By: Paul Arrow, Esq.

A recent ruling of the Bankruptcy Court for the Central District of California endorsed a path toward enforceability of prospective waivers of the automatic stay in certain circumstances. In short, such a waiver approved in a bankruptcy case may be enforceable in a subsequent bankruptcy case. This offers creditors a tactical opportunity to significantly better their position in such a subsequent case.

The automatic stay arises immediately upon the commencement of a bankruptcy case and prohibits a creditor from exercising rights and remedies on account of a default.  While creditors may seek relief from the automatic stay, obtaining that relief is usually anything but certain.  Since what is certain is that seeking relief will be time consuming and costly, creditors have long sought to include prospective waivers of the automatic stay in their agreements with borrowers.  Courts have not looked kindly upon these provisions, determining they are generally unenforceable on policy grounds because they favor a single creditor at the expense of the other creditors of the borrower.

In BGM Pasadena, 2016 Bankr. LEXIS 1854, the Bankruptcy Court granted a secured creditor relief from the automatic stay based in part on a waiver of the stay contained in a settlement agreement between the debtor and the creditor that arose during the course of an earlier bankruptcy case.  That settlement agreement provided that in the event of a subsequent bankruptcy filing, the creditor would be entitled to relief from the automatic stay to exercise its rights and remedies against its collateral.  When the Bankruptcy Court granted relief based on the waiver, the debtor appealed and sought a stay of the relief order pending its appeal.  In considering the motion for stay, the Bankruptcy Court analyzed the likelihood of the debtor’s success on the merits of the appeal.  In particular, the Court addressed the enforceability of the waiver.  The Court noted that the policy considerations that might otherwise render the waiver unenforceable were not present.  In contrast to the usual pre-petition waiver scenario, the waiver was approved by the court after notice to creditors and an opportunity for them to object.  Accordingly, the Court held that absent changed circumstances, the waiver should be enforced.  The Court found no such changed circumstances, and believed it “highly unlikely that an appellate court would permit the Debtor to disregard the terms of this agreement and avoid having to abide by the terms of a settlement agreement previously approved by this Court.”  For those reasons, the Court denied the motion for stay pending appeal.

Based on BMG Pasadena and similar rulings, creditors should consider incorporating waivers of the automatic stay wherever possible during a bankruptcy case.  Such opportunities are abundant.  For example, a secured creditor could include such waivers in cash collateral or debtor-in-possession financing agreements, settlement agreements, and confirmed plans of reorganization.  Even an unsecured creditor could benefit from the strategy.  For example, a party to a contract with a debtor could include a waiver of the automatic stay in an agreement to assume the contract.  Such a waiver could permit the creditor to terminate the contract upon the commencement of another bankruptcy case.  In each case, the waiver would be approved by a bankruptcy court after notice to creditors and an opportunity for them to object.  Armed with an order approving a waiver, a creditor will be in a much stronger position to enforce the waiver if the debtor commences a future bankruptcy case.