Opinion ID: 739923
Heading Depth: 2
Heading Rank: 2

Heading: Drop-Dead Clauses

Text: 21 The bankruptcy court in its April 13, 1995 Order Conditionally Modifying Stays included a drop dead clause over the objection of Mendoza. 5 A drop dead clause allows a creditor to exercise its state law remedies upon default of a debtor under a plan without seeking further permission from the bankruptcy court. In re Kennedy, 177 B.R. 967, 975 (Bankr.S.D.Ala.1995) (emphasis added). 22 Mendoza asserts that the bankruptcy court erred by including the drop dead clause in the order since the Bankruptcy Code does not allow a court to impose drop dead clauses over the debtor's objection. Temple contends that such provisions are not uncommon where the automatic lifting of the stay is conditioned on the debtor's failure to make timely payments, coupled with notice and an opportunity to cure. Alternatively, Mendoza contends that the bankruptcy court abused its discretion by including the clause on the basis that the clause is inconsistent with the goals of the Bankruptcy Code. 23 Mendoza relies on the language in Kennedy that if the parties don't agree [to a drop dead provision], both are left to their statutory remedies. Id., 177 B.R. at 975. In addition, the bankruptcy court in Kennedy stated that no section of the Bankruptcy Code requires such relief to be given a secured creditor by a debtor. Id. However, Kennedy involved a secured creditor's objection to confirmation of a proposed Chapter 13 plan where the plan itself did not include a drop dead clause in the event of default by the debtors. We find Mendoza's reliance on Kennedy misplaced. We do not consider Mendoza's strict reading of Kennedy as precluding the bankruptcy court from including drop dead clauses in its orders, whether by agreement of the parties or sua sponte without the parties' agreement. 24 Moreover, a natural reading of Bankruptcy Code § 362 does not preclude the inclusion of drop dead clauses in the bankruptcy court's order to modify the stay. See e.g. United States v. Ron Pair Enter., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989) (employing a plain meaning reading of Bankruptcy Code § 506(b)). Because of the equitable nature of bankruptcy in seeking a balance between debtors and creditors, bankruptcy courts should be afforded the latitude to fashion remedies they consider appropriate under the circumstances, including drop dead orders, as long as the bankruptcy court follows the Bankruptcy Code's statutory mandate. As a discretionary decision, the bankruptcy court's inclusion of a drop dead clause must be reviewed under the abuse of discretion standard. See, e.g., In re Standfield, 152 B.R. 528, 540 (Bankr.N.D.Ill.1993) (citing In re Holtkamp, 669 F.2d 505 (7th Cir.1982)). Based on our review of the record, we conclude that the bankruptcy court did not abuse its discretion by including the drop dead clause in its order Conditionally Modifying Stays. We find Mendoza's other arguments precluding drop dead clauses to be without merit.