Agreements for Future Relief from Automatic Stay

A recent bankruptcy case decided in Florida provides guidance on this difficult question. In In re Bryan Road, LLC, 382 B.R. 844 (Bankr. S.D. Fla. 2008), reconsideration den., 2008 WL 233287 (Jun. 9, 2008), the debtor, Bryan Road, was a developer of a pleasure boat dry storage facility, and borrowed a substantial sum, secured by the facility, from Florida Community Bank. Following the debtor's failure to make payments, the bank commenced a state court foreclosure action, and a final judgment of sale was entered.

On the morning of the sale, the debtor and the bank signed a forbearance agreement, delaying the foreclosure sale by several months to allow the debtor to refinance or sell. The forbearance agreement provided, in part, that in consideration for the bank's acquiescence, the debtor agreed that if it filed a bankruptcy petition, the bank “should be accorded relief from the automatic stay.”

The debtor failed to extract itself from its financial difficulties and filed a Chapter 11 bankruptcy petition the day before the rescheduled foreclosure sale. The bank moved to lift the automatic stay, contending that the debtor already had consented to the relief that the bank now sought. The debtor opposed the motion and argued that granting the relief would injure not just the debtor, but also the interests of other parties, including unsecured creditors and two junior lien holders, and would moot the debtor's plan to litigate against the bank over the amount and enforceability of its claim.

The bankruptcy court reviewed the state of the law on lift stay agreements and concluded that stay relief was merited. While that result is unremarkable, the court's analysis is detailed and instructive. First, the court explained that an agreement for stay relief made in a forbearance agreement or other pre-bankruptcy context is not automatically enforceable in a bankruptcy case.

Rulings on Stay Relief

Although courts in some prior cases indicated that stay relief should be automatically granted when it was premised upon a prior agreement in a forbearance or workout situation (see, e.g., In re Citadel Properties, Inc., 86 B.R. 275 (Bankr. N.D. Fla. 1988)), other courts had veered away from that approach and held that such agreements are not automatically enforceable. See, e.g., In re Jenkins Court Assocs. LP, 181 B.R. 33 (Bankr. E.D. Pa. 1995).

The Bryan Road court observed that courts in recent cases have held that a prior agreement for stay relief will be given significant weight in the exercise of the bankruptcy court's discretion as to whether to grant relief from the automatic stay ' but that other factors must be considered as well. The Bryan Road court articulated a sliding scale for testing the importance of prepetition waivers in the decision as to whether to lift the automatic stay in a subsequent bankruptcy case.

The court observed that, as a general matter, prepetition waivers of the automatic stay would have little influence on the court's decision if they were contained only in initial loan documents. Likely boiler-plate, such provisions should be given little weight. On the other hand, a stipulation contained in debtor's confirmed Chapter 11 plan in a prior bankruptcy case would be given significant, maybe dispositive, weight. Forbearance agreements, workouts, compromises and other agreements falling between those two bookends would be examined case-by-case.

Stay Relief

To structure its analysis, the Bryan Road court used the list of factors articulated in In re Desai, 282 B.R. 527 (Bankr. N.D. Ga. 2002): 1) the sophistication of the party making the waiver; 2) the consideration received by the debtor, including the length of the forbearance granted to the debtor and the risks that the creditor undertook as a result of the forbearance; 3) whether other parties, such as unsecured creditors and junior lien holders, would be adversely affected by lifting the stay; and 4) the feasibility of any plan proposed by the debtor, including a valuation of the debtor's equity in the property to be foreclosed on by the secured lender. All of the factors have their origins in earlier cases. The court also said other factors might come into play.

The Desai court denied enforcing the agreed stay relief on the grounds that there was no proof that debtor lacked equity in the property to be foreclosed. Without an agreement to lift the stay, the debtor's possible equity would be a first priority consideration in standard automatic stay analyses. Thus, the implication is that where the debtor might have equity in the property to be foreclosed, a lift stay agreement will not be immediately enforced. See, e.g., In re Deb-Lyn, Inc., 2004 W.L. 452560, __ F. Supp. __ (D.N.D. Fla. 2004); In re Sky Group Int'l, Inc., 108 B.R. 86 (Bankr. W.D. Pa. 1989).

