Courts have been split on whether a pre-petition agreement whereby the debtor agrees to waive the protection of the automatic stay under Section 362 of the Bankruptcy Code (“Code”) is enforceable. There are two general approaches: some courts have found that pre-petition waivers of the automatic stay are per se unenforceable; other courts have found that pre-petition waivers of the automatic stay are enforceable, because they encourage out of court restructuring and settlements, or at a minimum are a factor which weighs in favor of a court granting relief from the stay; and there are courts which have found that pre-petition waivers.
I. Prepetition Waivers Unenforceable.
Matter of Pease, 195 B.R. 431 (Bankr.D.Neb.1996) concluded that pre-bankruptcy waivers of the automatic stay under §362 are unenforceable, per se, because (i) the waivers are invalid due to the debtor’s lack of capacity to act on behalf of the debtor-in-possession; (ii) the waiver is unenforceable under specific provisions of the Code which limit the effectiveness of certain contractual provisions that take effect upon the filing of the bankruptcy case; and (iii) the Code extinguishes the private right of freedom to contract around its essential provisions.
With respect to its first argument, Pease noted that prior to the commencement of a bankruptcy case, the debtor has the capacity to enter into agreements binding upon the debtor under applicable non-bankruptcy law. Upon the commencement of a Chapter 11 bankruptcy case, the debtor becomes a “debtor-in-possession” with a fiduciary duty to creditors and rights and obligations under federal law. In this sense, the Chapter 11 debtor is a separate and distinct entity from the pre-bankruptcy debtor. Therefore, he cannot waive the automatic stay until after the bankruptcy case is commenced, and only then after notice and a hearing as required by Fed.R.Bankr.P. 4001(d).
Second, Section 363(l) of the Code invalidates contractual provisions purporting to waive the automatic stay, because enforcement of such waivers deprive the debtor-in-possession of the ability to use, sell or lease the lender’s collateral. The enforcement of a pre-petition waiver of the automatic stay would impermissibly circumvent §363(l). Third and finally, the Code extinguishes the private right to contract around its central provisions. According to the court, this conclusion follows from the comprehensive nature of the Code and its underlying purpose of providing a national, uniform, collective remedy to debtors and creditors. Other courts have also refused to enforce prepetition waivers of the automatic stay, see In re DB Capital Holdings, LLC, 454 B.R. 804, 816 (Bankr.D.Colo.2011) (citing and adopting Pease as support for its decision to deny enforcement of a pre-petition waiver, but still granting relief from the stay on other grounds); Farm Credit, A.C.A. v. Polk, 160 B.R. 870 (M.D.Fla.1993) (pre-petition agreements waiving the automatic stay are not per se binding on a debtor); In re Sky Group Intl, Inc., 108 B.R. 86 (Bankr.W.D.Pa.1989); (Pre-petition agreements waiving the protection of the automatic stay are not self- executing and are not binding per se on the debtor); In re Jenkins Court Assocs., 181 B.R. 33 (Bankr.E.D.Pa.1995) (declining to enforce pre-petition agreement with lender waiving automatic stay without full development of facts); and In re Madison, 184 B.R. 686 (Bankr.E.D.Pa.1995) (debtor’s agreement to temporarily forego bankruptcy protection violates public policy and is unenforceable).
In In re Trans World Airlines, Inc., 261 B.R. 103, 114 (Bankr.D.Del.2001) bankruptcy court in Delaware impliedly adopted Pease, by relying on its reasoning to hold that a debtor may not, in a pre-petition agreement, assume or reject an executory contract. The court held that a debtor’s right to reject a pre-petition contract under Section 365 of the Code was similar to the protection offered by §362 and the automatic stay, relying on Pease. In holding that the debtor could not, pre-petition, reject or assume a executory contract, the court held, “I also do not believe TWA has the capacity to waive its authority under §365 on behalf of the debtor-in-possession in disregard to the rights of third parties not bound by the prepetition agreement.”
