The debtor had entered into a forbearance agreement with its mortgage lender that included a stipulation that the lender would be entitled to relief from the automatic stay if the debtor became involved in a bankruptcy. After the debtor filed bankruptcy to stop a foreclosure sale, the lender moved for relief from the stay arguing that (1) the prepetition stay waiver constituted “cause” for relief, and (2) relief should be granted because the debtor’s plan did not have a reasonable possibility of being confirmed within a reasonable time.
The debtor made the typical arguments against granting relief based on the stay waiver: A prepetition waiver of the automatic stay is void and unenforceable as against public policy; rights provided in the Bankruptcy Code cannot be circumvented by contract. In addition, the purpose is to protect creditors as well as the debtor, so the debtor cannot by itself waive the stay.
In a typical response, the lender argued that the public policy in favor of encouraging out of court restructurings outweighed the arguments against granting stay relief, noting that the debtor received substantial additional consideration in the form of forbearance for an additional eight months.
Since this was a single asset real estate case, under Section 362(d)(3) of the Bankruptcy Code, another basis for granting relief from the stay was a failure to either commence monthly loan payments or file a plan that has a “reasonable possibility of being confirmed within a reasonable time” within 90 days after the bankruptcy case commenced.
The debtor proposed a plan of reorganization that provided for an auction of the property. There would be an opening bid of $3 million by the debtor. Any competing third party bidders would be required to pay cash, and the lender would be entitled to make a credit bid (i.e., set off its bid amount against its mortgage debt).
If the debtor was the winning bidder, it proposed to pay off the mortgage debt over time, with terms that it contended were confirmable because (1) the lender would receive a lien equal to its claim (based on its filed claim less an assumed value for other property securing guaranteed debt), (2) the sum of the payments would equal the claim, and (3) the present value of the payments would equal the present value of the collateral. As the court noted, the debtor essentially proposed a cramdown of the lender’s debt in the event that it was the winning bidder at the bankruptcy auction.
In addressing the bank’s argument based on waiver of the stay, the court commented (citation omitted; emphasis in original):
There appears to be an emerging trend to enforce such stay waiver agreements, although the majority of courts in earlier cases addressing the issue have determined that neither the debtor nor a creditor may waive or limit the protection of the automatic stay. Most of the more recent decisions have concluded that a prepetition agreement waiving defenses to relief from stay may be considered as a factor in deciding whether relief from stay for cause should be granted.
The court further noted but it did not agree with one court’s approach that a stay waiver cannot be enforced in a single asset case because it is the equivalent of a prohibition on filing for bankruptcy, which is contrary to public policy. Instead it followed the approach of another court that proposed a list of 10 considerations for determining whether to lift the stay when the parties have agreed to a waiver pre-bankruptcy.
The consideration that appeared to win the day with the court was the fact that the debt first matured December 10, 2008, while the lender waited until October 12, 2012 to file a foreclosure. The difference between the debtor’s proposed bankruptcy sale auction and allowing the lender to proceed with its foreclosure sale was that (1) there was a possibility that the debtor would retain the property (e.g., if there was no credit bid or third party purchase) under a cramdown scenario, and (2) the bank would be delayed at least an additional four months (e.g., the auction was to be held four months after the plan was confirmed to give the debtor an opportunity to market the property).
The bottom line for the court was that “the debtor gained almost four years to try to turn this operation around by either selling it or refinancing, however difficult that might have been in the current economy. The court holds it is not fair to delay this creditor any longer. The debtor has already had considerable advantage from the forbearance agreement of the waiver, and it is highly doubtful an additional four months of marketing will result in a better scenario than lifting the stay now.”
Undoubtedly the other key consideration was the court’s skepticism about the validity of the debtor’s proposed plan of reorganization. It characterized the debtor’s argument that it met cramdown requirements as a “mathematical sleight of hand;” and while its math might be correct, “its assumptions are built on shifting sands.”
The court also rejected the debtor’s proposal to classify the lender’s deficiency claim separately from the other unsecured claims. Without the ability to segregate the lender’s deficiency claim, it would have been difficult for the debtor to obtain approval by an impaired class. (See Classification of Mortgage Deficiency: The Difference Between a Veto Right and Disenfranchisement.) In sum, the plan was “too speculative and too attenuated” to conclude that there was a reasonable possibility of a successful reorganization within a reasonable time.
Accordingly, the court granted relief from the stay.
It is not unusual for a lender to require a borrower to waive the automatic stay in the context of a pre-bankruptcy forbearance or workout agreement. As suggested by this case, in considering the effect of this waiver in a bankruptcy, the parties should not assume either that relief from stay will automatically be granted or that the waiver will be rejected as unenforceable and against public policy.
Vicki R. Harding, Esq.