N.C. Court of Appeals: Epes v. B.E. Waterhouse, L.L.C.- Bankruptcy a Default

Summary: Epes was the guarantor of a lease on behalf of the lessee, CRC Management. CRC eventually sold its assets to Fuddruckers. In April 2010, Fuddruckers filed bankruptcy. In July 2010, Epes brought an action for a declaratory judgment that he no longer had any liability under the guaranty, however summary judgment was granted to the Defendants. The Court of Appeals affirmed the summary judgment for the defendants, finding that the lease included the filing of bankruptcy. Epes also argued that due to the Fuddruckers bankruptcy, Defendants had to obtain relief from the automatic stay in that case before seeking a summary judgment against him. Passing over the fact that Epes, who initiated the lawsuit himself, was possibly violating the automatic stay by seeking a declaratory judgment that would have impacted the Fuddruckers bankruptcy, the Court of Appeals recognized that the automatic stay does prevent actions against guarantors of loans. Commentary: As Fuddruckers is not an individual, it clearly did not file a Chapter 13. It would been better, however, that the N.C. Court of Appeals had recognized that co-signer protections do exist in Chapter 13 cases. This would have been dicta, but would have provided greater clarity for future cases. It is not clear from this opinion what treatment the lease was receiving in the Fuddruckers bankruptcy, but I would presume that it was rejected. Otherwise, the apparent failure by Epes did to challenge the validity of ipso facto provisions, which hold that bankruptcy is by itself an event of default, was a mistake. The 4th Circuit has long held that ipso facto provisions are void as against public policy, See Riggs Nat'l Bank v. Perry, 729 F.2d 982 (4th Cir.1984), and while BAPCPA did validate ipso facto provisions when it added 11 U.S.C. § 521(d), such validation was, through its reference to §§ 521(a)(6) and 362(h), only applicable to ipso facto provisions where the debtor is an individual. Accordingly, unless Fuddruckers rejected this lease, its bankruptcy was not an enforceable event of default. For a copy of the opinion, please see: Epes v. B.E. Waterhouse, L.L.C.- Bankruptcy a Default.pdf