Daily Development for
Wednesday, December 30, 1998
by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
Thanks to Jack Murray at First American Title Insurance for the tip on this one.
BANKRUPTCY; AUTOMATIC STAY; RELIEF; WAIVER: Waivers of automatic stay contained in workout agreements may influence the courts, but will not be given blanket enforcement and will be ignored where court feels that change circumstances or other factors justify continuing the stay.
Massachussets Mutual Life Insurance Co. v Shady Grove Tech Center Associates Limited Partnership, 1998 WL 842869 (Bankr. D. Md. 9/2/98).
This case apparently is one that has been followed closely by bankruptcy mavens, perhaps because it appeared likely to deliver a Federal Circuit Court of Appeals decision on the issue of enforceability of bankruptcy waivers in single asset real estate cases.
After an initial bankruptcy court opinion and an appeal to the District Court, however, the case was remanded to the bankruptcy judge with instructions that he make plain whether he was expressly upholding a bankruptcy waiver that appeared in a prior workout agreement between the parties. So we're still waiting in the Fourth Circuit.
The judge responded by indicating that indeed there was such a waiver and that he would be inclined to uphold it under the circumstances of this case, but that in his view such waivers were not automatically enforceable. Further, the judge issued an alternative holding that even absent a waiver relief should be granted in this case because the debtor had not met the burden of proof of showing that the property would be central to a successful plan of organization.
The court alludes at several points in the opinion to the court's first opinion in the case, reported as In re Shady Grove Tech Center Associates Limited Partnership, 216 B.R. 386 (Bkrtcy D. Md. 1998). In particular, the court relies upon authorities cited only in that prior opinion. The editor has provided the relevant excerpt from that opinion here:
"Lender does not assert the enforceability of the first and second parts of the agreement but asserts that the waiver of the right to defend against the motion for relief from stay by the Debtor, in the context of a prepetition restructure agreement, is part of the factual circumstances which justify relief from stay for cause. The courts have uniformly held that a waiver of the right to file a bankruptcy case is unenforceable. See Fallick v. Kehr, 369 F.2d 899 (2nd Cir.1966); In re Heward Bros., 210 B.R. 475 (Bankr.D.Idaho 1997); In re Madison, 184 B.R. 686 (Bankr.E.D.Pa.1995); In re Freeman, 165 B.R. 307 (Bankr.S.D.Fla.1994); In re Adana Mortgage Bankers, Inc., 12 B.R. 989, (Bankr.N.D.Ga.1980), vacated by joint motion of parties, 687 F.2d 344 (11th Cir.1982).
Further, courts have not permitted prepetition waivers of protection afforded by a bankruptcy case to be selfexecuting. In re Darrell Creek Assocs. Limited Partnership, 187 B.R. 908 (Bankr.D.S.C.1995); In re Powers, 170 B.R. 480 (Bankr.D.Mass.1994).
However, there is a split in the reported decisions as to whether or not a prepetition agreement to relief from stay should be afforded any weight in determining the motion for relief from stay for cause. Debtor asserts that the "more modern cases" turn away from an apparent trend to give effect to such agreements under specific circumstances, citing In re Pease, 195 B.R. 431, 432 (Bankr.D.Neb.1996).
This court disagrees with the Debtor's characterization of case law and respectfully declines to follow the decision in the Pease case. . . As acknowledged in the Pease decision, the emerging decisional law is that prepetition agreements waiving defenses to relief from stay may be considered as a circumstance in deciding whether relief from stay for cause should be granted. Id. at 43233. See also In re Darrell Creek Assocs. Limited Partnership, supra. Although it appears that no opinion has been reported in this district or by the Fourth Circuit Court of Appeals concerning this issue, two unreported decisions of this court have granted relief from stay based upon a prepetition agreement. Chief Judge Mannes of this court addressed this issue in the case of In re Merridale Gardens Limited Partnership, No. 9513091PM, (Bankr.D.Md. October 19, 1995), affirmed in unpublished 390 opinion No. S953334 (D.Md. Feb. 28, 1996).
The court stated: [N]o waiver provision will operate automatically, however. Resolution will generally be fact sensitive.... The trend among the courts which have addressed the issue appears to favor granting relief from stay when the debtor has agreed prepetition to such a waiver. Even if the court chooses not to enforce the agreement, it may weaken the debtors [sic] position and cause the court to look more favorably upon the motion. Id., Transcript of Court's Opinion, at 5 (quoting Jeffery Dahlgren, How Do You Get Relief? The Effectiveness of Prepetition Agreements for Relief from the Automatic Stay, NORTON BANKRUPTCY LAW ADVISOR, Sept. 1995, at 11).
" In the second opinion, following remand, the court obliges the reviewing court by reiterating its holding as to the circumstances under which a court will give effect to a workout agreement waiver of the automatic stay and its holding that those circumstances existed in this case.
The court cited four central considerations:
(1) The court must consider the financial sophistication of the borrower.
(2) There must be a demonstration by the creditor that "under the specific facts of the case, the public policy encouraging workout agreements overcomes the policy in favor of affording the debtor the repite accorded by the automatic stay. The court indicates that typically the lender must demonstrate that the lender granted substantial concessions in the workout agreement itself.
(3) the court must examine the impact of the waiver upon the interests of other parties who were not involved in the workout agreement but may be affected by the outcome of the bankruptcy proceeding.
(4) The court must consider whether the debtor, opposing the waiver, can show that circumstances have changed since the waiver was agreed upon such as a reasonable prospect of reorganization within a reasonable time.
The court also makes clear that the likelihood of a successful reorganization may be coupled with its evaluation of other factors in reaching the conclusion as to whether public policy is best served by upholding the waiver.
As indicated above, in this case the court found that the debtor was sophisticated, that significant concessions had been granted in the workout agreement, and that there was no likelihood of a successful reorganization. Consequently, it indicated that it would be inclined to uphold the waiver. The court also indicated, however, that the debtor had no equity in the real estate collateral and therefore, since there was little liklihood of success of a reorganization, the court would have granted relief from the stay even without the waiver.
Comment 1: Certainly the court here is taking baby steps toward encouraging lenders to participate in workout agreements, but the steps may be too tiny to really be meaningful. Even the court's pronouncement here will be reviewed several times before we know the Fourth Circuit position.
Comment 2: In light of the fact that the waiver might be helpful, debtors are going to find lenders quite assertive about the inclusion of such waivers in every piece of paper that might be construed to be a "workout agreement."
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