Spring 2006-05 Forbearance agreement accelerated

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Number 63
Spring 2006

Forbearance agreement accelerated

In Coastal Fuels of Puerto Rico, Inc. v. Zeeve, 2006 U.S. Dist. LEXIS 7504, the U.S. District Court for the District of Puerto Rico had the opportunity to rule on an acceleration provision in a forbearance agreement and its interplay with a Chapter 11 bankruptcy plan of reorganization.

The settlement

In order to settle pending litigation, defendant Caribbean Petroleum Corp entered into a repayment agreement with plaintiff Coastal Fuels of Puerto Rico, Inc. The settlement stipulated that Caribbean would pay to Coastal the sum of $7.8 million in six annual installments. These payments were personally guarantied by Dad Zeevi through a guaranty document executed simultaneously with the settlement. One of the conditions in the settlement agreement was an acceleration of maturity clause that provided that the whole outstanding sum would become due and payable if payment of an installment was missed. Which is precisely what happened: Caribbean missed the third installment. Caribbean also filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code.

The forbearance

Coastal and Zeevi then subscribed a forbearance agreement, which essentially set a modified payment schedule that included the payment of interest by Zeevi. Any sums paid by Caribbean would be applied to principal, but not to interest.

The plan of reorganization

Meanwhile, the Bankruptcy Court confirmed Caribbean's plan of reorganization, which in turn provided for a different repayment timetable for the outstanding principal. The plan also stated that nothing contained therein was intended to release Zeevi's obligations.

Missed installments

Zeevi made his first two payments under the forbearance agreement, but missed the next two. He subsequently deposited the money in court, after Coastal had sued him for the whole amount.

Coastal claimed that the because of the acceleration provision Zeevi now owed the full balance, not just the sum deposited in court. Zeevi insisted differently, pointing out that Caribbean had timely met all installment due under the plan of reorganization.

The ruling

The District Court sided with Coastal. "His non-compliance with that payment schedule, of course, placed him in default of the Forbearance Agreement. Under the terms of said document, such default had declared consequences: Coastal would no longer forbear pursuing legal remedies or accelerating the maturity of the debt recognized by [Caribbean] in the Settlement Agreement and guaranteed by Zeevi through his Guaranty." As to the bankruptcy plan, the court added that its very terms discarded any release or waiver of the guarantor's obligations.


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