By: Donald L Swanson
- “While the pre-petition Debtor may have consented to waiver of the automatic stay in favor of [secured creditor], . . . other creditors did not”; and
- “The automatic stay is designed to protect both debtors and creditors alike.”
In re DJK Enterprises, LLC, Case No. 24-60126, Doc. 196, at 13 (Bankr., S.D. Ill., February 13, 2025).
In re DJK Enterprises
In the DJK Enterprises opinion quoted above, Secured Creditor has a “stay waiver” provision in its pre-petition forbearance agreement with Debtor.
The stay waiver provides that, upon Debtor’s subsequent bankruptcy filing, Debor’s automatic stay protections of § 362 are waived—so that the Bankruptcy Court is required, in that subsequent case, to enter an order vacating the automatic stay.
The DJK Enterprises opinion rejects Secured Creditor’s stay waiver as “unenforceable per se.”
Split of Authority
The DJK Enterprises opinion describes a “split of authority” on the stay waiver issue as follows.
While it is well established that contractual waivers of the right to file bankruptcy are generally prohibited, there is a split of authority as to whether such prepetition waivers of the automatic stay are enforceable.
Cases enforcing the stay waiver tend to be single asset cases or “bad faith” filings. And such cases follow one of these two different approaches:
- enforcing the stay waiver on grounds of “freedom of contract,” with the goal of encouraging out of court settlements; or
- treating the stay waiver as one-of-many factors to be considered in the “cause” analysis under § 362(d)(1).
Cases rejecting enforcement of the stay waiver do so “per se as against public policy” and focus on the need to protect the debtor in possession, other creditors and other interested parties.
Enforcing a Stay Waiver—Untenable Arguments
I’ve always thought the arguments for enforcing a pre-petition stay waiver are untenable. Here are some supporting observations.
–To encourage out of court settlements
Here’s guessing that any judge finding the “to encourage out of court settlements” argument persuasive has never been on the debtor-side of a forbearance agreement negotiation.
That’s because enforcing a stay waiver will have exactly the opposite effect: it will push many debtors into an early bankruptcy, instead of allowing them to continue under a forbearance.
Here’s how:
- once a stay waiver becomes enforceable, it will show up in every draft of a forbearance agreement as one of the many non-negotiable, boiler-plate items; and
- a debtor who hopes to avoid bankruptcy—but suspects that bankruptcy might ultimately be needed—will be forced to file bankruptcy instead of signing onto the stay waiver.
–One of many “cause” factors
“Cause” deals with post-petition economic realities (i.e., adequate protection) and with debtor mis-behavior. Some opinions enforcing a pre-petition stay waiver say that such a waiver is one of many “cause ” factors to consider.
However, “cause” is not a matter to be resolved by pre-petition contract terms. Transforming a pre-petition contract provision into “cause” for relief from the automatic stay does violence to the meaning of “cause”:
- that’s because impairing pre-petition contract terms and rights is what bankruptcy does at its very core.
And if either a lack of adequate protection or debtor misbehavior exists, there is no need to include a pre-petition stay waiver in the relief from stay analysis. If a stay waiver is needed to tip the balance in favor of granting stay relief, the relief should not be granted.
Observations on Per Se Rejection of Stay Waiver
–In re Pease
The leading case for prohibiting stay waivers per se is In re Pease, 195 B.R. 431 (Bankr., D. Neb. 1996).
In Pease, a pre-petition agreement between debtor and its primary secured creditor contains a stay waiver.
Debtor files bankruptcy, and secured creditor moves for relief from the automatic stay, based on the stay waiver.
The Bankruptcy Court rejects the stay waiver argument as “unenforceable per se” for these reasons:
- a pre-petition debtor does not have the capacity to act on behalf of the debtor in possession;
- a stay waiver will “limit the effectiveness” of such bankruptcy provisions as §§ 363(l), 365(e) & 541(c), which specifically reject pre-petition bankruptcy waivers; and
- the Bankruptcy Code extinguishes the private right to freedom of contract around its essential and nationally-uniform provisions, from which a single creditor must not be allowed to opt out to the detriment of debtor and other creditors.
–I was there
My reaction to the In re Pease opinion, when it came down in 1996, was instinctive and visceral:
- “Heck, yeah! That’s right! Who could ever think otherwise!”
The reason for my strong reaction, back then and continuing to this day, is very simple:
- I was there—involved in that case as counsel for a general unsecured and administrative claimant; and
- my memory from 3 decades ago is that my client ended up happy with the money ultimately received in the Pease case (even though I lost an adversary proceeding in that bankruptcy)—but such ultimately-happy result would never have been possible, if the Secured Creditor’s stay waiver had been enforced.
A Huge Relief
The DJK Enterprises opinion provides a huge relief for all creditors whose rights would be impaired by the enforcement of a secured creditor’s stay waiver.
Here is a summation of the rights of others that must be protected, as set forth in the DJK Enterprises opinion, that render pre-petition stay waivers per se unenforceable;
- this approach best protects the rights and interests of the debtor-in-possession and all creditors under the Bankruptcy Code—not just those of the creditor asserting the waiver;
- a pre-petition debtor and a post-petition debtor-in-possession are two separate and distinct entities, and a pre-petition debtor simply lacks the capacity to bargain away rights that arise post-petition in favor of the debtor-in-possession; and
- pre-petition stay waivers may negatively affect the debtor’s other creditors who were not parties to the waiver agreement.
Further, the Bankruptcy Court in DJK Enterprises notes that the Secured Creditor with the stay waiver is not even the largest creditor in the case. Another creditor has an allowed claim of $13,486,879 but agreed to accept, under a settlement approved by the Bankruptcy Court, the total sum of $300,000 on its entire claim through the bankruptcy:
- such settlement “is of substantial benefit to the Debtor”;
- prohibiting Debtor from even attempting to defend the Motion for Relief from Stay would effectively terminate this case and result in unsecured creditors receiving absolutely nothing;
- while the pre-petition Debtor may have consented to waiver of the automatic stay for one creditor, Debtor’s other creditors did not—and the automatic stay is designed to protect both debtors and creditors alike; and
- enforcing the stay waiver in this case would benefit no one other than one secured creditor.
Conclusion
Here’s a big, “Thank you,” to the Southern Illinois Bankruptcy Court for its DJK Enterprises opinion.
And here’s hoping other courts follow suit!
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