Bankruptcy

Pre-Petition Workout Agreement Enforced, Even As to Stay Waiver

By J. Michael McBride

After defaulting on his principle and interest payments to Florida Community Bank, the owner of a set of “dry-stack” boat condominium units entered into a pre-petition forbearance agreement with the bank. The conditions of the forbearance agreement were as follows:

(a) the Bank should be accorded relief from the automatic stay in the event the borrower ever filed for bankruptcy;
(b) the final judgment would continue to accrue interest at the rate set forth therein; and
(c) the borrower, among others, waived all claims, counterclaims, defenses and causes of action against the Bank.

Shortly after entering into the forbearance agreement with the Bank and just before a foreclosure, the borrower filed for Chapter 11 relief. The Bankruptcy Court in Florida stated that pre-petition bankruptcy agreements that waive the automatic stay are neither per se enforceable nor self-executing. The court then cited Judge Laney from In re Desai, 282 B.R. 527 (Bankr. S.D. Ga 2002), stating that there are four factors that should be considered in deciding whether stay relief should be granted based upon such pre-petition waivers, and they are:

(1) the sophistication of the party making the waiver;
(2) the consideration for the waiver;
(3) whether other parties are affected including unsecured creditors and junior lienholders; and
(4) the feasability of the debtor’s plan.

Applying these factors to the Debtor’s case, the court held that: factor (1) weighs heavily in favor of enforcement, due to the sophistication of the parties (a Bank and a large business owner); factor (2) is a little problematic, the consideration that the Debtor received was only “two months of breathing room;” factor (3) although the unsecured creditors will no longer be able to look to the value of the Debtor’s Property if the stay is granted, “the existence of value in the Debtor’s project which would reach down to the level of the unsecured creditors is at best conjectural,” and thus the Debtor’s proposed plan was not feasible.

Based on the court’s analysis of these factors, the court found that the automatic stay relief was warranted under 11 U.S.C. § 362(d)(1), and thus enforced the pre-petition waiver.

Here is a link to the entire case: http://www.bkinformation.com/newcases/casecopies/BryanRoad_SDFL.cfm

Hunter

Full post as published by Texas Lawyer Blog on February 18, 2008 (boomark / email).