Even where a debtor does not resist stay relief premised on its prior agreement, other creditors may. In In re Atrium Highpoint P'ship, 189 B.R. 599 (N.D.N.C. 1995), the debtor agreed in its confirmed plan in its first bankruptcy case not to oppose a stay relief motion concerning certain real estate in the event that the debtor filed a second bankruptcy case. In the second case, the bankruptcy court held that the agreement would be enforced against the debtor, but, because there were now other creditors that had not been creditors in the first case, stay relief could not be automatically granted. Other grounds for stay relief needed to be proved.

Some courts have considered the interests of other creditors, even where they have not formally objected. See In re Deb-Lyn, supra.

What is the benefit of an agreement by the debtor in a forbearance/workout agreement not to oppose stay relief, or a even a stipulation granting stay relief in the event the debtor files a future bankruptcy case? The practical answer is, probably not very much. Bryan Road is the perfect example. That stipulation was negotiated by experienced counsel and was embodied in a forbearance agreement that gave the debtor substantial breathing room before it finally entered bankruptcy, just before the end of the forbearance period and the rescheduled sale.

Nonetheless, the Bryan Road court conducted a detailed analysis similar in some ways to the analysis usually undertaken on any lift stay motion, but going beyond that into questions about the stay relief agreement. In addition to issues related to the parties' forbearance contract ' sophistication of the parties and counsel, how valuable was the consideration given debtor and was consent to the agreement coerced ' the court also considered peculiarly bankruptcy issues ' the effect of the waiver on third parties such as other creditors, whether the debtor had any equity in the property in question, and whether the debtor's proposed plan of reorganization, which in the Bryan Road case consisted mostly of litigation against the bank, was feasible.

The lender's lawyers in Bryan Road covered the bases as best they could. The forbearance agreement contained the usual unenforceable promise not to file a bankruptcy case in the future, but went on to provide that if the debtor files a bankruptcy case, the debtor “agrees and stipulates that the automatic stay should, at the request of the Bank be immediately lifted or modified in a fashion to permit the Bank to proceed with its foreclosure action and ' sale.” The lender obtained debtor's agreement to the reasons why the lift stay stipulation was fair ' debtor “is a single purpose entity, has few unsecured creditors and it is highly unlikely that any significant benefit to unsecured creditors will be achieved by a bankruptcy reorganization.” Finally, debtor agreed that “the filing of a bankruptcy proceeding ' will be for the sole purpose of delaying the Bank in its foreclosure action and will constitute a bad faith bankruptcy filing.” Florida Community Bank's Motion for Stay Relief, filed in U.S.B.C., S. D. Fla., Case No. 07-17922, Docket No. 19, p. 33 (Emphasis added.).

The extended analysis undertaken by the Bryan Road court, despite these agreements and stipulations, shows that a lender's motion based on the waiver agreement will sometimes actually be harder to win than a simple stay relief motion based on traditional lift stay grounds ' debtor's inability to provide adequate protection for lender's interest in the collateral, or debtor's lack of equity in the collateral and no need for the collateral in a plan of reorganization.

Consequently, it seems that, at best, the earlier stipulation for lifting of the stay is a make-weight or an additional factor to be considered, not a dispositive agreement. Accordingly, savvy clients will then ask, “If we cannot get relief automatically, is there anything else we can do to bolster our motion for relief from stay when we make it?”

Appropriate Actions

The cases suggest several actions work better than others. First, the courts are far more likely to enforce a stay relief stipulation if it is the product of an earlier bankruptcy case. In In re Deb-Lyn, Inc., supra, at 4, and In re Atrium Highpoint, supra, 189 B.R. at 607, waiver agreements were enforced on the basis that the waiver was in an approved prior bankruptcy plan. If the debt is big enough, it may be worthwhile for a creditor to “require” a debtor go through a pre-arranged Chapter 11 case so that the waiver agreement can be in a court approved plan.

