## Facts

- Penn Hook Coal Co. purchased a John Deere wheel loader under a conditional sales contract note that was assigned to Credit Alliance Corporation.
- Gary L. Williams and Malcolm C. Williams, Jr. executed a guaranty of Penn Hook’s obligation to Credit Alliance.
- After Penn Hook defaulted, Credit Alliance sued Penn Hook and both guarantors in the Southern District of New York seeking the unpaid balance and related charges.
- The defendants did not appear or respond in the New York action.
- Penn Hook filed a Chapter 11 petition in the Western District of Virginia after the New York suit was filed but before judgment was entered.
- The New York court entered a default judgment against Penn Hook and the guarantors after the bankruptcy petition date.
- Credit Alliance later initiated garnishment proceedings in the Western District of Virginia to enforce the judgment.
- The bankruptcy court ruled the automatic stay rendered the default judgment void as to both Penn Hook and the nondebtor guarantors.
- The district court reversed as to the guarantors, holding the stay did not bar enforcement against them; Gary Williams appealed.

## Issues

1. Whether the automatic stay under 11 U.S.C. § 362 voids or stays enforcement of a post-petition default judgment against a nonbankrupt guarantor of the debtor’s obligation.
2. Whether any “unusual circumstances” justified extending stay protection to the nondebtor guarantor.
3. Whether res judicata barred the guarantor from raising defenses that could have been asserted in the earlier action resulting in default judgment.

## Decision

- The Fourth Circuit affirmed the district court’s order permitting enforcement of the judgment against Gary Williams as guarantor.
- The court held § 362(a) stays actions against the debtor, not against a nondebtor guarantor on an independent guaranty obligation.
- The court found no “unusual circumstances” warranting extension of stay protection to the guarantor because enforcing the guaranty did not jeopardize the debtor’s estate.
- The court held the default judgment against the guarantor was not void and remained enforceable.
- The court held res judicata barred Williams from collaterally asserting defenses that could have been litigated in the New York action.

## Legal Principles

- The automatic stay in 11 U.S.C. § 362(a) generally applies only to actions against the debtor and does not, by itself, protect nondebtors such as guarantors.
- A court may extend stay protection to a nondebtor only in limited circumstances (e.g., an identity of interests or estate-jeopardizing effects), and those circumstances are narrow.
- A guaranty functions as a separate source of repayment; enforcing it typically does not implicate the debtor’s estate merely because the principal obligor is in bankruptcy.
- A default judgment entered with jurisdiction and notice has claim-preclusive effect; a party who failed to appear may not later relitigate defenses that were available in the original action.

## Conclusion

The court held that Penn Hook’s bankruptcy filing did not shield a nonbankrupt guarantor from liability under a prepetition guaranty, and that the prior default judgment against the guarantor remained enforceable because the automatic stay did not apply and claim preclusion barred later defenses.


Credit All. Corp. v. Williams, 851 F.2d 119 (4th Cir. 1988)