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Over the years, bankruptcy courts around the country have been faced with cases involving forbearance agreements containing a waiver of the automatic stay, i.e., a provision in a pre-petition agreement between a borrower and a secured lender stating that in the event of a Chapter 11 bankruptcy filing by the borrower, the lender would immediately be entitled to relief from the automatic stay to allow the lender to pursue its rights against the collateral. Provisions of this kind have drawn mixed reactions. Some courts have held the waiver to be a valid contract between a borrower and lender, and enforced it post-petition. Other courts have not given such an agreement effect, arguing a number of theories including the theory that the agreement is void as against public policy, and that even if valid as between the borrower and lender, such an agreement could not be enforced against other parties in interest in a Chapter 11 case, such as junior lien holders, unsecured creditors, or a trustee. And not surprisingly, a third category of decisions was generated � decisions which held that “it all depends.” Several weeks ago, the U.S. Bankruptcy Court for the Southern District of Florida had an opportunity to again examine the issue. In re Bryan Road, LLC arose out of a failed development of a “dry stack storage facility,” a warehouse-type building in which boats are stored by their owners. This particular facility was built to hold in excess of 200 boats, stacked on several layers as well as on the ground floor. Each storage space on the upper levels could store a boat of some 30,000 pounds; ground floor storage spaces could handle boats of up to 37,000 pounds. The facility was set up like a condominium � each storage space constituted a separately owned storage space, with the owner responsible for maintenance of the space as well as a pro-rata share of maintenance. To that end, a Declaration of Condominium was filed in August of 2005, while the facility was under construction. In March of 2006, construction financing was replaced by permanent financing provided by Florida Community Bank, which secured its loan to Bryan Road with, among other things, a first mortgage on the entire facility. Sales of the storage units, which started in 2005, were slow. In October of 2006, Bryan Road defaulted on its payments to the bank, and a foreclosure proceeding was filed. Judgment in favor of the bank was entered in May of 2007 and a sheriff’s sale was scheduled for late July. Up until the day of sale, Bryan Road searched for takeout financing, and while it believed a takeout lender had been found, a refinance of the bank debt was not achieved by the sale date. On the morning of the sale, Bryan Road and the bank entered into a forbearance agreement, the pertinent terms of which were the following: first, Bryan Road received a 60-day stay of the sale, until Sept. 26, 2007 (this is all Bryan Road requested); second, interest would continue to run on the judgment for the 60-day period granted; third, Bryan waived all claims, defenses and causes of action it had against the bank; fourth, the bank would be accorded relief from the automatic stay in the event Bryan Road filed for bankruptcy; and fifth, that a bankruptcy filing, if one occurred, would be recognized to be for the sole purpose of delaying the bank’s foreclosure action. Bryan Road was represented in the negotiation of the forbearance agreement by an attorney to whom the bankruptcy court referred as a “very experienced bankruptcy practitioner.” Sixty days passed; takeout financing did not materialize. On Sept. 25, 2007, one day before the rescheduled sheriff’s sale, Bryan Road filed a Chapter 11 petition. The bankruptcy court stated that the case “… was expressly filed for the purposes of delaying that sale.” The bank filed a motion for relief two weeks later. By the time of the initial hearing to consider the motion for relief, Bryan Road had filed a plan of reorganization and a proposed disclosure statement. At that time, it raised an issue not raised in the state court foreclosure case, namely, that the bank’s mortgage was invalid because the bank did not file a separate mortgage on each of the 210 storage units, but recorded only one mortgage covering the entire facility. The bankruptcy court did not accept Bryan Road’s argument. However, it did not reject the argument based on Bryan Road’s earlier representations in the forbearance agreement that it had no defenses to the foreclosure action; rather, it examined the argument on its merits and concluded that under Florida law and in these circumstances, the bank had a properly perfected mortgage lien on each of the units constituting the facility, except for the 10 or so which were sold pre-petition and for which releases had been given by the bank. The remaining arguments were reserved for a subsequent hearing, which was held 30 days later. Although the issue before the bankruptcy court at this second hearing was arguably a purely legal one, the court allowed testimony to be adduced regarding the value of the facility and Bryan Road’s proposed plan of reorganization. It turned out that this evidence was of extreme importance to the court’s ultimate ruling. The bankruptcy court observed that the issue of the enforceability of a waiver such as the one before it is the subject of considerable written decisions. Reviewing some general propositions concerning enforceability, it pointed out that such an agreement will be given no particular effect if contained in the original loan documents; but it will likely be of great effect if entered into during a bankruptcy case which for some reason is dismissed, then refiled, as such an agreement would have been approved by a court with notice to parties in interest. Weighing the cases, the bankruptcy court elected to utilize the