warehouse, Inc. v. Rohnert Park Auto Parts, Inc. (In re Rohnert Park Auto Parts, Inc.), 113 B.R. 610 (B.A.P. 9th Cir. 1990) (Plan provision that enjoined actions against codebtors for five years violated § 524(e).). See also 11 U.S.C. § 524(g).

 

2  See In re Crompton, 73 B.R. 800 (Bankr. E.D. Pa. 1987); Beneficial Fin. Co. v. Rolland, 20 B.R. 931 (Bankr. W.D.N.Y. 1982); In re Stein, 18 B.R. 768 (Bankr. S.D. Ohio 1982); Old Phoenix Nat’l Bank v. Britts, 18 B.R. 203 (Bankr. N.D. Ohio 1982). See also Central Fidelity Bank v. Cooper (In re Cooper), 116 B.R. 469 (Bankr. E.D. Va. 1990) (It is an impermissible expansion of the codebtor stay for the plan to provide for surrender of collateral to a creditor but to then assert that the codebtor stay prohibits repossession.).

 

3  See In re Bonanno, 78 B.R. 52 (Bankr. E.D. Pa. 1987) (Creditor is barred from seeking relief from codebtor stay where 42% plan is confirmed with provision prohibiting actions against codebtors and creditor failed to object to or appeal order of confirmation.); Household Fin. Corp. v. Weaver, 8 B.R. 803 (Bankr. S.D. Ohio 1981); City Loan & Sav. Co. v. Betts, 8 B.R. 799 (Bankr. S.D. Ohio 1981).