In a Chapter 7 bankruptcy, a discharge eliminates the debtor’s liability for debts that arose before the bankruptcy. But what about a guarantee of future payment made before bankruptcy? If one party guarantees payment of another party’s obligations, does a Chapter 7 bankruptcy discharge liability for obligations incurred after the bankruptcy?
In an October 2022 case, District Judge Brett H. Ludwig of Milwaukee weighed in. In Reinhart Foodservice v. Schlundt, the debtor was a restaurant owner who personally guaranteed payments of the restaurant’s debts to its supplier, Reinhart Foodservice. The debtor filed for personal bankruptcy but continued to operate the restaurant. After the bankruptcy, the restaurant incurred about $37,000 in debt to Reinhart. The debtor argued that the bankruptcy wiped out this debt, reasoning that because the personal guaranty was signed before the bankruptcy, the debt should be deemed to have arisen prior to the bankruptcy.
Judge Ludwig disagreed, holding that debtor’s bankruptcy did not discharge liability on the personal guaranty made before the bankruptcy petition when the debt was incurred after the bankruptcy. Judge Ludwig applied the Seventh Circuit’s “conduct” test for determining the date of a claim. First articulated in Saint Catherine Hospital of Indiana, LLC v. Indiana Family and Social Services Administration, 800 F.3d 312 (7th Cir. 2015), the conduct test states that “the date of a claim is determined by the date of the conduct giving rise to the claim.” He found that the relevant conduct in this case was not the pre-petition promise to pay, but the post-petition purchase of goods from Reinhart that incurred the $37,000 in liability.
Judge Ludwig also noted an interesting wrinkle. Because the debtor’s personal guaranty was “irrevocable,” termination of that guaranty would have been a breach, and any liabilities arising from that pre-bankruptcy breach would have been discharged as pre-petition debt.