An article appearing in the July/August 2014 issue of the Business Restructuring Review discusses a ruling by an Oregon bankruptcy court that held unenforceable a negative covenant in a limited liability company's operating agreement prohibiting the company from filing a bankruptcy petition, among other actions. Addressing a different form of what some would consider an inviolate bankruptcy right—a debtor's right to the protections of the automatic stay under section 362 of the Bankruptcy Code—the U.S. Bankruptcy Court for the District of Puerto Rico ruled in In re Triple A&R Capital Investment, Inc., 2014 BL 283893 (Bankr. D.P.R. Oct. 9, 2014), that a secured lender was entitled to relief from the stay because the debtor, in a court-approved cash collateral stipulation, generally ratified prepetition forbearance agreements that included a stay waiver provision.
Triple A&R Capital Investment, Inc. ("A&R") was the owner of a single parcel of real property and therefore subject to the Bankruptcy Code's special rules governing single-asset real estate debtors when it filed for chapter 11 protection in June 2014. Among those provisions is section 362(d)(3), which obligates the bankruptcy court to terminate the automatic stay, upon the request of a party-in-interest, unless the debtor, within 90 days of entry of an order for relief in the case (with certain exceptions), either: (i) files a chapter 11 plan that has a reasonable possibility of being confirmed within a reasonable time frame; or (ii) makes monthly interest payments to the secured creditor on its claim at the non-default contract rate.
A&R and secured lender PRLP 2011 Holdings LLC ("PRLP") entered into a series of forbearance agreements beginning in 2009. In those agreements, A&R prospectively waived the protection of the automatic stay in any future bankruptcy case, which is not uncommon in real property financing transactions involving distressed borrowers.
After filing for bankruptcy, A&R sought court approval of a cash collateral stipulation in which A&R generally ratified its prepetition loan documents, acknowledged that their terms were valid and enforceable, and agreed that its obligations under the agreements were not subject to further challenge. The cash collateral stipulation itself, however, did not contain specific language waiving the automatic stay then in force in the bankruptcy case. In addition, A&R agreed in the cash collateral stipulation to provide adequate protection to PRLP, including monthly payments in the amount of $19,000.
One day after A&R filed the proposed stipulation with the court, PRLP moved to lift the automatic stay on the basis of the waiver provision. A&R later filed a chapter 11 plan within the time frame specified in section 362(d)(3).
At the hearing on PRLP's motion to vacate the stay, A&R contended, among other things, that the prepetition waiver was unenforceable at its inception and thus could not be ratified later because Puerto Rico law does not recognize the validity of any waiver of a right that is not in existence at the time the purported waiver is executed (here, a debtor's right to the protection of automatic stay, which is triggered only upon the filing of a bankruptcy petition).
The court ultimately sided with PRLP. After carefully examining the relevant case law and noting the absence of any controlling precedent in the District of Puerto Rico or the First Circuit, the court granted relief from the stay, stating that "[t]his Debtor, as a debtor in possession, ratified and agreed to be bound by clauses in the Forbearance Agreement which expressly contained a waiver." A&R appealed the ruling to the district court but did not seek a stay pending the appeal.
Case law varies on whether prepetition automatic stay waivers are enforceable. Many courts now evaluate such waivers as part of a multifactor analysis of whether the automatic stay should be lifted, rather than granting stay relief solely on the basis of such a waiver. Triple A&R adds a wrinkle to this analysis in the form of a postpetition general ratification of prepetition loan documents containing such a waiver.
Notably, the court did not address the absence of language in the cash collateral stipulation unequivocally manifesting the debtor's knowing and specific waiver of the stay. Nor did the court comment on what could be viewed as the unseemly "gotcha" element of PRLP's gambit of seeking stay relief one day after having signed a cash collateral stipulation that led A&R to believe that PRLP was cooperating and would refrain from exercising its remedies, at least in the short term.
Triple A&R is a cautionary tale. If, as is sometimes the case, an acknowledgment by a chapter 11 trustee or a debtor-in-possession of the validity, enforceability, or priority of prepetition loan or security agreements or a waiver of claims is part of the quid pro quo for a postpetition loan, extension of credit, or use of cash collateral, appropriate due diligence must be performed to ascertain exactly what the ramifications of such an acknowledgment or waiver are.