In New Falls Corp. v. LaHaye (In re LaHaye), No. 19-30795 (5th Cir. Nov. 12, 2021), the Fifth Circuit Court of Appeals prevented a secured lender from pursuing individual guarantors on a claim that had been partially released in the guarantors’ corporation’s confirmed bankruptcy plan of reorganization.

 

New Falls v. LaHaye — Background

Here, a husband and wife owned a grocery store. The grocery store borrowed $325,000 secured by a mortgage on the real estate on which the store was situated along with the couple’s home. They further guaranteed the loan.

The grocery store filed a chapter 11 petition and confirmed a plan whereby the store and the personal property in the store were surrendered to the lender leaving a $100,000 deficiency. After confirmation, the lender refused to treat the claim as being reduced to $100,000 and asserted a claim against the husband and wife for the entire $325,000. The lender further commenced foreclosure proceedings against the home. As a result, the husband and wife filed their own chapter 11 petition.

 

Fifth Circuit: Lender Cannot Relitigate Debt

The Fifth Circuit affirmed the district court’s holding that the lender could not relitigate the debt as it had been reduced in the store’s confirmed plan of reorganization. It further held that merely because the store had not been formally conveyed to the lender, the claim had not been reduced. In fact, the plan’s terms lifted the automatic stay, allowing the lender to take title by foreclosure or voluntary transfer.

The lender unsuccessfully argued that the husband and wife could not take advantage of the grocery store’s plan by discharging the guaranty. The Fifth Circuit found that discharge was not the issue here. The issue was the grocery store’s plan constituted a partial release of the lender’s secured claim against the husband and wife. By analogy, the Fifth Circuit compared the surrender of the grocery store’s real estate as being no different than if the grocery store had paid cash to the lender. Under these circumstances, the lender’s claim had been partially reduced by the value of the land. It was not discharged.

Holding that the provisions of a confirmed plan were binding on the debtor and its creditors, the lender was therefore precluded from relitigating the provisions of the plan once it was confirmed, whether or not the lender had accepted the plan or objected to the plan. The lender’s option was to appeal, not to collaterally attack the grocery store’s plans by pursuing a claim against the husband and wife.

The lesson: a creditor should not sit on its rights (if its claim is being adjusted or partially released in a plan of reorganization) thinking it can pursue its claim against non-debtor third parties. By sitting on its rights, a creditor may be precluded from pursuing such claims as terms of the confirmed plan of reorganization are binding on all parties.

About the Author: Bill Siegel

William L. (Bill) Siegel is a Shareholder and Section Head of the Cowles and Thompson Bankruptcy and Creditors’ Rights Practice Group as well as a member of the Corporate and Business Practice Group.