A recent Seventh Circuit decision, In re Airadigm Communications, Inc., 519 F.3d 640 (7th Cir. 2008), illustrates the importance of secured creditors actively protecting their interests in bankruptcy. In Airadigm, the FCC’s perfected secured interests in spectrum licenses were jeopardized because of a reorganization plan that did not provide for a continuing security interest in the licenses and because of the bankruptcy court’s ability under Section 1141(c) of the Bankruptcy Code to release third parties from nonconsensual liens.

Although the FCC was largely protected by federal communications laws, Airadigm reminds secured creditors that, even where they have validly perfected interests, property that is “dealt with” by a bankruptcy plan emerges from the plan free and clear of all claims and interests. Property can be dealt with if the plan either expressly or impliedly gives some indication that a court has exercised some power under the bankruptcy code to affect the creditor's interests, by extinguishing, impairing, or otherwise impacting the interest.

The Airdaigm court discussed at length In re Penrod, a 1995 7th Cir. decision, to emphasize this point. In Penrod, a bank filed a proof of claim to assert its security interest in the debtor's hogs. The reorganization plan required the debtors to repay the bank on its loan plus interest, but it said nothing about the security interest in the hogs. Subsequently, the debtors sold the hogs for slaughter, and the bank tried to enforce its security interest in the proceeds of the sale, but the Seventh Circuit held that the bank had given up its security interest in exchange for the stream of payments under the plan.

Airdaigm and Penrod illustrate that secured creditors should consult with counsel to be sure they are fully protected in reorganization plans. Secured creditors who participate in a debtor’s bankruptcy will lose their interest if the reorganization plan does not explicitly preserve that interest.

Automatic Stay Waiver Provision in Forbearance Agreement May Be Enforceable

In February of this year, a Florida bankruptcy court enforced a contractual agreement in a forbearance agreement granting a lender relief from the automatic stay in the event of the borrower’s bankruptcy. The Debtor in In re Bryan Road, LLC, 382 B.R. 844 (Bankr. S.D. Fla. 2008), executed a forbearance agreement with the senior mortgage-holder on the Debtor’s boat storage facility. The agreement stated in part that the lender would be granted relief from the automatic stay in the event of the Debtor’s bankruptcy filing as consideration for entering into the agreement. Subsequently, the Debtor filed for bankruptcy protection.

To determine whether the stay waiver provision should be enforced, the court applied four factors from In re Desai, a 2002 Southern District of Georgia case: (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. While the court noted that it may consider circumstances beyond these four factors, it concluded that the Desai factors weighed in favor of enforcing the stay relief provision at issue.

Bryan Road indicates that courts may be willing, in certain circumstances, to enforce contractual provisions for stay relief. Both creditors and debtors should consult with bankruptcy professionals prior to entering into forbearance agreements to weigh the benefits and risks accompanying stay relief provisions.

Bankruptcy Court Permits Debtor/Supplier To Retain Tooling It Possesses But Does Not Own

Earlier this year, in In re Plastech Engineered Products, Inc., et al., a bankruptcy court declined to lift the automatic stay to permit Chrysler to take possession of tooling, which it owned and had an immediate possessory right to obtain under applicable contracts, from the Debtor, a tier-one automobile supplier. It was undisputed that Chrysler paid for and owned the tooling, which it needed to be able to transfer production to another supplier and avoid a disruption in its automobile production. Nevertheless, the bankruptcy court held that the tooling was property of the debtor's bankruptcy estate due to the debtor's "bare possessory interest" and ultimately concluded that "cause" did not exist lift to the automatic stay because the debtor and possibly other creditors would suffer economic harm if the stay were lifted.

Plastech may be relied upon by debtors to attempt to retain possession of property they do not own, at the time of their bankruptcy filings, to the detriment of the actual property owners. The application of the Plastech decision may not be limited to manufacturing, and could possibly be expanded to other industries and businesses. In the manufacturing context, a debtor/supplier's ability to retain tooling, molds, documentation, etc. that is owned by a manufacturer could lead to post-petition disruptions in the manufacturer's production. Manufacturers and other business owners may be able to take steps to protect themselves from imposition of the Plastech decision by including automatic stay waivers in their contracts with suppliers.

If you have questions about these recent legal developments, please contact any of the attorneys in Taft's Business Restructuring and Creditor Rights Practice listed above.