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Bankruptcy Panel Rules Debtors Not Responsible for Guarantee Made by Franchisor to Bank - In re Unterreiner

November 28, 2011

As Fontana personal bankruptcy lawyers, we were pleased to see a recent bankruptcy appeals panel ruling that declined to hold bankrupt small businesspeople responsible for a loan guarantee made by their franchisor. In In re Unterreiner, bankruptcy filers Jeffrey and Lisa Unterreiner were once part of a business that co-owned three Dairy Queen restaurants in Missouri. When the business ran into financial difficulties, it took out a loan that, unbeknownst to them, was guaranteed by the franchisor, Dairy Queen of Greater St. Louis, Missouri Inc. (DQSTL). When they could not pay back the loan and the Unterreiners filed for bankruptcy, DQSTL's owner, the Samuel J. Temperato Trust, successfully sued to have the loan declared not dischargeable. The Eighth Circuit's BAP reversed in this decision.

Jeffrey Underreiner and a business partner, Edward Radetic, owned the three Dairy Queens through King William Management Inc., which franchised from and paid part of its earnings to DQSTL. In 2005, because of King William's difficulties, an employee of the Temperato Trust arranged for a loan to King William. This was a no-document loan from a bank King William had never before done business with. The Unterreiners, Radetic and his wife all personally guaranteed the loan, and they also gave a security interest in the business assets of two of the Dairy Queens. Without the Unterreiners' knowledge, the loan also fell under a preexisting blanket loan guarantee issued by the Trust. It was revealed that a separate business entity owned the majority of the business assets in the restaurants at issue, making the security interest problematic at best.

Unfortunately, King William was unable to repay the loan. The Unterreiners paid the bank $20,000 in exchange for a release of any claims related to the loan, and the bank went to the Trust, which ultimately paid $185,000. After the Unterreiners filed for bankruptcy, the Trust brought an adversary proceeding against them to collect that money, alleging they knowingly misrepresented the ownership of the assets, thus causing the loss to the Trust. The Unterreiners argued that they had no knowledge of the Trust's blanket guarantee to the bank, and that their release of liability from the bank should release them from this debt. The bankruptcy court ultimately found the debt nondischargeable, and they appealed.

The bankruptcy court had found that Jeffrey Unterreiner knowingly made a false statement by pledging the collateral King William did not own, and that the Trust reasonably relied on it when it agreed to guarantee the loan. The Eighth Circuit BAP disagreed. To exempt the debt from discharge, it said, the Trust would have to show that it paid the money directly to Unterreiner at the time of the misrepresentation, which is not true. The Trust could argue that Underreiner did get the guarantee from DQSTL, a thing of value, at the time of the misrepresentation -- but DQSTL is not the plaintiff in this case, the court noted; the Trust is. Furthermore, loan guarantee between the Trust and the bank preexisted the loan to King William, the court said. Thus, the Trust could not have relied on the security agreement by Unterreiner when it made the original guarantee. Thus, the Eighth sent back the case with instructions to reverse the determination of non-dischargeability.

Our Tustin consumer bankruptcy attorneys are pleased to see this decision go for the debtors, who undoubtedly cannot muster the high-priced legal representation of their former franchisor. In a sense, the decision breaks no new ground at all because it simply reiterates the rules for nondischargeability: the deception must have been made knowing that the party seeking nondischargeability would lose money. While it's possible that Unterreiner did indeed intend to deceive, it does not appear to be disputed that he didn't know about the preexisting blanket loan guarantee. Our Rancho Santa Margarita individual bankruptcy lawyers may be able to apply the ruling for other bankruptcy filers fighting a claim for nondischargeability, whether the dispute arises from business or another matter.

If you're considering bankruptcy and you'd like to discuss its potential benefits and options with an experienced California bankruptcy lawyer, don't wait to call Howard Law, P.C. For a consultation, send us a message online or call toll-free at 1-800-872-5925.

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