Ben Kittay
St. John's University School of Law
American Bankruptcy Institute Law Review Staff
Section 727(b) of title 11 of the United States Code (the “Bankruptcy Code”) provides that a Chapter 7 debtor’s bankruptcy discharge eliminates the debtor’s liability for “all debts that arose before the date of the order of relief.”[1]In Reinhart Foodservice LLC v. Schlundt, the United States District Court for the Eastern District of Wisconsin held that liabilities arising after the bankruptcy based on the debtor’s pre-bankruptcy guarantee were not subject to the debtor’s discharge.[2] From 2003 through 2018, David Schlundt (the “Debtor”) was the owner and sole member of the Refuge LLC, which operated a restaurant.[3] Pursuant to a supply agreement with Reinhart Foodservice LLC (the "Agreement"), Reinhart (the “Creditor”) agreed to supply The Refuge (the “Restaurant”) with goods and services for certain payments from the Restaurant.[4] Debtor personally guaranteed the Restaurant’s obligations to Creditor.[5]Several years after issuing the guarantee, Debtor filed a petition for relief under Chapter 7 of the Bankruptcy Code with the United States Bankruptcy Court for the Eastern District of Wisconsin.[6] In the bankruptcy case, the Debtor did not list Reinhart as a creditor.[7] At the time of the filing, the Restaurant, which was still owned by Debtor, owed Creditor approximately $10,000 for sales of goods and services under the Agreement.[8] Ultimately, the Debtor received a discharge.[9] Despite his bankruptcy filing, Debtor continued to operate the Restaurant, which continued to buy goods from Creditor in accordance with the Agreement for years after the closing of Debtor's bankruptcy case.[10] In the summer of 2018, Debtor closed the Restaurant, which still owed Creditor $36,839.62 for goods and services.[11] When the Restaurant failed to pay, Creditor demanded payment from Debtor pursuant to the personal guaranty.[12] In response, Debtor argued he was relieved of his obligation under the guaranty as a result of the bankruptcy discharge.[13] Consequently, the Creditor moved to re-open the bankruptcy case and filed an adversary complaint seeking a declaratory judgment that the $36,839.62 in debt arising from unpaid sales in 2018 was not subject to Debtor’s discharge.[14] Creditor moved for summary judgment, arguing that the $36,839.62 was not discharged under the plain terms of Section 727(b) because: (1) it arose after the Debtor’s bankruptcy discharge; and (2) the debt was excepted from discharge under 11 U.S.C. 523(a)(3) because it was not scheduled in time for Creditor to file a proof of claim.[15]Bound by the Seventh Circuit's decision in Saint Catherine Hospital of Indiana, LLC v. Indiana Family and Social Services Administration, which held that the date of a claim is determined by the date of the conduct giving rise to the claim, the bankruptcy court concluded that the liability was a pre-petition debt.[16] The Creditor’s "garden variety" debt was discharged notwithstanding any scheduling failures by the Debtors because Creditor had not alleged pre-petition fraud related to Debtor’s entry into the personal guaranty sufficient to take the debt outside the Guseck rule.[17]The Creditor appealed.[18]
According to the Wisconsin District Court, the Debtor’s 2018 liability was a post-petition liability that was not discharged by the Debtor’s 2014 bankruptcy.[19] The court explained that the Debtor’s argument confused a contractual "promise" with a "debt."[20] While most debtors enter bankruptcy having made promises and signed many contracts, the mere existence of a promise or a contract does not necessarily create a legal liability, i.e., debt.[21]Therefore, neither the Debtor nor the Restaurant had any liability for the $36,839.62 in 2014, meaning there was no claim for this amount, contingent or otherwise, during the time of the bankruptcy case.[22] The district court then determined that the bankruptcy court incorrectly interpreted the holding in Saint Catherine.[23] The creditor in Saint Catherine knew of its claims against the debtor before it filed for bankruptcy.[24] The district court found that Saint Catherine was distinguishable, not only because Saint Catherine did not deal with a personal guarantee, but also because neither the Creditor nor the Debtor had any idea of the amount owed to the Creditor in 2018 prior to the Debtor’s bankruptcy filing in 2014.[25]
Under the Bankruptcy Code, a debtor's discharge precludes enforcement of "debts," not promises that arose before the bankruptcy petition was filed.[26] However, a discharge does not wipe debt that arose from transactions or conduct after the filing of a bankruptcy case, including the post-petition exercise of a personal guaranty arising from post-petition defaults.[27]
[1] 11 U.S.C. § 727(b).
[2] 646 B.R. 478, 484 (E.D. Wis. 2022).
[3] Id. at 481.
[4] Id.
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Id. at 482.
[13] Id.
[14] Id.
[15] Id.
[16] In re Schlundt, No. 14-20454-beh, 2021 WL 3700401, at *5 (Bankr. E.D. Wis. Aug. 19, 2021).
[17] Id. (citing In re Guseck, 310 B.R. 400, 402-03 (Bankr. E.D. Wis. 2004)).
[18] Schlundt, 646 B.R. at 488.
[19] Id. at 484.
[20] Id.
[21] Id.
[22] Id. at 485.
[23] Id.
[24] Id. at 486.
[25] Id. at 487.
[26] Id. at 484.
[27] Id. at 480–81.