The holding in Trans World Airlines suggests that a Delaware court will not enforce a pre-petition agreement to waive the protections of the automatic stay, particularly where the agreement is applied to third-party creditors who were not a party to the agreement. Additionally, while the Third Circuit has not directly ruled on the issue, it has stated that, “[b]ecause the automatic stay serves the interests of both debtors and creditors, it may not be waived and its scope may not be limited by a debtor.” Acands, Inc. v. Travelers Cas. and Surety Co., 435 F.3d 252, 259 (3rd Cir.2006) (internal citations omitted).
II. Prepetition Waivers Are or Can Be Enforceable.
However, a recent trend in decisional law, particularly in the context of single asset cases, has been to enforce contractual waivers of the automatic stay, or to find that they weigh heavily in favor of granting relief from the stay. See In re Cheeks, 167 B.R. 817 (Bankr.D.S.C.1994) (Pre-petition agreements are enforceable on policy grounds encouraging out of court restructuring and settlements, but waivers are not self-executing and are not binding on third parties); In re Powers, 170 B.R. 480 (Bankr.D.Mass.1994) (same); In re Club Tower, L.P., 138 B .R. 307 (Bankr.N.D.Ga.1991) (Pre-petition agreement granting creditor relief from the automatic stay was binding on the parties where bankruptcy was filed in bad faith); In re Citadel Properties, Inc., 86 B.R. 275 (Bankr.M.D.Fla.1988) (same); In re Gulf Beach Dev. Corp., 48 B.R. 40 (Bankr.M.D.Fla.1985) (holding that while debtor cannot be contractually precluded from filing bankruptcy, the stay would be lifted for cause); compare In re Deb-Lyn, Inc., No. 03–00655–GVL1, 2004 WL 452560, *4 (N.D.Fla. Feb. 20, 2004) (court refused to enforce pre-petition waiver of automatic stay, or to grant creditor relief from stay, where the debtor was engaged in a large, successful business enterprise, and was not a bad faith, single-asset entity, with no possibility of reorganization).
In In re Atrium High Point Limited Partnership, 189 B.R. 599, 607 (M.D.N.C.1995), the court enforced a pre-petition agreement wherein a debtor agreed to waive any objection to a creditor’s petition for relief from the stay. In that case, the debtor was a single asset entity, and the court concluded “enforcing Debtor’s agreement does not violate the public policy concerns that agreements which prohibit a borrower from filing for bankruptcy violate … the Debtor in the present case also enjoys the various protections and rights afforded by the Bankruptcy Code. Although an order of this court granting relief from stay may debilitate the Debtor somewhat, the Debtor accepted that risk when it agreed to the prepetition waiver of the automatic stay.” The court concluded, however, that the pre-petition waiver could not overcome the objections of other creditors. Ultimately, the court concluded that while the waiver could demonstrate cause for relief from the stay, that cause was limited only to the debtor’s interest, and could not be used to demonstrate cause against the interest of other creditors.
In In re South East Financial Associates, Inc., 212 B.R. 1003 (Bankr.M.D.Fla.1997), the court held that prepetition waivers are not invalid per se. A prepetition waiver of bankruptcy benefits may be binding unless the agreement was obtained by coercion, fraud or a mutual mistake of material fact. See, In re Orange Park South Partnership, 79 B.R. 79 (Bankr.M.D.Fla.1987), citing Duncan Properties, Inc. v. Key Largo Oceanview, Inc., 360 So.2d 471 (Fla.3d DCA 1978). Nonetheless, such waivers are not self-executing and are not binding on third parties. Thus, if a waiver adversely effects other creditors, it is unlikely that the waiver will be enforced. In South East Financial, although the debtors voluntarily executed a stipulation waiving the right to benefit from the automatic stay, the court found that it would be inappropriate to enforce the prepetition waiver. South East Financial had eleven scheduled general unsecured creditors. These were third parties who were not bound by the stipulation and who would be detrimentally impacted by dismissal or modification of the automatic stay.