reasoning of a Georgia bankruptcy court [which itself relied on In re Sky Group International, 108 B.R. 307 (Bankr.W.D.Pa.1989)]. That court concluded that such an agreement is neither per se enforceable nor self-executing, and in determining whether to uphold such an agreement, a court should take into account the following factors: (a) the sophistication of the party giving the waiver; (b) the consideration for the waiver, including the creditor’s risk and the length of time involved; (c) whether other parties (junior lien holders and unsecured creditors) are affected; and (d) the feasibility of the debtor’s plan. These may not be the only factors to consider, stated the court; others may be relevant in appropriate circumstances. As to the first factor, the bankruptcy court stated that counsel’s experience was enough to conclude that Bryan Road was fully capable of understanding the implications of the waiver. As to the second factor, the court was more concerned, given relatively short time period (60 days) given by the bank, but concluded that this factor militated in favor of enforcement of the agreement’s waiver language, since this was the amount of time requested by Bryan Road. The third and fourth factors were treated together, since the feasibility Bryan Road’s proposed plan (the fourth factor) depended greatly on litigation with creditors and the impact of that litigation on how the amount of claims to be paid, and to whom (the third factor). In other words, assuming that all of the litigation proposed to be pursued against creditors proved successful, the plan contemplated to be effectuated by Bryan Road could be confirmed. It was here that the bankruptcy court utilized its prior ruling regarding the “defective mortgage” allegation, but equally importantly, the court actually reviewed the feasibility of the entire proposed plan and in doing so, considered Bryan Road’s allegations regarding the value of the facility (thus determining whether equity existed), and the merits of Bryan Road’s claims against creditors. The proposed plan was predicated on Bryan Road’s position that it had significant equity in the facility. It based this position on three separate appraisals, all done by the same appraiser, but at different times. According to Bryan Road, the facility was worth in excess of $25 million. For numerous reasons, the court did not accept the results of these appraisals. For example, the first appraisal, conducted in 2005, concluded that all 210 storage units could be marketed in two years. Yet, as noted by the court, by 2007 only 20 had been sold. In addition, none of the appraisals utilized an income approach to value, yet the only significant cash being generated by the project in the last two years was income from rentals. Another glaring error was that the appraisals assumed certain purchase prices could be obtained; yet none of the units sold either pre- or post-petition were sold at anywhere near the assumed purchase prices. In fact, the appraisal methodologies, when combined with actual sales made, suggested strongly that there was not enough equity in the facility to cover even the first lien holder, much less all lien holders. Moreover, assumptions regarding the number and amount of claims against Bryan Road were ill founded, according to the court. As to the claim of the bank, Bryan Road’s treatment was first, to challenge the validity of the mortgage, appeal if necessary from an adverse decision on this point and obtain a stay, thereby avoiding adequate protection payments pending appeal, and then, if all else failed, pay some amount less than the full amount of the judgment held by the bank (notwithstanding the state court judgment’s probable preclusive effect). As to junior liens, Bryan Road’s positions were similarly not well founded. For example, Bryan Road stated that as to one junior lien holder, Bryan Road will pay neither interest nor counsel fees, even though the claims were believed by Bryan Road to be fully secured. As to other parties in interest, one, a corporation with a contract to buy 36 storage units, would be treated by having its contract rejected, followed by a suit for fraud. Nowhere in the proposed disclosure statement was the basis for such a suit provided. The claims of most all unsecured creditors would be litigated. In sum, the bankruptcy court concluded that the plan was speculative at best. Thus, for purposes of the four-part test being utilized, the court stated that the plan put forth by Bryan Road was unfeasible. For these reasons, the pre-petition waiver of the protections of the automatic stay included in the forbearance agreement would be enforced and the stay would be lifted. (The court did not address the independent “bad faith filing” issue, stating that it did not have to reach this issue.) What, if anything, does this case add to the jurisprudence on this issue of pre-petition waivers? It does not add to the chorus of those who say that such waivers are per se unenforceable. Nor does it state by any means that the waiver will be enforced without regard to the facts. So is it an “it depends” decision? It would appear from this case that such waivers do not foreclose creative lawyering. If there were clearly substantial equity in the facility, even with a longer forbearance period, or a more realistic plan, enforcement of the waiver possibly (if not probably) would have been unlikely. So what is the lesson? If you are a secured creditor’s lawyer, by all means try to get the waiver; but certainly do not tell your client he can take the result � an automatic lifting of the stay � to the bank. Myron A. Bloom is a shareholder with the firm of Hangley Aronchick Segal & Pudlin. His practice is concentrated in the areas of corporate organization, bankruptcy, commercial workouts and creditors’ rights.

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