It has become common for small businesses to be structured as corporations, limited liability companies, and other entities to protect their owners from personal liability.
When those small businesses require loans, lenders often require one or more of the individuals who control the business to personally guaranty the loan to ensure that the lender has recourse in the event the entity fails to pay. Oftentimes, the loan documents will authorize the parties to contact one another in specific ways relative to the loan, and each party will provide contact information to facilitate same.
In the recent case of Zack v. Transportation Alliance Bank, the borrower (a limited liability company, or LLC) and its owner (an individual who guaranteed the loan) did exactly that by providing the same email address, and authorizing the creditor to contact them at that email address in the event of a default. The loan eventually went into default, and the individual guarantor sought Chapter 7 bankruptcy protection. The LLC borrower did not seek bankruptcy relief. When the creditor sent emails to the LLC borrower concerning the defaulted loan, the individual guarantor (now a Chapter 7 debtor) sued the creditor, arguing that the creditor knowingly violated the “automatic stay” by attempting to collect the debt from him post-bankruptcy.
One of the most significant features of the Bankruptcy Code is the so-called “automatic stay,” which arises under Section 362. While the exact contours and scope of the automatic stay vary based on the chapter, or type, of bankruptcy filed, as a general rule, in a Chapter 7 bankruptcy case, the automatic stay applies only to the person or entity which filed for bankruptcy relief. This means that creditors are prohibited from taking any action to collect their debts against whomever sought bankruptcy relief the minute the bankruptcy case is filed, and creditors who violate the stay can be held liable to the debtor for damages. However, other persons or entities who may also be liable for the debt, and may have a close nexus with the Chapter 7 debtor, are generally not protected by the automatic stay, unless they themselves seek bankruptcy protection. Therefore, the very same conduct might-or might not-violate the stay, depending upon who it is directed to. But what happens if the creditor sends an email demanding payment to an email address used by both the bankrupt and non-bankrupt party? This was the issue the Court was faced with in Zack.
The Court found that all of the emails sent by the creditor were directed to the non-bankruptcy party and referred to the business loan agreement signed by the non-bankruptcy party. None of the emails mentioned the bankruptcy party’s personal guaranty. Based on the foregoing, the Court held that the creditor did not violate the stay, since all of its collection efforts were directed toward the non-bankruptcy party.
One of the arguments in support of the claim of a stay violation was that even though the creditor directed its correspondence to the non-bankruptcy party, it was really attempting to collect from the bankruptcy party because the non-bankruptcy party had no assets and was otherwise unable to pay the debt. The Court noted that the bankruptcy party failed to produce any evidence that the creditor had knowledge of the non-bankruptcy party’s ability to pay, and the opinion seems to suggest that the Court’s ruling might have been different had such evidence existed, even though the communications were directed to the non-bankruptcy party. Notwithstanding the Court’s ruling in favor of the creditor in this case, creditors should remain hyper-vigilant to avoid automatic stay violations, particularly in the current climate.
