Personal Guarantees Nondischargeable
Stanley and his wife, Kay, owned and operated a travel agency. To facilitate the business of selling airline tickets, the agency entered into an agreement with an airline ticket broker. The broker acted on behalf of airline carriers, issuing tickets and collecting payments from travel agents. The travel agency maintained a trust account for holding customer payments owed to the broker. Part of the deal was that the couple signed personal guarantees for any debts owed by their agency to the broker.
When the travel agency began experiencing financial trouble, it also began to fail to deposit the proceeds of ticket sales into the trust account. As the broker tried to draw from the trust account, the checks started to bounce. The agency’s fortunes continued to decline and it went into bankruptcy. The broker then sued Stanley and Kay on their personal guarantees, claiming that, because the debtors had violated their fiduciary duty, the debt owed to the broker was not dischargeable in bankruptcy. The Bankruptcy Code provides that a debt is not dischargeable if it is for failure to meet an obligation while acting in a fiduciary capacity. In general terms, a fiduciary is one who undertakes to act primarily for another’s benefit, such as in managing money or property.
Stanley and Kay maintained that only their agency had a fiduciary duty to the broker, so that whatever debt they owed because of the personal guarantees could be discharged in bankruptcy. A federal court disagreed. It was true that, by itself, the fact that the couple had personally guaranteed the agency’s debt to the broker did not put them in a fiduciary relationship with the broker. The critical factor was that Stanley’s and Kay’s personal actions had created the debt owed by the agency to the broker. They had withheld money that should have gone into the trust account and had depleted that account to the point that checks were returned for insufficient funds. The court refused to allow Stanley and Kay to use bankruptcy to avoid the consequences of their own misconduct.