Contributed by Abigail Lerner
We all learned the first day of our Bankruptcy 101 class in law school that just because a debtor files for bankruptcy doesn’t mean those entities who have guaranteed the debtor’s obligations are off the hook. Doesn’t ring a bell? Well if you were sleeping during this part of the lecture, allow us to elaborate. Unless a guarantor has itself filed for bankruptcy, it will not be afforded protections under the Bankruptcy Code and creditors will not be stopped from looking to the guarantor for payment if the debtor fails to fulfill its obligation. But what if the debtor is the guarantor under a lease where the tenant is not the debtor? What then of the protections offered to the guarantor/debtor and tenant/non-debtor vis a vis the landlord? Did we lose you? Perhaps if we set forth the facts of In re Thomas we can help you understand the rights of a landlord holding a guaranty provided by two individuals who filed for bankruptcy, at least as explained by the United States Bankruptcy Court for the District of Colorado.
This case involves two individuals who ran a business called Platinum Play Family Fun and Event Center. Platinum Play, a separately incorporated entity, was operated out of leased commercial space located in Aurora, Colorado. The lessor, HIT, Inc., commenced an action in state court to retake possession of the leased premises but the action was stayed in February 2013 when Platinum Play’s owners filed a chapter 13 bankruptcy case. HIT, Inc. moved for relief from the automatic stay and, in May 2013, the bankruptcy court allowed HIT to resume its state court action and permitted the parties to litigate any claims that either had against the other arising out of the landlord tenant relationship.
In July 2013, following HIT’s eviction of Platinum Play from the premises, HIT filed an application for administrative rent payment under section 365(d)(3) of the Bankruptcy Code in hopes of recovering payments from the debtors on account of rent obligations, ahead of the debtors’ general unsecured creditors. The debtors objected, and the court set the matter for a hearing.
To tackle the first issue before the court – whether the debtors owed any obligation to HIT under the lease – the court considered the lease itself, which the court remarked was “rife with omissions and contradictions.” To start, the identity of the tenant was never set forth in the body of the lease. Instead, the lease merely stated that the tenant was “an individual.” After reviewing the exhibits to the lease, which the court found contained “the clearest expression of the identity of the landlord and tenant,” the court determined that Platinum Play was the tenant and that the debtors were guarantors under the lease. The court remarked that, notwithstanding the language of the exhibits, it would be “nonsensical” to ask the intended obligor under the lease to personally guarantee the very same obligations (that is, the individual debtors could not have themselves been the lessee and also guaranteed their own obligations under the lease).
Having clarified the nature of the obligations owed to HIT under the lease, the court turned to the next issue – whether a personal guaranty is an “obligation of the debtor . . . under an  unexpired lease of nonresidential real property” that requires treatment as administrative rent under section 365(d)(3) of the Bankruptcy Code. The court explained that the purpose of granting administrative expense claims is to encourage third parties to provide debtors with necessary goods and services. The court concluded, therefore, that it is only where the debtor is the obligor under a lease of nonresidential real property that the claim of a landlord for administrative rent may be allowed because the language of section 365(d)(3) “is limited to ‘obligations of the debtor’.” The terms of section 365(d)(3), the court stated, cannot be stretched to include a debtor’s personal guaranty of the debt of another. Having found that it was Platinum Play that owed the rent obligation to HIT, Inc. under the lease, the court concluded that the debtors did not owe an administrative rent obligation under section 365(d)(3) and HIT was, therefore, only entitled to a general unsecured claim on account of the guaranty.
This case presents a situation where, even though the guarantors themselves were debtors, the entity holding the guaranty tried to nonetheless cash in on payment ahead of others. Unfortunately for the landlord, the court denied its attempts to shoehorn the guaranty obligation into the type covered by section 365(d)(3). This case teaches us the importance of identifying exactly who owes a debt, the nature of the debt, and where the type of obligation falls in the pecking order of payments to creditors under the Bankruptcy Code. As In re Thomas demonstrates, the answers to these questions can be key to determining whether a payment qualifies as an administrative expense.