Can guarantors avoid liability when the debtor performs under a bankruptcy plan? Town & Country Bank v. Stevens Explained

In Town & Country Bank v. Stevens, the Utah Court of Appeals addressed whether guarantors can escape liability when the primary debtor is making payments under a confirmed bankruptcy reorganization plan. The court’s ruling provides important guidance for creditors and guarantors in commercial lending contexts.

Background and Facts

Town & Country Bank loaned $1,380,000 to Fairground Properties, secured by real property and personal guarantees from Robert Stevens and Brett John. When the borrower defaulted and filed Chapter 11 bankruptcy, the bankruptcy court confirmed a reorganization plan that modified the loan terms, extending the payment deadline and reducing the interest rate. Despite the debtor’s performance under the plan, the bank sued the guarantors for breach of their guarantees.

Key Legal Issues

The guarantors argued that summary judgment was inappropriate due to disputed facts regarding the bank’s alleged breach of the implied covenant of good faith and fair dealing. They also contended that Utah’s one-action rule should protect them from liability while the debtor continued making payments under the reorganization plan, and that the plan itself altered their guarantee obligations.

Court’s Analysis and Holding

The court of appeals affirmed the trial court’s grant of summary judgment. Relying on the Utah Supreme Court’s decision in Machock v. Fink, the court held that the one-action rule does not apply to suits against guarantors. The court explained that guarantees of payment are designed to shift risk from creditors to guarantors, and applying the one-action rule would undermine this risk-shifting purpose.

Importantly, the court rejected the guarantors’ argument that a confirmed bankruptcy reorganization plan discharged their liability. The court found persuasive the Fifth Circuit’s reasoning that reorganization proceedings are judicial, not contractual, and do not constitute an accord and satisfaction that would release guarantors from their obligations.

Practice Implications

This decision reinforces that personal guarantees remain enforceable even when the primary debtor performs under a bankruptcy plan. Creditors can pursue guarantors without first foreclosing on collateral or waiting for the debtor to complete payments under a reorganization plan. For guarantors, this case highlights the absolute nature of payment guarantees and the limited availability of defenses based on the creditor’s dealings with the primary debtor.