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Getting Spinach Power From a Can of Forbearance Agreement

October 05, 2015, 07:00 AM
Related: Delinquencies

Editor’s Note: In this blog, Andrew Stosberg uses the characters from a well-known comic strip to illustrate the benefits of forbearance agreements when addressing modestly wayward but active accounts. If you’re an equipment lender, maybe you should share this with your counsel ... it’s well worth the read.

Hey counselors, stop me if you’ve heard this one before.

You’re an attorney that routinely represents an equipment leasing or financing company (“Equipment Company”) on many of its business matters. We will generically refer to your loyal client as Popeye Equipment Leasing and Finance LLC (“Popeye”). One day, Popeye contacts you with a new matter. (One of its borrowers/lessees has filed for chapter 11, and Popeye wants you to monitor and protect its interests in the bankruptcy.)

As the call concerning the new matter is concluding, Popeye casually mentions a separate “Oh, by the way” matter to you. The OBTW matter is a seemingly docile situation as described by Popeye:

OBTW, I’ve got an account that’s a little behind under the terms of its agreement/lease. This account is for J. Wellington Wimpy Co. The company’s owner, Mr. Wimpy (“Wimpy”), promised me that “he will gladly pay me Tuesday (of next month) for continued use of my equipment today.” Wimpy’s company seems like a decent enough outfit; he’s generally paid on time – or close to on time – and he’s successfully financed and leased some other pieces of equipment from us in the past. We haven’t heard anything negative on the street about Wimpy’s business. Plus, I grab a burger with Wimpy on occasion, and he seems like a pretty good guy. So I’m gonna give him a pass and let him miss a payment, and then work with him on curing the arrearage the following month or so once a couple of his larger aged receivables finally come through the door. Anyhow, I just thought I’d mention this to you in case Wimpy’s business takes a turn for the worse down the road, and I need to get you involved.

Sound familiar? If so, then you know that there are two general outcomes to the story.

The happy-ending version is that the OBTW Account continues in the manner predicted and hoped for by Popeye. Wimpy struggles paying on time, but his chronic tardiness and inability to remain current is mild and eventually cured or managed without any need for litigation (or threat of litigation). Years later, Wimpy eventually pays his account in full, and Popeye never needs reactive legal assistance from you.

The ominous outcome involves a startling evolution of Wimpy’s account. Months after your initial phone call, you receive a second much-more alarming call from Popeye. During this subsequent call, Popeye advises that Wimpy has stopped paying on the Account. Popeye has heard nothing from Wimpy, and has tried reaching out to Wimpy with several calls and e-mails. Finally, Popeye hears from Wimpy, only to learn that Wimpy has retained Bluto Esquire to handle his account delinquency. Gone is the congenial and conscientious point of contact. Instead, Wimpy is replaced by a militant blowhard attorney that refuses to pay Popeye, and is threatening a variety of lender-liability, product liability and breach of contract counterclaims against Popeye. Over the course of a few weeks, the OBTW matter has abruptly morphed into a WTF matter.

Popeye is upset that it now must spend significant time and money fighting Bluto Esquire in court. The costs and stress associated with contesting these counterclaims are substantial for Popeye. Popeye sees no great options in the future for handling the Wimpy Account: either it 1) walks away from the fight and cuts an unfair deal allowing Wimpy to keep the equipment at a significant discount, or 2) it gets financially battered in a litigious courtroom fight as a result of Bluto’s hyper-aggressive bullying litigation tactics.

How did this happen? Could Popeye, an honest fair and hard-working company, have done something differently to avoid these two losing outcomes? That depends if Popeye’s attorney knew that he/she could serve Popeye some metaphoric spinach in the form of a forbearance agreement, which would have shielded Popeye from Bluto’s bullying litigation tactics, and deterred or prevented Bluto from instigating a nasty and costly fight involving Wimpy’s account.

Attention Lenders: Forbearance Agreements Pack a Punch!

Forbearance agreements can energize Equipment Companies so they are fit for addressing a modestly wayward but active account. Discussed below are four significant ingredients contained in a nourishing forbearance agreement.

First, like any other written contract, a forbearance agreement explicitly memorializes the terms of the workout deal between an Equipment Company and its borrower/lessee (“Debtor”). On many occasions, an Equipment Company may be tempted to rely on a phone call or a series of ambiguous e-mail exchanges to provide the terms of forbearance. Too often, however, this informal approach leads to unintended risks or consequences that affect the account to the future detriment of the Equipment Company, when the Debtor tries to change or ignore the terms of the actual deal. In this situation, the Equipment Company will lack an ironclad reference to dispute the Debtor’s contrary assertions, and may suffer through protracted and costly litigation.

Second, a healthy forbearance agreement should contain a self-serving and favorable narrative that explains the Debtor’s financial difficulties, and the Equipment Company’s (limited) willingness to help address the Debtor under a reasonable workout approach. Although recitals are not typically legally or contractually binding, they nonetheless provide context for the forbearance. Human beings love stories, and judges are human. So why not include a story about a benevolent Equipment Company that a judge may read one day if the matter is disputed and litigated.

Third, a forbearance agreement should contain a buffet of acknowledgements, stipulations and warranties from the Debtor. The Debtor should acknowledge that the (lease) agreement is past-due and payable, that events of default occurred and are ongoing, the Equipment Company provided proper notice of the default(s) to the Debtor, and that the Equipment Company has not waived any defaults, or its rights and remedies relating thereto. In addition, Debtor should stipulate that the (lease) agreement created a legal, valid and binding obligation for Debtor, which is enforceable by Equipment Company; the (lease) agreement complies with all applicable and governing state law; and Debtor has no defenses, counterclaims or rights of set-off. Further, Debtor should ratify and confirm any and all representations, warranties, and covenants set forth in the (lease) agreement (except as to the acknowledged defaults described in the forbearance agreement).

But perhaps the most appetizing component of a forbearance agreement for an Equipment Company is the broad release in the Equipment Company’s favor that the agreement should contain. The forbearance agreement should expressly provide that as a material inducement to the Equipment Company to enter into the agreement, the Debtor releases and forever discharges Equipment Company (and appropriate insiders and affiliates) from any and all known and unknown claims in the universe. As part of any expansive release, the Debtor should further specifically agree and acknowledge that the release for the consideration in the forbearance agreement is complete, final, unqualified, and not subject to any condition precedent or condition subsequent.

So next time you encounter OBTW matter to you, remind the client that it should consider the spinach-empowering benefits of a forbearance agreement when addressing one of its seemingly less problematic delinquent accounts. The spinach-like power of a forbearance agreement may end up protecting some other green that the client truly enjoys.

Andrew D. Stosberg
Attorney | Lloyd & McDaniel, PLC
Stosberg concentrates his practice in federal bankruptcy matters and creditors' rights litigation. He has represented secured creditors, unsecured creditors and creditors’ committees in several complex Kentucky and Southern District of Indiana bankruptcies. Mr. Stosberg is also an active member of the American Bankruptcy Institute and, as a co-editor of the American Bankruptcy Institute Journal, has authored several articles for national publication in the ABI Journal.
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