Postpetition Ratification of Prepetition Stay Waivers – A Possible End Around of the General Prohibition Against Prepetition Waivers of Bankruptcy Rights?

Contributed by Kyle J. Ortiz

“The past can’t hurt you anymore, not unless you let it.” – Alan Moore, V for Vendetta

Prior to the commencement of a bankruptcy case, the waiver by a potential debtor of the protections afforded by the Bankruptcy Code is usually found to be unenforceable. As a recent decision of the United States Bankruptcy Court for the District of Puerto Rico demonstrates, however, this general proposition has become more nuanced over the past few years. In In re Triple A & R Capital Investment, Inc. the court was faced with the question of whether to enforce a prepetition waiver of the protections of the automatic stay contained in a prepetition forbearance agreement between the debtor and its primary secured lender. Ultimately, enforcement of such waiver did not depend upon the debtor’s prepetition actions, but turned on the debtor’s postpetition actions. The bankruptcy court found that the debtor ratified the stay waiver when it entered into a postpetition cash collateral stipulation with the secured lender. The decision serves as a reminder that what practitioners may regard as “boilerplate” in a cash collateral stipulation or DIP agreement may have significant consequences.
The debtor’s prepetition forbearance agreement with the bank included a provision prohibiting the debtor from contesting any application by the bank to modify the stay to enforce the bank’s remedies under the forbearance agreement. After the debtor filed for chapter 11 and after the parties entered into the court-approved cash collateral stipulation, the secured lender moved for relief from the automatic stay, to which the debtor objected. The secured lender argued that the debtor had ratified the stay waiver postpetition when it entered into the stipulation and agreed to be bound by the loan agreements (including the forbearance) and all the debtor’s obligations under the same. Specifically, pursuant to the stipulation, the debtor agreed that the “the Debtor’s obligations under the Loan Agreements . . . are valid, binding and enforceable in all respects” and that “the obligations under the . . . Loan Agreements shall not be subject to any other or further challenge.” Despite the stipulation, the debtor argued that it could not be bound by acts taken by the prepetition debtor because the prepetition debtor lacked the capacity to act on behalf of the debtor in possession, and, as such, any agreement to waive rights of the debtor in possession were “unenforceable under the Bankruptcy Code.”
To address the question of the enforceability of the stay waiver, the court, after noting that no controlling law existed in the district or in the First Circuit, undertook a review of recent developments in the case law and noted that “although stay waivers were long thought to be unenforceable as against public policy, an increasing number of courts are now enforcing them.”
The court went on to state that the “difficult issue of whether prepetition stay waivers are enforceable, reflects the tension between the public policies favoring out of court workouts, on the one hand, and protecting the collective interest of the debtor’s creditors, on the other hand.” Although courts around the country vary in their approach to balancing these conflicting policies, the court found three main approaches to have emerged:

  1. Uphold the stay waiver in broad unqualified terms on the basis of freedom of contract.
  2. Reject the stay waiver as unenforceable per se as against public policy.
  3. Treat the wavier as a factor in deciding whether “cause” exists to modify the stay pursuant to section 362(d) of the Bankruptcy Code.

The court found the last approach of treating prepetition waivers as a factor in a larger section 362(d) “cause” analysis to be the approach most favored of late and the one it favored as well. The court also noted that, regardless of approach, all courts were “in agreement that a prepetition waiver of the automatic stay, even if enforceable, does not enable the secured creditor to enforce its lien without first obtaining stay relief from the bankruptcy court.”
In arguing that the waiver should not be enforced, the debtor cited the recent decision in DB Capital Holdings, LLC, where the court refused to uphold a prepetition stay waiver based upon its conclusion that “a debtor is a separate and distinct entity from the pre-bankruptcy debtor” and as such “the pre-bankruptcy debtor simply does not have the capacity to waive rights bestowed by the Bankruptcy Code upon a debtor in possession, particularly where those rights are as fundamental as the automatic stay.” (See our analysis of another DB Capital decision upholding a prepetition waiver of the right of an LLC to file a voluntary petition here) The Triple A & R court found the general principle in DB Capital – that the prepetition and postpetition debtors are different entities – persuasive, but found that DB Capital was distinguishable because Triple A & R “expressly and voluntarily” ratified the prepetition waiver by entering into the postpetition cash collateral stipulation.
Given that the case hinged on a postpetition ratification of the prepetition waiver, does Triple A & R move the needle with regard to the permissibility of prepetition waivers of rights under the Bankruptcy Code? At first glance, the case doesn’t move the needle much as it can be viewed as simply a matter of the court enforcing the parties’ agreement in the cash collateral stipulation. At the same time, however, debtors often will need to enter into some sort of cash collateral agreement or DIP financing agreement with their secured lenders, who typically insist upon including similar ratification language. Although such ratifications often allow a creditors’ committee a limited period within which to bring challenges, a creditors’ committee apparently was not appointed in Triple A & R. Although one might ask whether Triple A & R raises the question of what parties the automatic stay is designed to protect, the court’s use of the ratification as but one factor presumably provides the court flexibility to consider and protect the collective interests of creditors. In any event, the decision is one in a growing list of decisions that reminds practitioners that boilerplate exists for a reason, and lawyers should consider the consequences of their drafting decisions.
On the prepetition waiver front, this once settled area of the law has become more fluid in recent years. We at the Weil Bankruptcy Blog will be sure to keep you posted as the law on bankruptcy waivers continues to evolve.