Alternatively, instead of an outright waiver, stipulations as to critical facts that strongly support relief from stay could be included in the forbearance agreement. Some are suggested by the waiver in Bryan Road, above. Counsel might also write a tentative lift stay motion based on what is expected to be true at the time the forbearance agreement expires and then get stipulations to the expected facts. While the future is hard to predict, some things won't change: For example, “Debtor's sole business is the ownership and operation of [name of real estate project].” “The largest number of unsecured creditors debtor has had in the last two years is [number] and the largest amount owed by debtor to unsecured creditors at any one time during the last two years totals [number].” “The current appraised value of the collateral for the loan is [number], and debtor agrees to provide lender a quarterly statement of debtor's estimate of the then value together with a copy of any appraisal or third party estimate obtained in that quarter.” Creative counsel will think of a variety of fact stipulations that may be helpful in a future lift stay motion.

Conclusion

In sum, when the client asks whether you should demand a lift stay agreement by the debtor be included in a forbearance agreement applicable in a future bankruptcy case, the best answer to the question is, “Yes, but we should not bargain away much in return for that agreement, because we still will have to do almost everything we otherwise would do to obtain stay relief in any future bankruptcy. And, in any event, we want a long list of agreed facts in our forbearance agreement.”

Mike C. Buckley is a partner in the Oakland, CA, office of Reed Smith LLP. He has extensive experience in bankruptcy matters and complex commercial disputes, in industries ranging from real estate, oil and gas and construction to telecommunications, chemicals and electronic manufacturing. He may be reached at 510-466-6704 or [email protected].

The question, “Can we get them to agree not to file bankruptcy in the future?” must be near the top of the list of things clients most commonly ask their transactions and workout lawyers.

Most lawyers fielding this question are likely to explain that such an agreement is not enforceable under bankruptcy law. A debtor, even a sophisticated debtor represented by experienced and knowledgeable counsel, simply cannot give an enforceable promise not to file a future bankruptcy case. Fallick v. Kehr , 369 F.2d 899 (2nd Cir 1966). Good lawyers then suggest that, in certain situations, an agreement for the entry of an order lifting the automatic bankruptcy stay, or an agreement not to oppose a lift-stay motion if the other side files a bankruptcy petition, may be enforceable.

Enforceable v. Non-Enforceable

A recent bankruptcy case decided in Florida provides guidance on this difficult question. In In re Bryan Road, LLC, 382 B.R. 844 (Bankr. S.D. Fla. 2008), reconsideration den., 2008 WL 233287 (Jun. 9, 2008), the debtor, Bryan Road, was a developer of a pleasure boat dry storage facility, and borrowed a substantial sum, secured by the facility, from Florida Community Bank. Following the debtor's failure to make payments, the bank commenced a state court foreclosure action, and a final judgment of sale was entered.

On the morning of the sale, the debtor and the bank signed a forbearance agreement, delaying the foreclosure sale by several months to allow the debtor to refinance or sell. The forbearance agreement provided, in part, that in consideration for the bank's acquiescence, the debtor agreed that if it filed a bankruptcy petition, the bank “should be accorded relief from the automatic stay.”

The debtor failed to extract itself from its financial difficulties and filed a Chapter 11 bankruptcy petition the day before the rescheduled foreclosure sale. The bank moved to lift the automatic stay, contending that the debtor already had consented to the relief that the bank now sought. The debtor opposed the motion and argued that granting the relief would injure not just the debtor, but also the interests of other parties, including unsecured creditors and two junior lien holders, and would moot the debtor's plan to litigate against the bank over the amount and enforceability of its claim.

The bankruptcy court reviewed the state of the law on lift stay agreements and concluded that stay relief was merited. While that result is unremarkable, the court's analysis is detailed and instructive. First, the court explained that an agreement for stay relief made in a forbearance agreement or other pre-bankruptcy context is not automatically enforceable in a bankruptcy case.

