The debtor owned and operated a hotel, which included a restaurant and a convention center. The debtor began operations after executing a promissory note (the note) to the bank for a loan secured by a first mortgage lien, an assignment of leases and rents, and “substantially all of the [d]ebtor's assets,” including cash and revenue. The debtor defaulted on the note, and the bank assigned the note, along with a mortgage and loan agreement, to the creditor. The creditor and debtor then signed a forbearance agreement. The forbearance agreement prevented the creditor from collecting on the loan for seventy-five days; however, the debtor was required to pay the creditor interest on three occasions during that period. If the debtor failed to pay in time, then the deed to the debtor’s hotel would pass to the creditor. The forbearance agreement also waived the debtor’s right to an automatic stay upon filing for bankruptcy. When the debtor filed for bankruptcy, the creditor requested that the court enforce the automatic stay waiver of the forbearance agreement and, therefore, allow the creditor to take possession of the hotel. The creditor argued that it sought to prevent the debtor’s property from falling into disrepair, which would significantly diminish the property’s value.
In In re DJK Enters., LLC, No. 24-60126, 2025 Bankr. LEXIS 327 (Bankr. S.D. Ill. Feb. 13, 2025) (opinion not yet released for publication), the bankruptcy court struck down the automatic stay waiver, thereby granting relief to the debtor. The court grounded its decision on the finding that automatic stay waivers are unenforceable as a matter of law. Courts do not enforce automatic stay waivers in non-single asset cases because such a waiver only protects a single creditor, leaving the debtor in possession and other creditors at risk. In this case, if the court enforced the automatic stay waiver, then the rest of the debtor’s creditors would receive nothing because the creditor had an interest in practically all of the debtor’s property. The court then addressed whether the debtor had ceded its ownership interest in the hotel property to the creditor at the time of the forbearance agreement, finding that it had not. The court applied Illinois state law which construes the deed’s transfer as an equitable mortgage, or as an interest in the property rather than as a conveyance of the ownership because the forbearance agreement did not transfer title of the hotel to the creditor upon execution, instead the creditor could only seek to record the deed if the debtor defaulted. The court also noted, as further evidence that the debtor maintained its ownership interest and not the creditor, that the creditor reserved a specific right under the forbearance agreement to foreclose on the property which indicated that it did not have an ownership interest—foreclosure would not be necessary to eliminate subsequent liens against the debtor if the creditor was the owner. The court also noted that under the forbearance agreement, any deed transfer alone did not satisfy the debt, as the forbearance agreement stated that the debtor’s obligation would continue until the underlying debt was paid in full and certain provisions provided that the debtor would remain liable for damages, such as attorney’s fees, in the event of default. Illinois law clearly provides that if a debtor still owes under an agreement following the execution of the deed, “then the whole transaction amounts to a mortgage,” regardless of how the parties otherwise refer to it. Schwartzentruber v. Stevens, 133 N.E.2d 33, 36 (Ill. 1956). The creditor’s last attempt to acquire the property by getting the automatic stay lifted relied on relief for “cause” provided for by Section 362(d)(1) of the bankruptcy code. Whether cause exists is a fact-intensive inquiry and requires a case-by-case balancing test of the totality of the circumstances. The creditor alleged that it would suffer financial harm due to the hotel’s apparent deteriorating condition. However, the hotel manager, who “exhibited a deep knowledge and understanding of the [d]ebtor’s operations,” gave detailed information on the hotel’s more than satisfactory condition and even provided the hotel’s projected profits for the next four calendar years. Furthermore, the manager testified that the hotel stood among the top ten percent in franchise performance. The court also noted that the creditor failed to offer any evidence to indicate that the property was deteriorating or as to its alleged poor financial situation post-petition. Ultimately, the court found there was no cause for granting relief from the automatic stay.
By Conor Doris [email protected]
Edited By Taylor O’Brien [email protected]
Edited By Kristin Meurer [email protected]
Edited By Hayden Mariott [email protected]