In In re Bryan Road LLC,1 the United States Bankruptcy Court for the Southern District of Florida considered whether a waiver of the automatic stay provision included in a prepetition workout agreement is enforceable in the debtor’s subsequent bankruptcy. The Bankruptcy Court enforced the waiver and held the creditor was not bound by the automatic stay after engaging in a four-factor analysis of the agreement and the circumstances surrounding its execution. The Bankruptcy Court cautioned, however, that relief from stay provisions are neither per se enforceable nor self-executing. Instead, the Bankruptcy Court found that the enforceability of stay relief provisions must be considered on a case-by-case basis.

Background

In March 2006, Bryan Road LLC (the “Debtor”), the developer of a “dry stack” boat storage facility, borrowed $8.74 million from Florida Community Bank (“FCB”) pursuant to a promissory note, which was secured by (i) a mortgage on the Debtor’s boat storage facility, (ii) a security agreement, and (iii) an assignment of rents from the boat storage facility. Both the mortgage and assignment of rents were properly recorded and the security agreement was properly perfected. The Debtor defaulted on the promissory note, causing FCB to commence foreclosure proceedings in Florida state court (the “State Court Action”). In the State Court Action, the Debtor argued that FCB’s mortgage was void because it improperly described the property that was the subject of the mortgage. The state court disagreed and, on May 23, 2007, entered judgment in favor of FCB, setting July 25, 2007 as the date for a foreclosure sale of the boat storage facility.

Prior to the foreclosure sale, the Debtor and FCB entered into a workout agreement (the “Forbearance Agreement”) pursuant to which the foreclosure sale was moved to September 26, 2007, to provide the Debtor with time to attempt to refinance the debt to FCB. In addition, the Forbearance Agreement provided that, in consideration for entering into the Forbearance Agreement, FCB could seek relief from the automatic stay that would become immediately effective should the Debtor commence a bankruptcy case. The Forbearance Agreement further provided that the final state court judgment would continue to accrue interest at the rate set forth in the state court’s order, and that all causes of action of the Debtor against FCB were waived. Finally, the Debtor acknowledged in the Forbearance Agreement that if it filed for bankruptcy, the filing would be deemed to be intended to stall the foreclosure sale and to have been filed in bad faith.

The Debtor filed its chapter 11 bankruptcy case on September 25, 2007, one day prior to the scheduled foreclosure sale. Exercising its rights under the Forbearance Agreement, FCB filed a motion seeking relief from stay on October 12, 2007. After a hearing on this motion, the Bankruptcy Court held that the Forbearance Agreement was enforceable according to its terms and granted FCB’s motion for relief from stay, allowing FCB to proceed with enforcement of the judgment issued in the State Court Action.

The Legal Standard for Relief from Stay 

Section 362(a) provides that the filing of a bankruptcy petition automatically operates as a stay against “the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title...”2 A party in interest may seek relief from the stay provision of section 362(a) “for cause, including the lack of adequate protection of an interest in property of such party in interest.”3 In support of its motion for relief from stay, FCB contended that (i) the Debtor’s bankruptcy case was filed in bad faith, (ii) the Debtor filed its bankruptcy case on the eve of the foreclosure sale, and (iii) the Debtor is a single purpose entity with few creditors. FCB further argued that these facts were not in dispute as a result of the Debtor’s acknowledgment in the Forbearance Agreement.

Four-Factor Analysis of Prepetition Workout Agreements

Before determining whether sufficient cause existed to lift the automatic stay, the Bankruptcy Court considered whether the stay relief provision of the Forbearance Agreement was, in fact, enforceable. In making this determination, the Bankruptcy Court applied a four-factor test used by the United States Bankruptcy Court for the Middle District of Georgia in its decision in Southwest Georgia Bank v. Desai (In re Desai).4 The court in Desai held that when considering whether a stay relief agreement should be enforced, the court should evaluate: “(1) the sophistication of the party making the waiver; (2) the consideration for the waiver, including the creditor’s risk and the length of time the waiver covers; (3) whether other parties are affected including unsecured creditors and junior lienholders; and (4) the feasibility of the debtor’s plan.”5 The Bankruptcy Court in Bryan Road noted that in Desai, the stay relief provision was part of a confirmed plan of reorganization in an earlier bankruptcy case. The Bankruptcy Court explained that stay relief terms contained in confirmed plans of reorganization are due a greater level of respect than would be the case in a pre-petition agreement because “they have been negotiated in the plan context and approved after notice to all parties in interest...”6 The Bankruptcy Court warned, however, that, even when such a provision appears in a prior confirmed plan of reorganization, further analysis—the four-part test—is critical to a finding that the stay relief term should be enforced. The Bankruptcy Court concluded that the four-factor test of Desai was thus equally applicable to pre-petition workout agreements. After considering the facts presented in Bryan Road, the Bankruptcy Court found that all four factors weighed in favor of enforcing the stay relief provision of the Forbearance Agreement.

