The provisions in a confirmed chapter 11 plan of reorganization dealing with an allowed secured claim (1) outlined the post confirmation loan terms and (2) provided that the parties would execute new loan documents. When the parties were unable to agree on the form of the documents, the debtor filed a motion to compel execution as contemplated by the plan.
Under the plan the debtor agreed to execute new loan documents by no later than the effective date of the plan. The mortgage lender was required to provide proposed loan documents not less than 15 days prior to the effective date.
The plan laid out the terms for repayment, including “such items as the secured claim amount, retention of the existing lien, treatment of the twelve (12) initial interest only payments, treatment of the remaining amortized payments, payment due dates, interest rates, final balloon payment, the effects of prepayment, responsibilities of the guarantors, and consequences of default,” as well as various reporting requirements.
However, the parties were unable to reach agreement on various provisions that were not spelled out in the plan. Although the parties started out with a dispute over at least a dozen terms, the parties were able to narrow their dispute to four issues.
The court concluded that it had authority to direct parties to execute documents under Section 1142(b) of the Bankruptcy Code. However, the court’s jurisdiction is generally limited to protecting the confirmation order and consummation of the plan. In this case, the court noted that an extended deadline for executing the loan documents had passed, arguably causing the parties to be in default. So, to protect the confirmation order and aid in execution of the plan, the court concluded that it had the authority to supply “commercially reasonable” terms where the plan was silent and the terms did not alter the plan.
The court acknowledged that other courts have declined to order execution of loan documents when material terms were not included in the plan. However, since that was not the case here, the court felt comfortable in ruling on the disputes.
The remaining issues in the promissory note were as follows:
- Late payment charge: The loan documents provided for a late payment charge of 5% of the amount then past due, subject to a minimum charge of $5.00 and a maximum charge of $100.00. The dispute arose because the debtor proposed a grace period so that there would not be a default for a period of 10 days after the due date of a payment. The debtor was concerned that because of the “tortured history between the parties” it might be at risk for only a nominal delay that was beyond its control (such as a delay in mail service). The court decided that the grace period language proposed by the debtor should be included in the note.
- The death of any guarantor constituted an event of default: The debtor argued that it had two guarantors, both of which were experienced, and the owners could replace the existing manager (who was one of the guarantors) with a professional management company. While acknowledging the interest of the lender in retaining the person most involved in the day-to-day operations, the court noted that in this case there were two guarantors with expertise, knowledge, and motivation. So, the court determined that only the death of both guarantors should trigger an event of default.
- Discharge of liens: The lender wanted to provide that failure to discharge a tax lien, levy, writ of attachment, etc. within 30 days would constitute an event of default. The debtor wanted 90 days. Based on expert testimony from a debtor witness, the court went with 90 days.
- Material Adverse Change: The lender also proposed that a “material adverse change of condition of the financial prospects of Borrower or any Collateral” should be an event of default. The debtor was concerned that this gave the lender unfettered discretion. After comparing this language to the language of the pre-bankruptcy note, the court left in the material adverse change default but directed that it be qualified with a “reasonable belief” or “in good faith” standard.
The note also included an acknowledgment that it had been freely executed “without duress.” Initially the debtor’s principal objected. However, after the hearing he realized that he did not understand the legal concept of duress and dropped his objection. The court nevertheless reviewed the applicable state law on duress, concluding that it required wrongful or unlawful conduct. Since there was no evidence of this type of conduct, the court concluded that there was no duress.
Consequently, the court ordered the lender to revise the note to incorporate its changes, and further ordered the debtor and lender to execute the note.
The provisions in the Bankruptcy Code that address treatment of a secured claim in a contested context focus on the required payment stream, and do not address the status of the loan documents that will govern post confirmation. A lender should not take for granted that its old loan document terms will carry forward with only the payment terms changed, and a debtor should not take for granted that it will be able to control the form of the new loan documents. To avoid unnecessary disputes, it may be worth negotiating the actual loan documents and incorporating them into the plan.
Vicki R. Harding, Esq.