WAIVERS OF AUTOMATIC STAY: ARE THEY ENFORCEABLE (AND DOES THE NEW BANKRUPTCY ACT MAKE A DIFFERENCE)?

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1 WAIVERS OF AUTOMATIC STAY: ARE THEY ENFORCEABLE (AND DOES THE NEW BANKRUPTCY ACT MAKE A DIFFERENCE)? Judith Greenstone Miller * and John C. Murray ** Editors= Synopsis: This Article discusses waivers of the automatic stay in bankruptcy proceedings in which a borrower, in consideration for the lender=s agreement to exercise forbearance, agrees not to oppose a lender=s motion for automatic stay relief. The authors begin with a discussion of automatic stay under the Bankruptcy Code and the arguments both for and against prepetition waivers of the stay. The authors examine the courts= treatment of prepetition waivers of the automatic stays in recent case law, as well as recent legislative developments. Finally, the authors provide advice to lenders in their use of relief-from-stay provisions and sample provisions for relief from the automatic stay that may be included in loan workout documents. I. INTRODUCTION II. THE AUTOMATIC STAY III. THE PROS AND CONS OF PREPETITION WAIVERS IV. RECENT CASE LAW V. GUIDELINES FOR LENDERS VI. R ECENT LEGISLATIVE DEVELOPMENTS VII. CONCLUSION APPENDIX A: WAIVER OF AUTOMATIC STAY APPENDIX B: PREPETITION WAIVER OF AUTOMATIC STAY (STIPULATION) * Partner, Insolvency and Reorganization Group, Jaffe Raitt Heuer & Weiss, P.C., Southfield, Michigan; B.A. 1975, University of Michigan; J.D. 1978, Wayne State University Law School. ** Vice PresidentCSpecial Counsel, First American Title Insurance Company, Chicago, Illinois; B.B.A. 1967, University of Michigan; J.D. 1969, University of Michigan. Waivers of Automatic Stay: Are They Enforceable (And Does the New Bankruptcy Act Make a Difference by Judith Greenstone Miller and John C. Murray published in Real Property, Probate and Trust Law Journal, Volume 41, No. 2, Summer Copyright 2006 by the American Bar Association. Reprinted with permission.

2 I. INTRODUCTION Many mortgage modification and forbearance agreements executed during loan workout negotiations contain provisions that are intended to negate the effects of a subsequent bankruptcy. Among other things, the mortgagor agrees to waive the automatic stay, whether such bankruptcy proceeding is voluntary or involuntary. Lenders typically seek to include such provisions in order to implement the timely enforcement of state law remedies, such as receivership, foreclosure, or assignments of rents, irrespective of the bankruptcy. These provisions provide that the borrower will not object to or oppose the lender=s motion for relief from the automatic stay in consideration of the lender=s willingness to forbear from exercising its rights and remedies. This Article will examine the factors that bankruptcy courts consider when determining whether such prepetition waivers of the automatic stay are enforceable and will suggest negotiating and drafting strategies to minimize the risk of such waivers being held invalid. II. THE AUTOMATIC STAY Upon the filing of a bankruptcy proceeding, an automatic stay arises by operation of law under section 362(a) of the Bankruptcy Code (ACode@). 1 The purpose of the automatic stay is to stop all collection efforts against the debtor and its assets, including actions to realize the value of collateral securing an obligation of the debtor, and to give the debtor breathing room to attempt to develop a repayment plan that will satisfy the debtor=s outstanding obligations. The stay specifically precludes, among other things, as follows:: (1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title; (2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title; (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate; 1 See 11 U.S.C. ' 362(a) (2005).

3 SUMMER 2006 Waivers of Automatic Stay 359 (4) any act to create, perfect, or enforce any lien against property of the estate Id.

