Creditors must be aware that a bankruptcy filing by a principal debtor may not toll (delay) the Statute of Limitations to proceed against a non-bankruptcy co-debtor.

The Credit Union in this case was prevented from collecting a deficiency amount owed and suffered a financial loss.

This Court held that a Chapter 11 bankruptcy filing does not toll the statute of limitations against a nonfiling co-debtor.

Here, the primary debtor’s estate went into bankruptcy. The credit union did not proceed against the co-debtor until after the statute of limitations expired.

The credit union argued that the statute was tolled (suspended) by the bankruptcy filing.

The court found against the credit union and ruled in favor of the non-filing co-debtor since there was nothing preventing the credit union from proceeding against the co-debtor during the bankruptcy.

By the terms of the note, each maker was independently responsible for the entire amount. The court noted that the clear language of the Bankruptcy Code does not intend to extend the “stay” to a non-bankrupt co-debtor or third parties. The court cautioned, however, that “a co-debtor stay does apply when debtor’s case is a Chapter 13 bankruptcy.”

Held: For the co-debtor; the credit union could not collect its deficiency from co-debtor.  Houston Milk Producers Federal Credit Union vs. James Simmons, Court of Appeals of Texas, Case No. A14-91-01051-CV.

Author: Charles R. Harroun, Attorney at Law