The automatic stay provisions of section 362 of the Bankruptcy Code—which go into effect immediately upon the filing of a bankruptcy petition—protect a debtor from litigation, lien enforcement actions, and other attempts to enforce prepetition claims or affect property of the debtor estate. Although a debtor may enter into a prepetition waiver of the automatic stay, traditionally these agreements are deemed unenforceable as a matter of public policy.
Notwithstanding this tradition, a recent decision by the U.S. Bankruptcy Court for the District of Puerto Rico reflects an increased willingness to evaluate the enforceability of prepetition waivers on a case-by-case basis. The decision, however, does not represent a departure from the principle that prepetition waivers are generally not enforceable, in light of the court’s finding that the debtor agreed to be bound to terms of a prepetition waiver after the bankruptcy had commenced.
In In re Triple A & R Capital Investments, Inc., 519 B.R. 581 (Bankr. D. P.R. 2014), a lending bank and a borrower (which later became the debtor) entered into a forbearance agreement that granted the bank a waiver of the automatic stay in the event of a bankruptcy. After the debtor filed for bankruptcy, the lender moved to lift the automatic stay, requiring the bankruptcy court to determine whether the prepetition waiver was valid and binding on the debtor.
The court began by noting the tension between public policies favoring out-of-court workouts, on one hand, and protecting the collective interest of a debtor’s creditors, on the other. The court observed that bankruptcy courts follow one of three approaches:
- uphold the stay waiver in broad unqualified terms on the basis of freedom of contract;
- reject the stay waiver as unenforceable per se as against public policy; or
- treat the waiver as a factor in deciding whether “cause” exists to lift the stay.
The court endorsed the third option, noting a similar trend outside the First Circuit. It then turned to the issue of whether cause existed to lift the stay.
The debtor cited In re DB Capital Holdings, LLC, 454 B.R. 804 (Bankr. D. Colo. 2011) for the proposition that a single asset chapter 11 debtor’s prepetition waiver in a forbearance agreement was unenforceable “as too closely approximating, for a single asset debtor, waiver of the right to file for bankruptcy relief.” There, the court held that “the chapter 11 debtor is a separate and distinct entity from the pre-bankruptcy debtor,” and as such “a debtor may not waive the automatic stay of 11 U.S.C. 362 until after the bankruptcy case is commenced and the debtor is acting in the capacity as debtor in possession.”
In Triple A & R Capital, the court did not dispute the court’s reasoning in DB Capital Holdings. Rather, it found that the debtor, once in bankruptcy, had ratified the prepetition stay waiver by entering into a post-petition cash collateral agreement with the lender. The cash collateral agreement contained provisions that bound the debtor to its obligations under prepetition loan agreements, including the forbearance agreement which contained the automatic stay waiver. As such, the court held that the waiver was enforceable and granted the lender’s lift stay motion.
The decision provides an important reminder for a debtor entering into post-petitioning financing arrangements to check whether in doing so they are breathing new life to what could otherwise be an unenforceable prepetition waiver. On the flip side, a creditor looking to lift an automatic stay should not rely simply on a debtor’s prepetition waiver, as it is still generally regarded as unenforceable.