In In re Shady Grove Tech Centers Assocs., 216 B.R. 386 (Bankr.D.Md.1998), a detailed restructuring agreement was entered into between the debtor and Massachusetts Mutual Life Insurance Company (the “Lender”). The agreement contained a 3-tiered waiver of the right to seek relief under the Code. At the first tier, the agreement provided that the debtor could not to file a petition for bankruptcy before November 1, 1998. At the second tier, the agreement provided that if the debtor should become a debtor in bankruptcy, notwithstanding the first tier promise, that the stay imposed by 11 U.S.C. §362(a) would be waived as to actions by the Lender against the property. Finally, the agreement provided that if §362 did apply to stay the lender’s foreclosure action, the debtor waived the right to defend against a motion for relief from the stay. Citing to the unpublished decision of In re Merridale Gardens Limited Partnership, No. 95-1-3091-PM, (Bankr.D.MD. October 19, 1995) the court stated:
No waiver provision will operate automatically, however, resolution will generally be fact sensitive . . . . The trend among the courts which have addressed the issue appears to favor granting relief from the stay when the debtor has agreed prepetition to such waiver. Even if the court chooses not to enforce the agreement, it may weaken the debtor’s position and cause the court to look more favorably upon the motion.
Stated another way, a prepetition agreement that provides party consent to relief from stay, or provides that the debtor will not contest a motion for relief from stay, may be considered a factor in determining whether cause exists for relief from stay. Quoting from the Merridale Gardens, the court noted as follows:
I believe that in the final analysis waiver is a factor in the decision as to whether cause exists to modify the stay, and as in so may bankruptcy cases it is a balancing process that requires consideration of a number of factors. I have set forth some of those factors. One, the sophistication of the party making the waiver; two, the proximity in time between the waiver and the filing of the bankruptcy case; three, the consideration for the waiver; that is are there substantial concessions, is the risk assumed by the lender, that is if the lender is undersecured does the lender go further out, is the debtor under water, what is the length of the forbearance. Another factor I would consider is the feasibility of the debtor’s plan going back to the water front, is the plan one of a rising tide raising all boats; is it a Cinderella plan that “some day my prince will come;” is it a plan that depends upon either lightning or flood to convert an inventory into cash, or is there positive cash flow. Finally, the last factor is whether other parties are affected, is there a large unsecured group of creditors, are there junior liens that will be wiped out, are there subordinated leases that will disappear, are there employees who will have a job if the stay is terminated?
In In re Excelsior Henderson Motorcycle Mfg. Co., 273 B.R. 920 (Bankr.S.D.Fla.2002), the court also found a prepetition waiver enforceable. This case involved serial Chapter 11 cases. During the first case, the debtor proposed a plan of reorganization pursuant to which it restructured its secured debt. The plan required that one of the terms of the new Note was a consent to stay relief in the event of a later bankruptcy filing. The court found this agreement enforceable in the second case. It noted that the debtor bargained away the protection of the automatic stay as part of a plan of reorganization which was confirmed by the court. Id. at 924. In addition, the court found that enforcement of the agreement furthered the public policy in favor of encouraging out of court restructuring and settlement. Id.
In In re Bryan Road, LLC, 382 B.R. 844 (Bankr.S.D.Fla.2008), the debtor and its lender entered into a forbearance agreement approved by a state court in a foreclosure case and pursuant to which the foreclosure sale was rescheduled to September 26, 2007. The forbearance agreement provided as follows:
(a) the Bank should be accorded relief from the automatic stay in the event the Debtor filed bankruptcy protection as consideration for the Bank entering into the Forbearance Agreement;
(b) the Final Judgment would continue to accrue interest at the rate set forth therein; and
(c) the Debtor, among others, waived all claims, counterclaims, defenses and causes of action against the Bank.
The debtor’s Chapter 11 case was expressly filed for the purpose of delaying the rescheduled foreclosure sale.
The court started its analysis by noting that a prepetition waiver of the automatic stay “will be given no particular effect as part of initial loan documents;” but rather would be given the “greatest effect if entered into during the course of prior (and subsequently aborted) chapter 11 proceedings. Id. at 848. Notwithstanding, the court noted that prepetition agreements waiving the automatic stay are neither per se enforceable nor self-executing. It noted that in evaluating the enforceability of such agreements, four factors should be considered.
