- U.S. Bankruptcy Court in California Issues Decision on Enforceability of Prepetition Waivers of the Automatic Stay
- July 23, 2016
- Law Firm: Duane Morris LLP - Philadelphia Office
- Adding to the unsettled body of case law on the enforceability of prepetition waivers of the automatic stay, on April 27, 2016, the U.S. Bankruptcy Court for the Central District of California issued a memorandum decision finding that cause existed to grant relief from stay where a chapter 11 debtor had waived the protections of the automatic stay in a court-approved settlement agreement in the debtor’s prior chapter 11 case. In re BGM Pasadena, LLC, 2016 Bankr. LEXIS 1854 (Bankr. C.D. Cal. April 27, 2016).
The debtor owned real property in Pasadena, California, subject to a secured creditor’s lien. The court entered orders granting the secured creditor relief from stay for “cause” under section 362(d)(1) of the Bankruptcy Code [as well as under section 362(d)(3), applicable to single-asset real estate cases]. The debtor, in turn, moved for a stay of the orders pending appeal.
In determining whether to grant the debtor a stay pending appeal, the court evaluated, among other criteria, whether the debtor’s appeal had a strong likelihood of success on the merits. With respect to its finding that cause existed to grant relief from stay, the court pointed to the terms of a settlement agreement approved in the debtor’s prior chapter 11 case, which contained the following language:
[I]n the event of a filing of any such a bankruptcy case [a subsequent filing by the Debtor], Debtor agrees that sufficient cause exists for the bankruptcy court having jurisdiction over such bankruptcy case to grant Creditors relief from the automatic stay based upon, among other things, lack of adequate protection. Debtor irrevocably consents and waives any right to object, and Creditors shall be entitled, to an order granting relief from any and all stays, including the automatic stay imposed by 11 U.S.C. § 362 or equitable relief under 11 U.S.C. § 105, or other applicable law, so as to permit Creditors to foreclose upon the Property and to exercise any and all other rights and remedies of Creditors under applicable law, this Agreement or any other Loan Document.
The court explained that a waiver of the automatic stay is generally unenforceable when contained in a prepetition agreement between a lender and a borrower since the interests of unsecured creditors and other third parties were not considered when the agreement was made. These concerns, the court noted, are not present when such a waiver is approved in an earlier bankruptcy case following notice to creditors and an opportunity for hearing.
In support of its ruling, the court pointed out that, absent changed circumstances, waivers of the automatic stay have “routinely been enforced” when made a part of a confirmed plan or court-approved settlement, either with the consent of unsecured creditors or after they receive notice and opportunity to object. Moreover, the court found no facts or circumstances that would make it unwilling to enforce the prior agreement. Based upon this record, the court found it “highly unlikely” that an appellate court would hold otherwise. For this and other reasons, the court denied the debtor a stay pending appeal.
To date, there is no hard and fast rule on the enforceability of prepetition waivers of the automatic stay. However, there are steps a secured creditor should consider to improve its chances that a waiver will be enforceable. The takeaway from BGM Pasadena is that a secured creditor should be on the lookout for opportunities in a pending chapter 11 case to obtain a court-approved waiver of the automatic stay in a future bankruptcy filing, whether through a settlement, cash collateral or other stipulation, or a confirmed chapter 11 plan. Having such a waiver “blessed” by the court following notice to creditors and an opportunity for hearing may significantly improve the likelihood that a court will find cause to grant relief from stay in the event the debtor’s chapter 11 turns into a chapter 22.