Vincent Howard and our Loma Linda personal bankruptcy lawyers were interested to see a decision about what happens to those who guarantee a loan that goes into bankruptcy. In Eagerton v. Vision Bank, Fred and Nancy Eagerton made limited guarantees on a loan taken out by a company operated by their daughter and son-in-law, Elizabeth Dotson and John Dotson Jr. The Dotsons made unlimited guarantees on the same loan, but eventually defaulted on the loan, put the company into bankruptcy and defaulted on their bankruptcy plan. After the company's properties were foreclosed and sold, Vision Bank, the lender, sued the Eagertons for the remaining balance on the loans. The Alabama trial court found that the Eagertons were released from their obligations because the loan had been consolidated without their knowledge or input, and the Alabama Supreme Court agreed.
The company, Dotson 10s LLC, was formed to operate a tennis club, with the Dotsons the sole members of the company. The Dotsons took out their original loan, a mortgage secured by real estate belonging to Dotson 10s, in December of 2007, giving unlimited personal guarantees to the bank; the Eagertons gave limited guarantees. In December of 2008, Dotson 10s took out a second mortgage and the Dotsons guaranteed it personally, without involving the Eagertons. Unfortunately, both loans went into default, prompting Dotson 10s to file for Chapter 11 bankruptcy. The reorganization plan consolidated both loans with input from the bank but not from the Eagertons. Dotson 10s later defaulted on its bankruptcy plan and the mortgages were ultimately foreclosed and sold for about 75 percent of the loan balance. The bank then sought to hold the Eagertons responsible in Alabama trial court for the proportion of the balance on the consolidated loans that came from the first mortgage. The trial court ultimately granted this and the Eagertons appealed.
The Alabama Supreme Court reversed, finding the Eagertons were not responsible for the loan because the consolidation discharged their obligations under the guaranty contracts. Those contracts, one for each spouse, say the Eagertons guarantee the specific original mortgage loan up to a certain amount. By contrast, the high court noted, the Dotsons' guaranty contracts guarantee each and every debt they may incur to the bank. The Eagertons argued that the creation of the consolidated loans in bankruptcy materially altered their contracts with the bank and their obligations, without their knowledge or consent. The high court agreed. The Eagertons did not guarantee the loan with modifications, and the bankruptcy consolidation undisputedly made modifications. It rejected the bank's argument that the consolidation was nothing more than a "replacement note" as defined by the contracts, saying any replacement would have required the Eagertons' consent and knowledge. Thus, it reversed the trial court and remanded the case to lower court. A dissent argued that the trial court's original decision was correct because the guaranty contracts agreed to changes in advance.
Vincent Howard and our Anaheim individual bankruptcy attorneys were interested to see this case, because it spells out a basic fact of bankruptcy in a non-bankruptcy context. When a bankruptcy case is filed and debts are moved into a payment plan or otherwise altered, this creates a new debt. This case is a bit unlike those we typically handle because the Eagertons themselves did not go into bankruptcy; they were merely drawn into the one filed by Dotson 10s. (A footnote to this case notes that the Dotsons themselves later went into bankruptcy.) However, creditors to a consumer bankruptcy will be the first to tell you that bankruptcy alters debts substantially, which is why creditors are often eager to avoid it. At Howard Law, P.C., our Carson consumer bankruptcy lawyers harness this power to help clients get the best possible chance at a new financial start.
If you're deep in debt and worried about how you can ever repay it, you should talk to Vincent Howard and Howard Law about whether bankruptcy is right for you. To set up a consultation, send us an email today or call 1-800-872-5925.