cma forbearance issues created by the in re moon decisions.

Lemon

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05-02-2025

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The In re Moon decisions, a series of bankruptcy court rulings, have significantly impacted the landscape of Chapter 11 bankruptcies, particularly concerning the treatment of commercial mortgage-backed securities (CMBS) and the associated forbearance agreements. These rulings have introduced complexities and uncertainties, creating several key issues for borrowers and lenders alike. This analysis explores the significant forbearance issues stemming from In re Moon, highlighting the challenges and potential solutions.

Understanding the In re Moon Impact on CMBS Forbearance

The In re Moon cases centered around the question of whether a borrower's acceptance of forbearance under a CMBS loan agreement constitutes a rejection of the executory contract under the Bankruptcy Code. Prior to these rulings, there was a degree of ambiguity concerning the treatment of forbearance agreements in bankruptcy. The In re Moon decisions clarified (or arguably complicated) this, holding that acceptance of forbearance could be considered a rejection of the underlying loan agreement, leading to significant consequences.

Key Forbearance Issues Arising from In re Moon:

• Increased Uncertainty for Borrowers: The rulings created uncertainty for borrowers seeking forbearance. The fear of inadvertently rejecting the underlying loan agreement through acceptance of forbearance provisions could deter borrowers from pursuing such arrangements, leaving them with fewer options to navigate financial distress. This uncertainty can lead to more debtors resorting to Chapter 7 liquidation, rather than the potentially more beneficial Chapter 11 reorganization.

• Challenges for Lenders in Negotiating Forbearance: Lenders are now faced with the increased challenge of negotiating forbearance agreements that are both effective and bankruptcy-proof. The risk of a court deeming the acceptance of forbearance as a rejection of the contract necessitates more cautious and legally sound agreement drafting. This adds complexity and time to the process, potentially delaying crucial financial restructuring.

• Disputes over Cure Periods: The In re Moon decisions have also impacted the application of cure periods within forbearance agreements. The interpretation of what constitutes a "cure" and the timeframe within which it must be achieved can become contentious, leading to further litigation and delays. The risk of a court deeming a cure attempt insufficient can severely jeopardize the viability of a reorganization plan.

• Impact on CMBS Market Liquidity: The added legal uncertainty surrounding forbearance agreements significantly impacts the liquidity of the CMBS market. The increased risk associated with granting forbearance may discourage lenders from offering such agreements, limiting the options available to distressed borrowers and potentially causing a ripple effect throughout the commercial real estate sector.

Navigating the Challenges: Potential Solutions and Mitigation Strategies

While the In re Moon decisions present significant challenges, several strategies can help mitigate these issues:

• Careful Drafting of Forbearance Agreements: Precise and detailed language in forbearance agreements is crucial to avoid ambiguities that might lead to disputes concerning rejection of the contract. Collaboration with legal counsel experienced in bankruptcy law is paramount.

• Clear Communication and Transparency: Open and transparent communication between borrowers and lenders throughout the forbearance process is essential. Early engagement and a collaborative approach can minimize the potential for misunderstandings and disputes.

• Proactive Risk Assessment: Both borrowers and lenders must conduct thorough risk assessments before entering into forbearance agreements. Understanding the potential implications of the In re Moon decisions and having a clear strategy for addressing them is vital.

• Exploration of Alternative Restructuring Options: In some cases, exploring alternative restructuring options outside of formal forbearance agreements might be a more prudent approach given the added risk.

The In re Moon decisions have undeniably created a more complex environment for negotiating and implementing forbearance agreements within the CMBS context. While the decisions aim to clarify the application of bankruptcy law, they have inadvertently introduced greater uncertainty for borrowers and lenders. Proactive strategies, including careful agreement drafting, transparent communication, and proactive risk assessment, are crucial for navigating these challenges and preserving the viability of the CMBS market. Further judicial interpretation and clarification will be needed to fully resolve the issues raised by these important rulings.