Here is a bankruptcy twist servicers need to know, particularly for those occasions where a guarantor may be sued.
We should note immediately that guarantors are not so often the sole object of an action on a note or a mortgage. Typically, one forecloses a mortgage and names all those liable for the debt, including guarantors. As we have discussed in prior alerts, though, there are occasions where a guarantor will be sued separately and alone, such as where the mortgaged property has been lost for taxes and cannot be redeemed or where the property has become valueless, among others.
Suppose then that the borrower is Mr. X (or a corporation) and Mr. Y is the guarantor. Upon default, circumstances dictate that guarantor Y should be sued. After the action on the obligation is begun against Y alone, borrower X files a petition in bankruptcy. Guarantor Y then opposes the action against him on the ground that there is a stay imposed by the bankruptcy filing by X. Is there such a stay?
It depends upon what the guaranty says, but typical guaranty language will allow a mortgagee/obligee to enforce its rights against a guarantor without first pursuing the debtor. When that is so – and as noted it is typical – then the action against the guarantor and the bankruptcy proceeding will not share a required complete identity of parties or causes of action or judgment sought. When that identity is missing, there is no basis to stay the action against the guarantor merely because the borrower/obligor had filed a bankruptcy.
All of this is confirmed by a new case, Fleet National Bank v. Marrazzo, 23 A.D.3d 337, 804 N.Y.S.2d 99 (2d Dept. 2005), and is a concept worth noting.
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.