Forbearance Agreements and Waiving the Protections of the Automatic Stay
Under the current “credit crisis” we can expect that more commercial loans will become non-performing. These loans will require restructuring through appropriate forbearance and loan modification agreements. One key aspect in preparing these agreements is the inclusion of a waiver of the protections of the automatic stay under the Bankruptcy Code in the event the borrower subsequently files for bankruptcy.
It was recently reaffirmed in In re Bryan Road, LLC, 382 B.R. 844 (Bankr. S.D. Fla. 2008), that, under certain circumstances, forbearance agreements with waivers of automatic stay provisions are enforceable, even when generally, such waivers are not enforceable when part of an initial loan transaction. In Bryan Road, the borrower, with assistance of experienced counsel, agreed to waive the protections of the automatic stay of the Bankruptcy Code in a prepetition forbearance agreement in exchange for rescheduling a foreclosure sale in order to afford the borrower additional time to complete a possible refinancing. The borrower subsequently filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code, and the lender sought stay relief from the court. Following its analysis, the waiver was found to be enforceable and the lender’s motion for relief from the automatic stay was granted.
The decision to enforce such waivers is by and large left to the discretion of the court, which looks to the totality of the circumstances, but more particularly is based on four relevant factors:
- the sophistication of the party making the waiver
- the consideration given for the waiver, including the lender’s risk and the length of time of the waiver
- whether other parties are affected, including unsecured creditors and junior lienholders, and
- the feasibility of the borrower’s plan.
In Bryan Road, the court stated that the borrower’s representation by an experienced bankruptcy lawyer, capable of understanding the forbearance agreement, satisfied the sophistication requirement. Second, the consideration given by the lender for the waiver need not be great, so long as it is what the borrower wanted at the time the agreement was signed (a two-month forbearance period was found to be sufficient). The third and fourth factors are more situation-specific factual determinations. Based on the analysis of the above factors, the court found that stay relief was warranted “for cause” under 11 U.S.C. §362(d)(1).
Therefore, with some care, the first two factors can be easily established. By using the four factors laid out in Bryan Road, lenders may determine with greater accuracy the likelihood that waivers of the automatic stay will be enforced in prepetition forbearance agreements, recognizing that the treatment of such waivers can vary from court to court.