"The general rule is that a discharge in bankruptcy does not affect a guarantor's liability." In re Applewood Chair Co., 203 F.3d 914 (5th Cir. 2000). That being said, it's very common that debtors' attorneys in chapter 11 bankruptcies attempt to include broad releases for guarantors, officers and directors of a chapter 11 debtor in a plan of reorganization. One such recent attempt in the Southern District of Florida was deemed to be valid by the 11th Circuit Court of Appeals - even though the contemplated release was beyond the scope of the guarantor's obligations for the debtor that were administered in bankruptcy.
In In re: FFS Data, Inc., 509 B.R. 403 (Bankr. S.D. Fla. 2014), the United States Bankruptcy Court for the Southern District of Florida (the "Bankruptcy Court") upheld the broad release of all of the obligations of the guarantor, Brandon Geisen ("Geisen"), for debts of the chapter 11 debtor, FFS Data, Inc. (the "Debtor"), and any other claims held by creditors against Geisen. The Debtor's plan of reorganization provided, "[I]n exchange for releasing the Insider Claims totaling $1,000,817.30, and providing the New Value Payment, all holders of Claims agree to a general release of Bradford Geisen" (the "General Release of Geisen"). In re: FFS Data, 509 B.R. at 405. In addition to the General Release of Geisen, a different section of the Debtor's plan of reorganization provided for specific releases for additional parties, such as officers and directors of the Debtor, specifically related to these parties' liability for the Debtor's obligations (the "Specific Releases"). See id. at 406-408. Geisen was president and officer of the Debtor in addition to being a guarantor on many of the Debtor's obligations. As such, he was the only party included in both the broad release as to all holders of claims against the Debtor's estate and the more narrow release provisions tailored to the Debtor's obligations to creditors.
IberiaBank (the "Objecting Lender") was a creditor in the Debtor's bankruptcy and also had outstanding loans to Siena Realty Associates, LLC ("Siena") that were guaranteed by Geisen and the Debtor. It's important to note that Siena's loans were not directly administered in the Debtor's bankruptcy since Siena is a separate legal entity than the Debtor and Siena did not file for bankruptcy protection. Nevertheless, the Bankruptcy Court concluded and the 11th Circuit Court of Appeals affirmed that the General Release of Geisen in the Debtor's bankruptcy case was sufficient for res judicata to apply to any claims that the Objecting Lender had against Geisen relative to his guaranty obligations for the Siena loans.
In upholding the Bankruptcy Court, the 11th Circuit in In re: FFS Data, Inc., No. 14-11473, 2015 WL 294269 addressed the question in two steps. First, the 11th Circuit addressed whether or not the principles of contract interpretation supported the broad General Release of Geisen. In short order, the 11th Circuit found that construing the General Release of Geisen as anything other than a "general release" renders the Specific Releases of the Debtor's plan and resulting confirmation order "meaningless" or "superfluous". In re: FFS Data, Inc., 2015 WL 294269 at *4. The 11th Circuit further explained "the released claims in [the General Release of Geisen] are not limited to any claims relating to [the Debtor], the bankruptcy or the Plan". Id. at *5. As such, the 11th Circuit concluded the General Release of Geisen was not redundant of the Specific Releases applicable to Geisen and other officers and directors of the Debtor and was clearly intended as a general release for Geisen. Id.
After determining that the plain language of the General Release of Geisen did include Geisen's liability for claims outside of the Debtor's bankruptcy, the 11th Circuit examined if res judicata attached to this broad release provision thus preventing the Objecting Lender from pursuing Geisen for his guaranty of the Siena obligations. The 11th Circuit set forth its res judicata requirements that "(1) the prior decision must have been rendered by a court of competent jurisdiction; (2) there must have been a final judgment on the merits; (3) both cases must involve the same parties or their privies; and (4) both cases must involve the same cause of action." In re: FFS Data, Inc., No. 14-11473, 2015 WL 294269 at *5 (quoting In re: Piper Aircraft, 244 F.3d 1289, 1296 (11th Cir. 2001)). The court expounded that a bankruptcy court's "confirmation order that is final and no longer subject to appeal becomes 'res judicata to the parties and those in privity with them' [and a] reorganization plan that is incorporated into a confirmation order has the same res judicata effect." Id. (citing Travelers Indemnity Co. v. Bailey, 557 U.S. 137, 152 (2009)).
The 11th Circuit then examined the Objecting Lender's claim that the Debtor's Plan, Bankruptcy Court's confirmation order and the resulting General Release of Geisen did not "arise out of the same transaction or series of transactions", as required for res judicata to attach. The 11th Circuit concluded that the "confirmed Plan resolved [the Objecting Lender's] claims against [the Debtor] and, as we have concluded, released Mr. Geisen from his guaranty on the [Siena] Loan. Although [the Objecting Lender] claims that Mr. Geisen's guaranty was never discussed as part of the bankruptcy, [the Debtor's] guaranty was at issue in the bankruptcy, and the two guaranties applied to the same underlying Loan." In re: FFS Data, Inc., No. 14-11473, 2015 WL 294269 at *6.
The 5th Circuit has adopted the requirement that a release for a third party must be "sufficiently specific" in order for bankruptcy orders confirming plans of reorganization to be given res judicata effect releasing a third party from liability. See In re: FFS Data, Inc., No. 14-11473, 2015 WL 294269 at *7. Interestingly, although the Objecting Lender sought for the 11th Circuit to adopt the 5th Circuit's "sufficiently specific" requirement in upholding confirmation orders and confirmed plans that release third-party guarantors, the 11th Circuit rejected the additional requirements. Id. The 11th Circuit found this "sufficiently specific" requirement was not required in light of subsequent U.S. Supreme Court precedent in Travelers Indemnity Co. v. Bailey, 557 U.S. 137, 152 (2009) in which the Supreme Court held "allowing collateral attacks on a bankruptcy court's order 'cannot be squared with res judicata and the practical necessity served by that rule.'" Bailey, 557 U.S. at 145.
In light of this recent opinion by the 11th Circuit Court of Appeals, creditors should be vigilant when receiving notices and pleadings in a chapter 11 bankruptcy. RELEASES MAY NOT ONLY AFFECT THE LOANS HANDLED THROUGH THE BANKRUPTCY CASE, BUT MAY EXTEND TO LOANS NOT DIRECTLY ADMINISTERED THROUGH THE BANKRUPTCY CASE! It is likely wise for all secured creditors to object to any third party releases contained in a chapter 11 plan in order to allow the debtor an opportunity to explain why such a release is justified in light of the facts surrounding the case - and especially as to any general releases in favor of third parties as in the FFS Data case.
Should you need any help interpreting or resolving the complexities of chapter 11 bankruptcy, we at Walding, LLC stand ready to help. Just contact us!