Rulings on Stay Relief

Although courts in some prior cases indicated that stay relief should be automatically granted when it was premised upon a prior agreement in a forbearance or workout situation (see, e.g., In re Citadel Properties, Inc., 86 B.R. 275 (Bankr. N.D. Fla. 1988)), other courts had veered away from that approach and held that such agreements are not automatically enforceable. See, e.g., In re Jenkins Court Assocs. LP, 181 B.R. 33 (Bankr. E.D. Pa. 1995).

The Bryan Road court observed that courts in recent cases have held that a prior agreement for stay relief will be given significant weight in the exercise of the bankruptcy court's discretion as to whether to grant relief from the automatic stay ' but that other factors must be considered as well. The Bryan Road court articulated a sliding scale for testing the importance of prepetition waivers in the decision as to whether to lift the automatic stay in a subsequent bankruptcy case.

The court observed that, as a general matter, prepetition waivers of the automatic stay would have little influence on the court's decision if they were contained only in initial loan documents. Likely boiler-plate, such provisions should be given little weight. On the other hand, a stipulation contained in debtor's confirmed Chapter 11 plan in a prior bankruptcy case would be given significant, maybe dispositive, weight. Forbearance agreements, workouts, compromises and other agreements falling between those two bookends would be examined case-by-case.

Stay Relief

To structure its analysis, the Bryan Road court used the list of factors articulated in In re Desai, 282 B.R. 527 (Bankr. N.D. Ga. 2002): 1) the sophistication of the party making the waiver; 2) the consideration received by the debtor, including the length of the forbearance granted to the debtor and the risks that the creditor undertook as a result of the forbearance; 3) whether other parties, such as unsecured creditors and junior lien holders, would be adversely affected by lifting the stay; and 4) the feasibility of any plan proposed by the debtor, including a valuation of the debtor's equity in the property to be foreclosed on by the secured lender. All of the factors have their origins in earlier cases. The court also said other factors might come into play.

The Desai court denied enforcing the agreed stay relief on the grounds that there was no proof that debtor lacked equity in the property to be foreclosed. Without an agreement to lift the stay, the debtor's possible equity would be a first priority consideration in standard automatic stay analyses. Thus, the implication is that where the debtor might have equity in the property to be foreclosed, a lift stay agreement will not be immediately enforced. See, e.g., In re Deb-Lyn, Inc., 2004 W.L. 452560, __ F. Supp. __ (D.N.D. Fla. 2004); In re Sky Group Int'l, Inc., 108 B.R. 86 (Bankr. W.D. Pa. 1989).

Even where a debtor does not resist stay relief premised on its prior agreement, other creditors may. In In re Atrium Highpoint P'ship, 189 B.R. 599 (N.D.N.C. 1995), the debtor agreed in its confirmed plan in its first bankruptcy case not to oppose a stay relief motion concerning certain real estate in the event that the debtor filed a second bankruptcy case. In the second case, the bankruptcy court held that the agreement would be enforced against the debtor, but, because there were now other creditors that had not been creditors in the first case, stay relief could not be automatically granted. Other grounds for stay relief needed to be proved.

Some courts have considered the interests of other creditors, even where they have not formally objected. See In re Deb-Lyn, supra.

What is the benefit of an agreement by the debtor in a forbearance/workout agreement not to oppose stay relief, or a even a stipulation granting stay relief in the event the debtor files a future bankruptcy case? The practical answer is, probably not very much. Bryan Road is the perfect example. That stipulation was negotiated by experienced counsel and was embodied in a forbearance agreement that gave the debtor substantial breathing room before it finally entered bankruptcy, just before the end of the forbearance period and the rescheduled sale.

Nonetheless, the Bryan Road court conducted a detailed analysis similar in some ways to the analysis usually undertaken on any lift stay motion, but going beyond that into questions about the stay relief agreement. In addition to issues related to the parties' forbearance contract ' sophistication of the parties and counsel, how valuable was the consideration given debtor and was consent to the agreement coerced ' the court also considered peculiarly bankruptcy issues ' the effect of the waiver on third parties such as other creditors, whether the debtor had any equity in the property in question, and whether the debtor's proposed plan of reorganization, which in the Bryan Road case consisted mostly of litigation against the bank, was feasible.

