Prepetition Stay Waivers: Which Way Is The Wind Blowing?

In re Triple A & R Inv., Inc., 519 B.R. 581 (Bankr. D. P.R. 2014) –

A mortgagee moved for relief from the automatic stay based on the debtor’s prepetition consent to stay relief.  The debtor argued that a prepetition waiver was unenforceable.

In 2009 the debtor entered into a forbearance agreement with its lender.  The debtor stipulated in the Agreement that “Bank will be entitled to an immediate and absolute lifting of any automatic stay of the enforcement of Bank’s remedies under this Agreement, the Forbearance Documents and the Loan Documents, at law or in equity (including without implied limitation, the provisions of 11 U.S.C. §362, as amended).”  The debtor also agreed that it would not contest any application for relief from the stay.  This agreement was ratified in 2010.

In 2012 the debtor entered into a second forbearance agreement.  This forbearance agreement also included a consent to relief from the automatic stay:  As inducement for the continued forbearance, the debtor agreed that the lender would be entitled to relief from any automatic stay under Section 362 and “expressly and unconditionally waives the benefit of such automatic stay and consents and agrees to raise no objection to such relief.”

The 2012 agreement further recited that consenting to relief from the stay would not prejudice unsecured creditors since the assets were fully encumbered and the debtor had no equity in the assets.  Thus the filing of a bankruptcy would “(i) be for the sole purpose of delaying the Creditor’s efforts to realize and collect upon the Collateral and/or pursuant to the provisions and terms set forth in this Agreement and (ii) constitute a bad faith bankruptcy filing under the Bankruptcy Code.”

In reviewing the state of the law on prepetition stay waivers, the bankruptcy court commented that historically stay waivers were considered unenforceable as against public policy.  However, there appears to be a trend towards enforcement of the waivers.  The court attributed this to balancing the policy in favor of out of court workouts against the policy in favor of protecting creditors.

The court identified three approaches taken by courts, commenting that the third approach has been gaining ground:

(1) uphold the stay waiver in broad unqualified terms on the basis of freedom of contract;

(2) reject the stay waiver as unenforceable per se as against public policy; and

(3) treat the waiver as a factor in deciding whether “cause” exists to lift the stay.

The court emphasized that a secured creditor must obtain relief from the automatic stay from the bankruptcy court even if a debtor’s waiver is enforceable.

The debtor made several arguments.  First it contended that the waiver was null and void on the basis that state law required that the right to be waived exist at the time of the waiver, and that it lacked capacity to act on behalf of the debtor-in-possession that arises in connection with a bankruptcy case.  The court brushed this argument aside based on its conclusion that the case law cited was “wholly unconvincing.”  The court gave more credence to the debtor’s argument that in the context of a single asset real estate case a prepetition waiver should be unenforceable since it was in essence the equivalent of a waiver of the right to file bankruptcy (which should not be enforceable.)

However, in connection with negotiating an order authorizing the debtor to use cash collateral, the debtor ratified the “Loan Agreements, the Collateral and Loan Documents.”  It acknowledged that its obligations under these agreements were “valid, binding and enforceable in all respects.”  Further, the obligations under these agreements “shall not be subject to any other or further challenge.”

Since “Loan Documents” specifically included the forbearance agreements with the prepetition stay waivers, the debtor in effect ratified and agreed post-petition to the lender’s entitlement to relief from the automatic stay.  Given this factor, the court found that the debtor’s waiver was enforceable and granted the lender relief from the automatic stay.

It is always risky to agree to a provision on the basis that it will not be enforceable in bankruptcy.  In general you can usually find a bankruptcy case somewhere that supports any argument that you might wish to make.  In addition, as suggested by the opinion, even if it appears that case law is fairly well settled at the time of negotiations, it may evolve over time.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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