A very common question I get from businesses contemplating bankruptcy is whether or not the personal guarantees can be dealt with through the Chapter 11 reorganization process. Obviously the owners are concerned that we get a great deal for the business but the difference ultimately falls back on them because of the guarantees. There really is no easy answer regarding the guarantees but I will attempt to at least touch on the subject.
There are two distinct ways to protect guarantors. Injunctions or Releases. Injunctions permanently enjoin creditors from bringing an action against the guarantor. Releases relieve the guarantor from liability. Let me start off by saying that if the creditor agreed to release the guarantor then there is no issue at all. Courts routinely allow guarantors to be released when the creditor agrees. (This is rare however that they agree!) Typically if you are going to get a release it has to be done through the plan process and approved by the court. Courts routinely look at the following when deciding whether or not to allow a release:
1. Are there “unusual circumstances” present?
2. Is the release fair and necessary?
3. Do the debtor and the guarantor share an identity of interest that would negatively affect the debtor?
4. Has the guarantor contributed substantial assets to the debtor’s reorganization?
5. Is the release essential to the reorganization?
6. Have the affected creditors voted to accept the plan with the release language?
7. Does the plan offer to pay all, or most of the claims that are negatively affected?
8. Does the plan have a mechanism for non-agreeable parties to recover in full?
9. Is the release supported by adequate consideration?
The court looks and weighs all of the above factors. It appears that numbers 2 through 5 are looked at closest but the court takes this case by case and there really is no hard line rule regarding releases. A lot of times the guarantee clauses can be alleviated by the owner filing for personal bankruptcy protection and other times the creditors just decide not to pursue the guarantee clauses. If you would like to discuss your specific situation please feel free to call me at (904) 521-9868 or (386) 868-2650. If you just want more information on bankruptcy go to http://chapter11jax.com.