4 REAL PROPERTY, PROBATE AND TRUST JOURNAL In the past, lenders have also attempted to include provisions in loan workout agreements (or even in their original mortgages) that prohibit a borrower from filing bankruptcy. But the courts have uniformly considered such provisions invalid and unenforceable as an attempt to obstruct and abridge the jurisdiction of federal courts and to preclude the ability of a debtor to reorganize. 3 Also, courts generally have held that prepetition waivers of bankruptcy benefits, other than the automatic stay, are unenforceable. 4 But Acarveouts@ 3 Many courts have held that a debtor cannot waive the rights bestowed upon it by the Code at the prepetition stage. See, e.g., Fallick v. Kehr (In re Fallick), 369 F.2d 899, 904 (2d Cir. 1966) (A[A]n advance agreement to waive the benefits of the [Bankruptcy] Act would be void.@); In re Tru Block Concrete Prod., Inc., 27 B.R. 486, 492 (Bankr. S.D. Cal. 1983) (AIt is a well settled princip[le] that an advance agreement to waive the benefits conferred by the bankruptcy laws is wholly void as against public policy.@); In re Gulf Beach Dev. Corp., 48 B.R. 40, 43 (Bankr. M.D. Fla. 1985) (stating in dictum that Athe Debtor cannot be precluded from exercising its right to file Bankruptcy and any contractual provision to the contrary is unenforceable as a matter of law@); In re Shady Grove Tech Ctr. Assoc. Ltd. P=ship, 216 B.R. 386, 389 (Bankr. D. Md. 1998), opinion supp., 227 B.R. 422 (Bankr. D. Md. 1998) (AThe courts have uniformly held that a waiver of the right to file a bankruptcy case is unenforceable.@ (citations omitted)); Archambault v. Hershman (In re Archambault), 174 B.R. 923, 933 n.8 (Bankr. W.D. Mich. 1994) (AAmple case law exists suggesting that an agreement not to file bankruptcy is unenforceable because it violates public policy.@); In re Madison, 184 B.R. 686, 690 (Bankr. E.D. Pa. 1995) (A[A]n agreement not to file bankruptcy is unenforceable because it violates public policy.@). See also Hayhoe v. Cole (In re Cole), 226 B.R. 647, 651B52 n.7 (9th Cir. B.A.P. 1998) (citing numerous cases holding that prepetition waivers of bankruptcy benefits are unenforceable); In re Heward Brothers, 210 B.R. 475, 479 (Bankr. D. Idaho 1997) (A[A] prepetition agreement to waive a benefit of bankruptcy is void as against public policy.@). See also In re Pease, 195 B.R. 431, 433 (Bankr. D. Neb. 1996) (holding that a prebankruptcy debtor does not have the Acapacity to waive rights bestowed by the Bankruptcy Code upon a debtor in possession, particularly where those rights are as fundamental as the automatic stay@); In re Jenkins Court Assoc. Ltd. P=ship, 181 B.R. 33, 36 (Bankr. E.D. Pa. 1995) (holding that ipso facto clauses precluding debtor=s right to file for bankruptcy are per se invalid). 4 See, e.g., Giamo v. Detrano (In re Detrano), 222 B.R. 685, 688 (Bankr. E.D. N.Y. 1998), vacated, 266 B.R. 282 (E.D.N.Y. 2001), aff=d and remanded 326 F.3d 319 (2nd Cir. 2003) (AAs a matter of superseding federal bankruptcy policy, however, a prepetition waiver of a discharge of a particular debt or of all debts is against public policy and unenforceable.@ (citations omitted)); In re Fallon, 244 B.R. 589, 593 (Bankr. E.D. Pa. 2000) (AThe notion that a prepetition waiver [of] a bankruptcy benefit is unenforceable is not novel.@ (citations omitted)). See also In re Cole, 226 B.R. at 653B54 (holding a prospective waiver of the dischargeability of the debt unenforceable because it undermines the Afresh start@ purpose of the Code);

5 SUMMER 2006 Waivers of Automatic Stay 361 to nonrecourse provisions in mortgage loan documents, which impose personal liability if a bankruptcy petition is filed by or against the borrower, generally have been construed in favor of lenders by the few courts that have ruled on the validity and enforceability of such provisionscat least in single-asset cases, when the bankruptcy proceedings had been terminated before the lender commenced the legal action involving personal liability and the debtor-borrower had very few, if any, creditors other than the mortgage lender. 5 Johnson v. Kriger (In re Kriger), 2 B.R. 19, 23 (Bankr. D. Or. 1979) (AIt is a well settled principle that an advance agreement to waive the benefit of a discharge in bankruptcy is wholly void, as against public policy.@); Bisbach v. Bisbach, 36 B.R. 350, 352 (Bankr. W.D. Wis. 1984) (holding that a prepetition waiver in a divorce agreement that described the debt as maintenance or support, and thus nondischargeable, was unenforceable). See also In re S.E. Fin. Assocs., 212 B.R. 1003, 1005 (Bankr. M.D. Fla. 1997) (holding that a stipulation, which provided that any subsequent breach by debtor would constitute Abad faith,@ was by itself insufficient to establish bad faith for purposes of dismissal, and stating that A[a] prepetition waiver of bankruptcy benefits may be binding unless the agreement was obtained by coercion, fraud or mutual mistake of fact@ (citations omitted)); In re Madison, 184 B.R. at 690 (ruling that prepetition agreement to waive a debtor=s right to file further bankruptcies within 180 days from the filing of debtor=s last bankruptcy petition was unenforceable because it violated public policy); In re Lippolis, 216 B.R. 378, 380 n.3 (Bankr. E.D. Pa. 1997) (AThis court disfavors bars on future bankruptcy filings because they operate contrary to the principle that a debtor=s future bankruptcyfiling rights are generally unenforceable and because they are difficult for the clerk=s office to enforce.@ (citations omitted)). See also In re Psychotherapy & Counseling Ctr., Inc., 195 B.R. 522, 535 (Bankr. D.C. 1996) (refusing to enforce an agreement settling claims and excluding debtor from Medicare and Medicaid reimbursement and finding lack of specificity and a lack of knowing consent by debtor). But see In re Univ. Commons, L.P., 204 B.R. 80, 82 (Bankr. M.D. Fla. 1996) (dismissing case based on language in prepetition settlement agreement that provided any subsequent bankruptcy filing would be in bad faith). See also In re Wald, 211 B.R. 359, 361 (Bankr. D.N.D. 1997) (finding that evidence of special circumstances is required to relieve debtor from prepetition stipulation that permitted creditor to commence foreclosure upon default). See also Vision Metals, Inc. v. SMS Demag, Inc. (In re Vision Metals, Inc.), 327 B.R. 719, 721B22 (Bankr. D. Del. 2005) (holding that prepetition release executed by debtor cannot release state fraudulent transfer claims, because prepetition claims belonged to debtor=s creditors). See also Luis F. Chaves, In Rem Bankruptcy Refiling Bars: Will They Stop Abuse of the Automatic Stay Against Mortgages?, 24 CAL. BANKR. J. 3 (1998); Thomas G. Kelch & Michael K. Slattery, The Mythology of Waivers of Bankruptcy Privileges, 31 IND. L. REV. 897 (1998). 5 See FDIC v. Prince George Corp., 58 F.3d 1041, 1046B47 (4th Cir. 1995) (rejecting borrower=s argument that it had statutory right to bankruptcy protection and that waiver of right was against public policy because contract merely provided