When collecting against an entity that files a Chapter 11 bankruptcy, I usually file an immediate suit against any guarantors of the debt. In Chapter 11, there is no statutory “co-debtor” stay, so there’s nothing stopping me from applying pressure to the other liable parties, who are usually the principals/owners of the company. The goal is not only to collect the debt from those parties, but also pressure the bankrupt entity to improve my client’s payment position.
In the opinion, the debtors filed an adversary proceeding seeking an injunction of a collection action against guarantors, arguing that the collection action would adversely impact the ability of the debtor to reorganize.
The Bankruptcy Court agreed, finding that it had jurisdiction over the matter involving non-debtor entities under 11 U.S.C. 1334(b), since the action was “related to” to the underlying Bankruptcy. The Court found that the guarantors were “vital to the success of the reorganization process and that that the [collection action] would place a significant burden on Guarantors to the extent that [they] would not be able to adequately assist in the reorganization process.” Ultimately, the Court found that the guarantors were so critical to the reorganization process that the collection action against them would significantly impair the bankruptcy process and, thus, using 11 U.S.C. 105(a), the Court was willing to issue the injunction.
The Bankruptcy Court made clear that special factual circumstances existed, such as the guarantors’ past involvement and commitment to remain involved. Further, the Court noted that the guaranty liability isn’t extinguished and is, instead, only stayed during the pendency of the bankruptcy.
But, even with those safe-guards, it’s easy to imagine that this decision–if adopted by other courts–could create a common law co-debtor stay in Chapter 11s. Here’s a link to the full opinion:
Harris N.A. v. Gander Partners, LLC, No. 10-C-5495, 2011 WL 249484 (N.D. Ill. Jan. 26, 2011)