As many areas continue to rebound slightly from the real-estate downturn, much litigation still exists related to the exposure of guarantors for corporate-entity real estate loans.   In many instances a corporation or Limited Liability Company (LLC) may have filed for Chapter 11 in an effort to stave off a foreclosure and restructure the secured debt. However, it is well settled that a corporate bankruptcy case does not operate to discharge a guaranty from a guarantor who is not in bankruptcy.

Berger Singerman recently defended a guarantor in a suit on his guaranty and prevailed when the Court found that in the underlying corporate bankruptcy case, the property had been conveyed to the Bank in “full Satisfaction” of the Bank’s claim.

The corporate Chapter 11 Debtor owned several parcels of real property along with certain equipment.   The Debtor proposed a Plan that re-structured some of the underlying debts for the real and personal property that the Debtor wished to retain and utilize in its restructured operations and which also conveyed back to certain secured creditors the collateral that secured their debts. The Debtor and the Plan specifically provided for the treatment of the lender and provided that the “surrender of the real and personal property was in full satisfaction of the debt.”   The lender did not object to this proposed treatment and the Chapter 11 Plan was confirmed.

Thereafter, the lender delayed in seeking to foreclose on the property but instead sued the guarantor claiming that they had not been paid. Guarantor objected to the suit and moved for summary judgment. The Court agreed with the well-established principle that the “satisfaction” of the underlying debt releases the guarantor. Had the Chapter 11 Plan, not included the three simple words “in full satisfaction” of the debt, it is likely that the state-court would not have given the guarantor the benefit of the full credit of the property against the debt.