With respect to the first factor, the Bankruptcy Court noted that at the time the Forbearance Agreement was executed, the Debtor was represented by an experienced bankruptcy attorney, who was fully capable of understanding the rights being waived pursuant to the Forbearance Agreement and of explaining the consequences of this waiver to the Debtor. The analysis of the second factor was less clear. In exchange for waiver of the automatic stay, the Debtor received a two-month period within which to refinance its FCB loan with another lender. The Bankruptcy Court explained that while two months is a short period of time, this was all the consideration the Debtor wanted at the time it entered into the Forbearance Agreement. Thus, the consideration was sufficient to warrant enforcement of the stay relief term.

The Bankruptcy Court next addressed the third factor: other parties affected by enforcement of the stay relief provision. In addition to FCB, the Debtor had two junior mortgageholders and a handful of unsecured creditors, holding approximately $973,000 in claims against the Debtor’s estate. The two junior mortgages, which represented over $650,000 of the $973,000 in claims, were disputed by the Debtor, and the Debtor, which had filed a disclosure statement, had reserved the right to object to these claims. The Bankruptcy Court found that, although the junior mortgageholders would clearly be affected by any relief from stay granted to FCB, these creditors could protect their interests in FCB’s foreclosure action through their state court rights. The Bankruptcy Court added that it was unlikely that the Debtor’s unsecured creditors would receive any distribution from the Debtor’s bankruptcy estate, given the size of FCB’s secured claim and the rapidly deteriorating condition of the Debtor’s business.

The Bankruptcy Court then addressed the feasibility of the Debtor’s proposed plan of reorganization, the fourth Desai factor. The Bankruptcy Court explained that the viability of the Debtor’s plan rested on the value of the Debtor’s remaining boat slip units; the Debtor was in the process of selling individual storage units within its facility. The Bankruptcy Court evaluated the multiple appraisals of these storage units, which were prepared on behalf of the Debtor. The assumptions underlying the appraisals raised concerns for the Court. In particular, the Court was troubled that the appraisals were based on a fair market value developed by the appraiser, as opposed to prices at which the Debtor was actually able to sell its units. Further, the appraisals did not account for the Debtor’s failure to sell any units in the post-petition period. For these reasons, the Bankruptcy Court found that, for purposes of FCB’s relief from stay motion, the Debtor’s plan was not feasible, militating in favor of enforcement of the terms of the Forbearance Agreement. Accordingly, and for the reasons discussed earlier in its decision, the Bankruptcy Court found that the stay relief term of the Forbearance Agreement was enforceable.

Finally, the Bankruptcy Court turned to the question of whether cause existed to lift the automatic stay pursuant to section 362(d)(1). Given the enforceability of the stay relief provision in the Forbearance Agreement and the clear infeasibility of the Debtor’s plan, the Bankruptcy Court found sufficient cause to grant FCB’s motion and lift the automatic stay.

Conclusion

The Bankruptcy Court’s decision in Bryan Road strengthens the position of creditors who, in an effort to provide the debtor with time to reorganize its business without court intervention, enter into workout agreements pursuant to which the debtor waives or limits its right to invoke the protections of the automatic stay in any future bankruptcy case. Despite such encouraging news for creditors, the Bankruptcy Court cautioned that pre-petition agreements to waive the automatic stay should not be deemed per se valid or self-executing. In order to enforce a pre-petition agreement granting relief from stay, the enforcing party must seek court approval of the agreement. Whether such court authorization is obtained, in turn, will depend heavily on the facts of the case.

In Bryan Road, there were few creditors and the amount of the claims asserted by these creditors was minimal in comparison to the claim asserted by the creditor who had obtained the stay relief provision. Further, the Debtor was disputing the two largest claims and, because the Debtor was not likely to successfully reorganize, unsecured creditors were not expected to receive any distribution from the Debtor’s estate. Creditors should thus approach the decision in Bryan Road with some level of caution. When the debtor’s chances at reorganizing look promising, a creditor may find that a court will refuse to enforce a pre-petition lift stay provision. In those cases, the creditor will once again need to resort to a showing of “cause” under section 362(d) before it will be permitted to take action to collect its debt.