Will In re Pace Industries add support to the notion that springing guaranties violate public policy?

The COVID-19 recession is likely to cause serious economic difficulties to both commercial tenants and to landlords who rely on a steady cash flow from their tenants. Landlords may be reluctant to file for Chapter 11 because of a springing guaranty that exposes the guarantors to liability in the event of a bankruptcy filing. 

Springing guaranties should be unenforceable as a matter of public policy.  While the bankruptcy courts have yet to squarely address this issue, a  decision issued on May 5, 2020 by Judge Walrath for the Delaware bankruptcy court, may lend support to those who seek to challenge the springing guaranty. Judge Walrath held that a provision in a corporate charter that granted preferred shareholders the right to consent to a bankruptcy filing violated public policy. “Numerous courts have held that all persons—which include corporations—have a constitutional right to avail themselves of a right to file a bankruptcy. . . . And the Courts have held that any restriction of that constitutional right is against public policy.”

Experience has shown that there is no more detrimental restriction to the right to file than the springing guaranty. 

See David Kuney, Rethinking the Springing Guaranty, The Practical Real Estate Lawyer, p. 15.