I am often asked to review waivers and other bankruptcy-related language in loan modifications, forbearance, tolling and other types of agreements and answer what appears to be a very simple question: “Are these waivers enforceable in bankruptcy?” Regrettably, although the inquiry is simple enough, the answer can be quite murky. Often times, the prevailing school of thought in one jurisdiction is rejected and not followed by another bankruptcy court in a different
jurisdiction. In addition, bankruptcy law is always evolving with new trends emerging regularly.
Thankfully, there are several types of bankruptcy-related waivers that have relatively clear answers concerning enforceability. Specifically, three types of pre-petition waivers are generally unenforceable and not upheld. They are: (1) waiver of the right to file a bankruptcy case; (2) self-executing provisions that purport to provide that no automatic stay arises in a bankruptcy case; and (3) self-executing clauses that purport to vacate the automatic stay. These waivers are generally unenforceable because they are reminiscent of contracts of adhesion. Because bankruptcy courts are courts of equity and strive to give a debtor a fresh start, they disfavor contractual provisions that interfere with these policies.
Bear in mind that simply because these provisions are generally not upheld, they are by no means “extinct.” Indeed, these bankruptcy-related provisions are commonly included in agreements day after day. Given that the law is not settled and bankruptcy court decisions are sometimes inconsistent, a convincing lawyer and a compelling set of facts could prompt a bankruptcy court to enforce the provision. If it is your corporate policy to ask for such bankruptcy-related waivers in agreements, there is no reason to discontinue the practice. Generally, however, nine times out of ten, the three types of waivers listed above will not be enforced by a bankruptcy court.
Moving from the easy questions to those that present greater difficulty, there is one particular bankruptcy-related waiver provision that causes a significant difference in opinion among bankruptcy courts throughout the country. This vexing waiver provision is an agreement whereby a debtor consents to relief from the automatic stay or agrees not to contest a motion for relief for the stay. Bankruptcy court decisions regarding enforceability of these types of pre-petition agreements span the gamut of potential outcomes.
In Maryland, for example, several bankruptcy judges view a pre-petition consent to relief from the stay or a pre-petition agreement not to oppose a motion for relief from the automatic stay as only a factor in determining whether cause exists for relief from the stay. In re Shady Gove Tech Center Assoc. Ltd. Pship, 216 B.R. 386 (Bankr. D. Md. 1998), opinion supplemented on remand from district court, 227 B.R. 422 (Bankr. D. Md. 1998). Other factors that are considered in determining whether to lift the automatic stay are: (1) the sophistication of the parties negotiating the waiver; (2) the risk incurred by the lender or other party who wishes to benefit from the waiver; (3) the level of consideration given to the debtor by the lender or other party seeking the waiver; and (4) the number of other creditors affected if the automatic stay is lifted. Id. The approach taken by Maryland bankruptcy courts is gaining ground, as bankruptcy courts in Florida and Vermont have adopted the view that a pre-petition waiver is only a factor to consider in whether or not to lift the automatic stay for cause.
On the other hand, the bankruptcy court in Puerto Rico, after noting that “stay waivers were long thought to be unenforceable as against public policy, as increasing number of courts are now enforcing them,” upheld a debtor’s pre-petition waiver of the automatic stay. In re Triple A & R Capital Inv., Inc., 519 B.R. 581 (Bankr. D. P.R. 2014). Courts that enforce these waivers place importance on encouraging out-of-court restructuring and settlements. In re Atrium High Pt. Ltd. Pship, 189 B.R. 599 (Bankr. M.D. N.C. 1995). Finally, other courts, such as the bankruptcy court in Nebraska, reject stay waivers as unenforceable per se and reason that they are against public policy. In re Pease, 195 B.R. 431 (Bankr. D. Neb. 1996).
There is a saying among bankruptcy practitioners that if you are looking for bankruptcy case law to support a position, simply look carefully and you will find a case that fits the bill. As evidenced by the wide range of outcomes in resolution of the same inquiry – “Is my bankruptcy-related waiver enforceable?” – the answer truly depends on the specific court and the fine tuning of the waiver language.