Prepetition Waivers of the Automatic Stay - Are They Enforceable?
In recent case law, bankruptcy courts are beginning to consider prepetition waivers of the automatic stay in bankruptcy as a consideration in determining whether “cause” exists to lift the automatic stay. In In Re 4848, LLC, 490 B.R. 343, 345 (Bankr. E.D. Wis. 2013), the court found the following language to constitute such “cause”:
“Relief from the Automatic Stay. As a material inducement to Lender to enter into this Agreement, Borrower hereby stipulates and agrees that Lender shall be entitled to relief from the automatic stay imposed by 11 U.S.C. § 362 or any similar stay or suspension of remedies under any other federal or state law in the event Borrower becomes subject to a bankruptcy or other insolvency proceeding, to allow Lender to exercise its rights and remedies with respect to the Collateral.”
The court determined that the public policies in favor of freedom of contract and encouraging out-of-court restructurings and workouts of a debtor’s relationships with its creditors outweighed the public policy behind the automatic stay.
Although prepetition waivers of the automatic stay are enforceable, they are not per se enforceable, nor are they self- executing. Instead, the courts will consider the following factors:
The sophistication of the waiving party
The consideration for the waiver, including the creditor’s risk and length of time covered by the waiver
Whether other creditors’ rights are impacted
The feasibility of debtor’s plan
Whether there is evidence that the waiver was obtained through coercion, fraud, or mutual mistake of material factors
Whether enforcing the waiver will further the public policy in favor of out-of-court workouts
Whether there appears to be a likelihood of reorganization
To what extent the creditor will be harmed by not enforcing the waiver
The length of time between the date of the execution of the waiver and the date of the bankruptcy filing and whether a compelling change in circumstances has occurred during that time
Whether the debtor has any equity in the property
We suggest that all lenders should consider including the language cited above in all of their future loan documents, and in all forbearance agreements.