Tuesday, June 19, 2012, 9:46 AM

COA: Guarantor Liable Notwithstanding Lessee's Bankruptcy Filing

Today, a panel of the North Carolina Court of Appeals (McGee, Geer, McCullough) held that a guarantor of a lease continued to be liable under the guaranty despite the lessee having filed for bankruptcy.  The case is C. Richard Epes, M.D. v. B.E. Waterhouse, LLC and A.J. Waterhouse, LLC.

In 1998, C. Richard Epes, M.D. signed a guaranty agreement on a lease.  By 2005, following several assignments of rights under the original lease, the lessors were B.E. Waterhouse, LLC and A.J. Waterhouse, LLC, and the lessee was Fuddruckers Inc.  Dr. Epes brought suit in 2010, asking for a declaratory judgment that he have no ongoing duties, obligations, or liability under the guaranty agreement.  The trial court entered judgment in favor of the defendants, B.E. Waterhouse, LLC and A.J. Waterhouse, LLC, and Dr. Epes appealed.

On appeal, Dr. Epes claimed that the defendants had not shown that Fuddruckers defaulted, so Dr. Epes could not be liable as a guarantor.  Specifically, Dr. Epes pointed to the lease's terms regarding events of default, arguing that under the lease, it was permissible for Fuddruckers to file for bankruptcy and avoid default so long as the petition of bankruptcy was set aside within 60 days.  The Court rejected this argument, noting that Dr. Epes misread the lease, as the 60-day provision applied to petitions for the appointment of a receiver or trustee, not a petition of bankruptcy.  The Court also overruled Dr. Epes's argument that federal bankruptcy law provides for a stay on collection actions put in place at the time of a bankruptcy filing, explaining that federal courts have held that the automatic stay does not prevent actions against guarantors of loans.

Dr. Epes also argued that judgment should have been entered in his favor because the language in the assignment and the continuation of the guaranty with Fuddruckers was ambiguous and should have been construed against the defendants.  The Court disagreed, noting that the assignment specifically stated that the guaranty would continue "in full force and effect," and that the guaranty clearly stated that the landlord and tenant, without notice to or consent by the guarantor, "may at any time or times enter into suchthereby."  Accordingly, the Court held that the clear and unambiguous language of the assignment and guaranty reflected that the assignment to Fuddruckers would not release Dr. Epes from liability as guarantor.  For these reasons, the Court affirmed the grant of summary judgment to the defendants.

Related links: Record on appeal; Epes's brief; B.E. Waterhouse, LLC and A.J. Waterhouse, LLC's brief.

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