(1) the sophistication of the party making the waiver; (2) the consideration for the waiver, including the creditor’s risk and the length of time the waiver covers; (3) whether other parties are affected including unsecured creditors and junior lienholders; and (4) the feasibility of the debtor’s plan.
Applying the above factors in its instant case, the court noted that the first factor weighed heavily in favor of enforcement. As noted, the debtor had a very experienced bankruptcy lawyer fully capable of understanding the implications of the forbearance agreement. Id. at 849. The second factor, however, was more problematic, as the debtor got in exchange for the waiver only two months breathing space, “not a very lengthy period.” Id. Yet, at the time, the debtor was engaged in refinancing efforts and expected to be able to refinance the lender’s loan. It was unable to do so. “Although the consideration given to the Debtor in exchange for the Forbearance Agreement was not in retrospect particularly great, it was what the Debtor wanted at the time the Forbearance Agreement was signed. I cannot say that this consideration was de minimis in this context.” Id.
Finally, based upon its performance, both pre- and post-petition, the court concluded that the debtor’s plan was speculative at best. The value it asserted were unsupported by its sales performance, and the rate of sales estimated as required in the appraisal provided to the court had been missed by a margin so great as to make reasonable calculations of sales projections impossible.
In applying the facts of this case to the third and fourth Desai considerations (effect on other creditors and plan feasibility), I conclude for purposes of the Bank’s stay relief motion that the Debtor’s Plan is unfeasible. Although there are other creditors here, McEwen and Schuman will have the right to protect their interests as junior lienors in the Bank’s pending foreclosure case. The Debtor will remain free to litigate with its creditors on the various claims it asserts against them, and vice versa. Although the unsecured creditors – whether they aggregate $973,000 or, as the Debtor’s schedules and Disclosure Statement assert, a small fraction of that amount – will no longer be able to look to value in the Debtor’s project for a recovery if stay relief is granted to the Bank, it appears to me that the existence of value in the Debtor’s project which would reach down to the level of the unsecured creditors is at best conjectural.
Id. at 854.
In In re Simpson, 2018 WL 1940378 (Bankr.D.Vt.) the court held that such pre-petition waivers can be enforceable, but:
In the absence of a complete evidentiary hearing—wherein other grounds for modifying the stay are established, the Court believes that enforcement of the prepetition waiver of the automatic stay in this instance too closely approximates the more reviled prohibition against filing for bankruptcy petition.
Id. at *5 (quoting, In re Jenkins Court Assoc. Ltd. P’ship, 181 B.R. 33, 37 (Bankr.E.D.Pa.1995).
In this case, the court held a half-day evidentiary hearing, at which it allowed the parties to present witnesses, elicit testimony and introduce documentary evidence. It stated that such waivers are neither per se enforceable, nor self-executing. “Because waivers of relief from stay are not self-executing, “[e]nforcement of the waiver always depends upon final review by a bankruptcy court after notice and a hearing.” Id. at *7 (quoting, In re Alexander SRP Apts., LLC, 2012 WL 1910088, at *7-8, 2012 (Bankr.S.D.Ga.2012)). It noted the existence of cases which have concluded that “a prepetition agreement waiving defenses to relief from stay may be considered as a factor in deciding whether relief from stay for cause should be granted.” And enforcement of a forbearance agreement does not in itself mean that the automatic stay will be lifted, but simply means that the court will give no weight to a debtor’s objection as this conflicts with and is in derogation of the previous agreement. Id. Here, the court enforced the agreement.
[T]he Debtors have failed to demonstrate they provided adequate protection. Their sole allegation and purported proof on this point is the Debtors’ intent to sell Wells Fargo’s collateral through orderly sales of portions of the real estate collateral and unnecessary equipment collateral, in a manner they believe will result in a larger recovery than Wells Fargo could obtain through a foreclosure. The Debtors presented no proof of any non-contingent sales contracts for either land or equipment, and failed to respond to the Wells Fargo arguments that a piecemeal approach to land sales would drastically reduce the value of the remaining land that secures Wells Fargo’s debt. * * * * Contrary to the assertions of the Debtors, Wells Fargo presented credible evidence that the value of property is declining.
Id. at *7.
Matthew T. Gensburg
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