The lender's lawyers in Bryan Road covered the bases as best they could. The forbearance agreement contained the usual unenforceable promise not to file a bankruptcy case in the future, but went on to provide that if the debtor files a bankruptcy case, the debtor “agrees and stipulates that the automatic stay should, at the request of the Bank be immediately lifted or modified in a fashion to permit the Bank to proceed with its foreclosure action and ' sale.” The lender obtained debtor's agreement to the reasons why the lift stay stipulation was fair ' debtor “is a single purpose entity, has few unsecured creditors and it is highly unlikely that any significant benefit to unsecured creditors will be achieved by a bankruptcy reorganization.” Finally, debtor agreed that “the filing of a bankruptcy proceeding ' will be for the sole purpose of delaying the Bank in its foreclosure action and will constitute a bad faith bankruptcy filing.” Florida Community Bank's Motion for Stay Relief, filed in U.S.B.C., S. D. Fla., Case No. 07-17922, Docket No. 19, p. 33 (Emphasis added.).

The extended analysis undertaken by the Bryan Road court, despite these agreements and stipulations, shows that a lender's motion based on the waiver agreement will sometimes actually be harder to win than a simple stay relief motion based on traditional lift stay grounds ' debtor's inability to provide adequate protection for lender's interest in the collateral, or debtor's lack of equity in the collateral and no need for the collateral in a plan of reorganization.

Consequently, it seems that, at best, the earlier stipulation for lifting of the stay is a make-weight or an additional factor to be considered, not a dispositive agreement. Accordingly, savvy clients will then ask, “If we cannot get relief automatically, is there anything else we can do to bolster our motion for relief from stay when we make it?”

Appropriate Actions

The cases suggest several actions work better than others. First, the courts are far more likely to enforce a stay relief stipulation if it is the product of an earlier bankruptcy case. In In re Deb-Lyn, Inc., supra, at 4, and In re Atrium Highpoint, supra, 189 B.R. at 607, waiver agreements were enforced on the basis that the waiver was in an approved prior bankruptcy plan. If the debt is big enough, it may be worthwhile for a creditor to “require” a debtor go through a pre-arranged Chapter 11 case so that the waiver agreement can be in a court approved plan.

Alternatively, instead of an outright waiver, stipulations as to critical facts that strongly support relief from stay could be included in the forbearance agreement. Some are suggested by the waiver in Bryan Road, above. Counsel might also write a tentative lift stay motion based on what is expected to be true at the time the forbearance agreement expires and then get stipulations to the expected facts. While the future is hard to predict, some things won't change: For example, “Debtor's sole business is the ownership and operation of [name of real estate project].” “The largest number of unsecured creditors debtor has had in the last two years is [number] and the largest amount owed by debtor to unsecured creditors at any one time during the last two years totals [number].” “The current appraised value of the collateral for the loan is [number], and debtor agrees to provide lender a quarterly statement of debtor's estimate of the then value together with a copy of any appraisal or third party estimate obtained in that quarter.” Creative counsel will think of a variety of fact stipulations that may be helpful in a future lift stay motion.

Conclusion

In sum, when the client asks whether you should demand a lift stay agreement by the debtor be included in a forbearance agreement applicable in a future bankruptcy case, the best answer to the question is, “Yes, but we should not bargain away much in return for that agreement, because we still will have to do almost everything we otherwise would do to obtain stay relief in any future bankruptcy. And, in any event, we want a long list of agreed facts in our forbearance agreement.”

Mike C. Buckley is a partner in the Oakland, CA, office of Reed Smith LLP. He has extensive experience in bankruptcy matters and complex commercial disputes, in industries ranging from real estate, oil and gas and construction to telecommunications, chemicals and electronic manufacturing. He may be reached at 510-466-6704 or [email protected].