In the very unusual period in which we find ourselves today, it seems to be common wisdom that an avalanche of commercial loan defaults is coming. As such, it is a good time to take a fresh look at the terms and provisions used in commercial workout documents, whether in a simple agreement that extends a maturity date or in a complex forbearance document that restructures the collateral arrangement and financial covenants.
One provision often used by creditors’ rights and workout attorneys is a prepetition automatic stay waiver. The automatic stay, of course, generally halts all attempts by creditors to exercise their rights and remedies, and goes into effect immediately upon a bankruptcy filing. It is therefore one of the most fundamental and powerful protections provided to a debtor. As such, if a creditor could negate a future bankruptcy automatic stay in an agreement entered into now, it would thereby avoid one of the debtor’s major protections in bankruptcy.
Unfortunately, prepetition stay waivers are sometimes not used by non-creditors’ rights and workout attorneys. This is reasonable enough, given the Bankruptcy Code’s bar on some so-called ipso facto clauses – contractual clauses that make a future bankruptcy a trigger for certain contractual events or results in favor of the non-debtor party. Non-workout practitioners often assume that any contractual provision that improves a creditor’s rights in the event of a future bankruptcy filing is unenforceable. The Bankruptcy Code, however, prohibits such clauses only in a few situations, none of which relate to the automatic stay.
And so the question arises for commercial lenders: Are automatic stay waivers enforceable in subsequent bankruptcy cases? The answer is “maybe,” and more specifically may depend upon which bankruptcy court is involved. Various courts and authors have attempted to categorize the various approaches used by courts, but this is not an easy task given the wide variety of prepetition facts and procedural settings involved. With that said, we would make the following observations about the enforceability of prepetition stay waivers.
To begin, some courts hold that prepetition automatic stay waivers are unenforceable per se, and some courts reach the opposite conclusion (that they are not unenforceable per se). Further, all courts appear to reject the proposition that such waivers are self-executing without any need for court approval.
As to specifics, numerous courts apply a multi-factor test to determine if prepetition stay waivers are enforceable. Relatedly, some courts consider them valid but only one of many factors in determining whether or not the stay should be lifted. Finally, a few courts appear to enforce prepetition stay waivers with little or no analysis.
Possibly the most important observation is that no creditor appears to have been punished or otherwise disadvantaged in attempting to enforce a prepetition automatic stay waiver in bankruptcy. As such, there is no reason not to include a prepetition automatic stay waiver in a workout or restructuring agreement. In doing so, however, the drafter should be familiar with the case law in the relevant jurisdiction. In most cases, that case law will provide additional guidance on what to include in a prepetition waiver provision, thereby improving the chances that it will be beneficial to the creditor in a later bankruptcy filing.