In re Chatham Parkway Self Storage LLC: Court Supplies Disputed Terms to Post-confirmation Loan Documents where Plan was Silent | Practical Law

In re Chatham Parkway Self Storage LLC: Court Supplies Disputed Terms to Post-confirmation Loan Documents where Plan was Silent | Practical Law

The US Bankruptcy Court for the Southern District of Georgia, in In re Chatham Parkway Self Storage, LLC, held that the Court had the authority to supply "commercially reasonable" terms to loan documents contemplated by a confirmed plan of reorganization where the plan was silent and that did not alter any of the plan's provisions.

In re Chatham Parkway Self Storage LLC: Court Supplies Disputed Terms to Post-confirmation Loan Documents where Plan was Silent

by Practical Law Bankruptcy & Restructuring
Published on 22 May 2014 • USA (National/Federal)
The US Bankruptcy Court for the Southern District of Georgia, in In re Chatham Parkway Self Storage, LLC, held that the Court had the authority to supply "commercially reasonable" terms to loan documents contemplated by a confirmed plan of reorganization where the plan was silent and that did not alter any of the plan's provisions.
On March 3, 2014, the US Bankruptcy Court for the Southern District of Georgia, in In re Chatham Parkway Self Storage, LLC, held that the Court had the authority to supply "commercially reasonable" terms to loan documents contemplated by a confirmed plan of reorganization where the plan was silent and that did not alter any of the plan's provisions (507 B.R. 13 (Bankr. S.D. Ga. 2014)).

Background

Chatham Parkway Self Storage, LLC (Debtor) manages a self-storage facility located on a tract of land it owns in Chatham County, Georgia (Property). Darby Bank assigned Ameris Bank (Ameris) its interest in a $6 million loan it made to the Debtor, secured by a first-priority interest in the Property. On November 2, 2012, the Debtor filed a voluntary Chapter 11 petition.
After filing two proposed plans to which Ameris objected, the parties entered mediation, reached an agreement and filed an amended plan which the Court confirmed on July 22, 2013. The plan required that new loan documents be executed by its effective date, September 6, 2013, but the Court extended this deadline to September 13, 2013 and set out the following material terms of the loan repayment:
  • The secured claim amount.
  • Retention of the existing lien.
  • Treatment of the twelve initial interest-only payments.
  • Treatment of the remaining amortized payments.
  • Payment due dates.
  • Interest rates.
  • Final balloon payment.
  • Effects of prepayment.
  • Responsibilities of the guarantors.
  • Consequences of default.
The plan also provided that the loan documents include provisions requiring the Debtor to deliver certain financial information about itself and its guarantors.
After reviewing Ameris's draft of the loan documents, the Debtor submitted its own "dramatically different" version of the loan documents to Ameris for execution. Ameris's version was its standard form loan agreement, which the Court felt was the better starting point for its ruling on the disputed issues. The parties disagreed on 12 specific terms and provisions that were not spelled out in the plan, but after negotiating, they narrowed the issues to four, which involved:
  • The late payment charge. Ameris objected to the inclusion of a grace period for late payments. The Debtor argued that, because of the "tortured history" between the parties, a 10-day grace period should be included to protect it from a technical default, such as a delay in mail service.
  • The death of any guarantor constituting an event of default. Because two experienced co-owners guaranteed the loan, the Debtor argued that the death of a single guarantor would not put Ameris at risk and therefore an event of default should only be triggered by the death of both guarantors.
  • The grace period to clear disputes over tax compliance. Ameris proposed that this grace period should be 30 days, while the Debtor argued that because governmental officials can sometimes be slow to clear disputes, this period should be 90 days.
  • Any material adverse change to the financial prospects of the Debtor constituting an event of default. Ameris proposed a material adverse change (MAC) clause provision with no qualifications, while the Debtor proposed that the MAC clause be qualified with a "reasonable belief" or "good-faith" standard.
On November 1, 2013, the Debtor filed a motion to compel Ameris to execute its version of the loan documents, or alternatively to order further mediation or to hold a hearing and determine the appropriate terms to be included in the loan documents.

Outcome

The Court held that it had authority under section 1142(b) of the Bankruptcy Code, which governs implementation of a Chapter 11 plan, to direct the parties to execute the loan documents to protect the confirmation order and aid in the plan's execution. The Court noted that the Collier on Bankruptcy treatise states that under section 1142, a court has the authority to order a party to execute a security agreement, mortgage or similar instrument if the plan provides that a claim is to be secured by property of the estate. The Court reasoned that if a court has this authority, then it would have that same authority to order a party to execute an instrument expressly called for by the plan. In addition, the Court noted that because the extended deadline for executing the loan documents had passed and the parties were in default of the plan, it had the authority to supply commercially reasonable terms and conditions to the loan documents to protect the confirmation order and aid in the plan's execution.
The Court acknowledged that other courts have refused to order the execution of an agreement referred to in the plan because the material terms of the agreement were not included in the plan. However, in this case, the plan contained "sufficient agreed-upon material terms to infer a meeting of the minds between the parties and a willingness to be bound by [l]oan [d]ocuments incorporating these terms." Further, the Court noted that "it is not reasonable to expect a plan of reorganization in bankruptcy to contain the amount of minute detail that is typically found in commercial loan documents" which presumably "is why the [a]ddendum called for the parties to execute [l]oan [d]ocuments after confirmation."
The Court then went on to cite caselaw supporting a court's ability to "clarify a plan where it is silent or ambiguous," and to "interpret plan provisions to further equitable concerns" where supplying missing terms and conditions would in no way alter a material provision of a confirmed plan. Therefore, the Court held that it had the authority to supply commercially reasonable terms and conditions to the loan documents where the plan was silent and which did not alter any provision of the plan.
The Court held that the commercially reasonable missing terms were:
  • A 10-day grace period for late payments.
  • The death or termination of only both guarantors would trigger an event of default.
  • A 90-day grace period to remove any tax lien, levy or writ from the property.
  • The addition of a good faith qualification to the MAC clause.

Practical Implications

This decision is a reminder that relying on a term sheet and executing final documents after confirmation of a plan leaves open the risk that the court may intervene if the parties cannot agree on all of the terms of the agreements contemplated by the plan. Parties can avoid this outcome by negotiating final agreements and incorporating them into the plan, or at least mitigate this risk by negotiating a term sheet that is as detailed as possible and contains all material terms.