Opinion ID: 3160786
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Heading Rank: 2

Heading: The Gentry’s Liability as Guarantors

Text: FB Acquisition also claims the bankruptcy court erred in limiting the Gentrys’ liability as guarantors under the Gentry Plan to the amount that Ball Four, the original borrower, is ultimately determined to owe. Under Colorado law, contract interpretation is a question of law. See In re Centrix Fin., LLC, 434 B.R. 880, 884 (Bankr. D. Colo. 2010). We review de novo. See In re Paul, 534 F.3d at 1310. “A guaranty is a collateral promise to answer for the debt . . . of another.” First Interstate Bank of Denver, N.A. v. Colcott Partners IV, 833 P.2d 876, 878 (Colo. App. 1992). Under Colorado law, the extent of a guarantor’s liability is determined by the language of the guaranty, and “absent language to the contrary,” a guarantor’s liability usually matches that of the borrower. Id. Applying that standard and finding no language to the contrary, the bankruptcy court held, and the district court affirmed, that the Gentrys as guarantors owe no -8- more than Ball Four, the borrower. We disagree for two reasons: first, this rule of equivalent liability is inapplicable in the bankruptcy context, and second, the language of the guaranties demonstrates the Gentrys may be liable even if Ball Four is not. First, we turn to the law the bankruptcy court applied. To determine the extent of the Gentrys’ liability, the bankruptcy court looked to Colorado law on guarantors. The court cited two cases that held a guarantor’s liability matched that of the borrower. See Cont’l Nat’l Bank v. Dolan, 564 P.2d 955, 957 (Colo. App. 1977); see also First Interstate Bank of Denver, 833 P.2d at 878. Neither of these cases, however, considers the effect of bankruptcy. With its unique code of rules, protections, and purposes, bankruptcy necessarily changes the calculation. The Bankruptcy Code provides—and multiple courts have confirmed—that discharge of a borrower’s debt in bankruptcy does not affect a guarantor’s liability. 11 U.S.C. § 524(e). Expressly stated in the code, that principle preserves creditors’ claims against co-debtors and guarantors and provides an avenue for creditors to freely prosecute those claims. See In re Fasse, 40 B.R. 198, 200 (Bankr. D. Colo. 1984). Bankruptcy cases consistently and uniformly apply this rule. In re Vogt, 257 B.R. 65, 70 (Bankr. D. Colo. 2000); see In re W. Real Estate Fund, Inc., 922 F.2d 592, 601 (10th Cir. 1990); see also In re SureSnap Corp., 983 F.2d 1015, 1019 (11th Cir. 1993); F.D.I.C. v. Municipality of Ponce, 904 F.2d 740, 748 (1st Cir. 1990); In re Sandy Ridge Dev. Corp., 881 F.2d -9- 1346, 1351 (5th Cir. 1989). Holding otherwise would impair a guaranty. Guaranties act as a safeguard, assuring performance of a guarantor even if the borrower defaults. In fact, fear of a borrower’s default often motivates a creditor to require a guarantor. See Restatement (Third) of Suretyship & Guaranty § 34 (1996); see also NCNB Tex. Nat’l Bank v. Johnson, 11 F.3d 1260, 1266 (5th Cir. 1994) (stating that a creditor “obtains guaranties specifically to provide an alternative source of repayment” in the event of bankruptcy). Extending this rule of equivalent liability into the bankruptcy context would destroy the value of a guaranty. Second, even if we overlooked Ball Four’s bankruptcy and relied solely on the language of the guaranties, we still cannot agree with the bankruptcy court’s reading of that text. The bankruptcy court found no provision in the guaranties creating a greater obligation for the Gentrys than what may be owed by Ball Four. We found three. First, the Gentrys promised to pay “all of the principle amount outstanding” whether “barred or unenforceable against Borrower for any reason whatsoever . . . .” I Aplt. App. 158. Second, the Gentrys also expressly waived any defenses arising because of the “cessation of Borrower’s liability from any cause whatsoever.” Id. at 159. Third, the Gentrys agreed not to assert “any deductions to the amount guaranteed under this Guaranty” through a setoff, counterclaim, counter demand, or other method. Id. By signing the guaranties, the Gentrys promised to pay—especially when Ball Four could not. -10- Rather than looking at the guaranties on the whole, the Gentrys ask this court to focus solely on the definition of indebtedness. The Gentrys promised to repay Ball Four’s “indebtedness” when they guaranteed the loan. Indebtedness, they argue, reflects “judgments . . . or transactions that . . . modify . . . or substitute these debts . . . whether[] voluntarily or involuntarily incurred.” Id. at 158. The Gentrys claim Ball Four’s indebtedness now reflects the bankruptcy court’s judgment that modified the underlying debt. This argument misunderstands the power of a bankruptcy court. A bankruptcy court can grant a discharge, but a discharge does not extinguish the underlying debt rather it changes a debtor’s liability for that debt. This distinction is important. In confirming the Ball Four Plan, the bankruptcy court did not modify Ball Four’s indebtedness but its liability for that indebtedness. Therefore, the indebtedness remains unchanged—and that is what the Gentrys guaranteed. Because we find the bankruptcy court erred in limiting the Gentrys’ liability, we remand for the bankruptcy court to reconsider the amount of FB Acquisition’s claim under the guaranties. Given that the bankruptcy court’s determination of the Gentrys’ liability may alter its assessment of feasibility, the court should also reassess the feasibility of the plan. Accordingly, we AFFIRM in part, and REVERSE in part and REMAND. -11-