In re Paul Orlandi

Case Type:
Case Status:
Affirmed in part and Reversed in part
19-8001 (6th Circuit, Feb 28,2020) Published
The Bankruptcy Appellate Panel for the Sixth Circuit affirmed in part and reversed in part the bankruptcy court (N.D. Ohio)'s discharge violation finding. Failure to require a contempt proceeding was not error. The debtor’s personal guaranty was a contingent claim discharged in his bankruptcy. The bankruptcy court did not apply the Supreme Court’s Taggart standard. Given the unsettled case law on whether a personal guaranty is dischargeable, there was an objectively reasonable basis to conclude the defendants’ conduct was lawful. The BAP reversed the bankruptcy court’s willfulness finding.
Procedural context:
Debtor commenced adversary proceeding seeking damages for alleged discharge violation from defendants commencing a state court action to enforce a personal guaranty. Bankruptcy court granted judgment in favor of debtor, and defendants appealed to the BAP for the 6th Circuit.
The debtor signed a personal guaranty in connection with a lease of a shopping center. The debtor and his spouse filed for chapter 7 and received a discharge. The counterparty to the lease received notice of the bankruptcy and the discharge. Post-discharge, the creditor sued the debtor in state court to enforce the personal guaranty. The debtor moved to reopen his bankruptcy and filed an adversary proceeding against the creditor and its counsel asserting the state court action violated the discharge injunction. The defendants moved for summary judgment and were denied. At the trial, the defendants sought to dismiss the discharge violation counts because they had not been asserted in a contempt motion. The bankruptcy court denied the request, finding it would place form over substance. The bankruptcy court concluded after trial that the personal guaranty was a contingent claim discharged in the debtor’s bankruptcy, that the defendants acted willfully in enforcing the guaranty, and awarded damages. On appeal, the BAP agreed with the bankruptcy court’s analysis as to two issues. First, the BAP acknowledged that courts have split on whether a discharge violation must be asserted in a contempt motion. However, the BAP agreed that based upon the facts, this would place form over substance. Second, the BAP agreed that a personal guaranty is a contingent claim discharged in bankruptcy. Courts have split on this issue, with some courts concluding that there is no contingent claim without a post-petition right to payment, such as enforcement of the guaranty. The BAP agreed with the former, finding that the broad definitions of “debt” and “claim” in the Bankruptcy Code supported its interpretation. As to willfulness, however, the BAP concluded that the bankruptcy court failed to consider the effect of Taggart and instead applied the former standard for discharge violations. There was no controlling authority in the Circuit as to the dischargeability of a personal guaranty, and lower courts have split. Although the defendants had notice of the bankruptcy, there was nevertheless an objectively reasonable basis for them to conclude that filing the state court action was lawful. However, after the BAP’s ruling, it would be clear to the defendants that further pursuit of the guaranty would be unlawful.
Dales, Harrison (author), and Opperman

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