Real Estate Strategies Update – Swap Agreements as Exempt Transactions under the Automatic Stay Protections of the Bankruptcy Code

    By Real Estate Strategies Group

    The swap agreement is an important tool for Lenders and Borrowers entering into new real estate financing arrangements. One significant benefit is that by entering into a swap agreement, the parties are able to fix the interest rate by swapping the otherwise applicable floating rate for a fixed rate. Another key benefit to a swap agreement is the protections offered by Sections 362(b)(17) and 560 of the Bankruptcy Code, which insulate swap agreements from certain effects of the bankruptcy of either party.

    Swap agreements have received particular attention recently in connection with the automatic stay in bankruptcy. Section 362 of the Bankruptcy Code provides for an automatic stay on action by creditors enforcing their rights against debtors who have filed a Chapter 11 bankruptcy petition. Section 362(b)(17) provides an exception to the automatic stay for swap participants by permitting a swap participant to exercise its contractual rights under any swap agreement or any security agreement forming a part of or related to any swap agreement, or of any contractual right to offset or net out any termination value, payment amount, or other transfer obligation arising under or in connection with one or more such agreements, including any master agreement for such agreements.

    Therefore, in spite of the automatic stay, some actions by the creditor who is also a party in a swap agreement are permitted by this exception subsequent to the Chapter 11 filing of the debtor and swap counterparty. If the terms of the swap agreement include a provision that the bankruptcy of a participant is an event of default giving rise to a right to terminate the swap agreement, the creditor may take action to liquidate, terminate or accelerate the swap agreement pursuant to Section 560 of the Bankruptcy Code without violating the automatic stay. Among other benefits, this provision gives the creditor swap participant the ability to terminate the swap, halting the accrual of losses while also fixing the amount owed by the petitioning party. However, it is important to note that if the decision is made to terminate the swap agreement, the swap participant may still have claims against the bankrupt swap party under Section 562 of the Bankruptcy Code. If a swap participant liquidates, accelerates, or terminates a swap agreement, damages are measured as of the date of such liquidation, acceleration, or termination.

    As the swap agreement is being prepared and negotiated both parties, or participants, in the swap transaction should be aware of the rights and protections of the swap agreement, especially in bankruptcy proceedings.

    Otto W. Konrad is a partner in the firm’s Richmond office. His practice includes a variety of commercial real estate and includes the development and leasing of shopping centers, multi-site retail establishments, office buildings and multi-family housing projects. He also has experience in RESPA, commercial bankruptcy and commercial foreclosures.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.