Landlords, Tenants, Guaranties and Bankruptcy

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Landlords, Tenants, Guaranties and Bankruptcy

The new case of Lariat Company, Inc. v. Wigley (In re Wigley), 15 F.4th 1208 (8th Cir. 2021) shows exactly what a landlord should do in pursuing a guarantor (and his wife) when the tenant defaults and the guarantor tries shenanigans to try to avoid paying under the guaranty and then files bankruptcy.  End result:  the recipient of a fraudulent transfer may have committed “actual fraud” for purposes of non-dischargeability, leaving the guarantor worse off than before filing bankruptcy.

Michael Wigley’s restaurant failed.  Michael was sued by the restaurant’s landlord for past due and future accruing rent under Michael’s guaranty of the lease.  But, while that action was pending, Michael transferred assets to his wife, Barbara, and the court found such transfers to have been done with actual intent to hinder, delay, or defraud the landlord (i.e., a fraudulent transfer).  Even through Barbara was not a guarantor, the landlord got judgment against Michael and Barbara, jointly and severally, in the amount of more than the guaranty amount under a fraudulently transfer theory of liability.

But wait, there’s more.

Michael (but not Barbara) then filed bankruptcy.  Landlords know that § 502(b)(6) of the Bankruptcy Code cap a landlord’s claim for rents (including claims against a guarantor), which in this case was for less than the judgment under the guaranty noted above.  Michael paid the capped sums due.  Barbara then sought to have the guaranty judgment against her vacated because the capped amount was paid.  The court denied her request.  So, Barbara then filed her own bankruptcy.  The landlord again filed a claim in her bankruptcy for the unsatisfied portion of the judgment, plus accrued interest.  Under § 502(b)(6), the landlord’s claim was again capped in Barbara’s bankruptcy case.  Barbara paid this amount.

The landlord was annoyed by now.  So, the landlord sought to have the uncapped portion of the judgment excepted from discharge in Barbara’s bankruptcy case under a claim of actual fraud.  The Bankruptcy Court conducted a trial and entered judgment in favor of the landlord, finding that a fraudulent transferee (Barbara) may be found liable under Bankruptcy Code § 523(a)(2) for a debt that originated with another (the transferor, Michael) and Michael had transferred assets to Barbara with actual intent to hinder, delay, or defraud his creditors, and finding that Barbara had participated in the fraud scheme, possessing “actual fraudulent intent when receiving the transfers.”  Barbara was in deep trouble.  She was found to have been a transferee who received a fraudulent transfer with the requisite wrongful intent commits ‘actual fraud,’ and that the debts traceable to the fraudulent transfer are excepted from discharge.

There is now a growing line of cases holding that the transferor and the transferee of a fraudulent transfer commits “actual fraud” and can be held liable for actual fraud.

If you have any questions regarding Fraud (no, just kidding – regarding bankruptcy, landlord/tenant issues or guaranties) issues, please contact Dawn at:

Information contained in this Memo is intended for informational and educational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.  It is considered advertising under laws of some states.  Epps & Coulson, LLP encourages you to call to discuss these matters as they apply to you or your business.

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