Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Daniel Gill
Members of a limited liability company who guaranteed its debts were protected from creditor lawsuits during the LLC’s bankruptcy, an Iowa bankruptcy judge ruled May 16 ( In re Bailey Ridge Partners, LLC , 2017 BL 165776, Bankr. N.D. Iowa, No. 17-00033, 5/16/17 ).
In addition, another co-debtor was protected from a lawsuit, because both cases satisfied certain “special circumstances” justifying an extension of the automatic stay to non-debtor third parties.
In January 2017, Bailey Ridge Partners LLC, a pig feeding and housing operation, filed for Chapter 11, after defaulting on a major loan.
Chapter 11 protects individuals and companies from creditors while they seek to reorganize their debt or liquidate pursuant to a plan which must be approved by the bankruptcy court.
One protection is an automatic stay, which prohibits creditors from commencing or continuing any kind of actions to collect on their debts.
Generally, that stay does not extend to non-debtor third parties, but here a number of individual guarantors asked the court for an extension of the automatic stay, to protect them from collection acts pending the bankruptcy proceedings.
The court said that under special circumstances, Section 105 of the Bankruptcy Code authorized it to extend the stay of litigation to protect non-debtors. To do so, the court would consider the following factors:
The court noted that it appeared that the debtor would be able to successfully reorganize, but that it depended on the continued contributions—both in labor and financially—by the debtor’s guarantors.
It found that without an injunction to protect the guarantors, the farm would likely have to cease operations. Because the debtor’s success depended on an ongoing contract with a major client, losing that contract would end the debtor’s good prospects to reorganize, the court said.
When the court balanced the harm to the bank, it noted that the bank was fully secured by the debtor’s assets, so its interests were protected.
Finally, the court found that the public interest was best served if the debtor could reorganize and pay its debts, a prospect it wouldn’t enjoy if the litigation were allowed to continue.
Regarding a second case, the court made a similar analysis and found that a co-debtor with the debtor, Jerry Ruba, was similarly situated. If the stay were not extended to Ruba, he would be entitled to a judgment against the debtor which could prevent reorganization.
The subject loan was made with the expectation that the debtor would pay it, the court found.
Donald H. Molstad, Sioux City, Iowa, represented the debtor. The Official Committee of Unsecured Creditors was represented by Brian J. Jackiw and Matthew E. McClintock, Chicago.
To contact the reporter on this story: Daniel Gill in Washington at email@example.com
To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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