Contracting for Stay Waivers

One of my students brought to my attention this recent decision enforcing a prepetition waiver of the automatic stay in a Chapter 11 case. As the decision notes, it's not uncommon to see court enforce pre-petition waivers of the stay when the waivers were made in the context of earlier aborted Chapter 11 plans. But in this case the waiver was made in exchange for a foreclosure forbearance agreement and not in the context of an early Chapter 11.

There is, of course, an important body of scholarship arguing for permitting contracting around bankruptcy on efficiency grounds. The literature has a real problem in addressing the fairness norms that are central to bankruptcy, but leaving it aside, I think prepetition waivers of the stay have a fundamental doctrinal problem--the stay is a right of the estate, not of the prepetition debtor, so the prepetition debtor has no ability to bargain it away.

The second the court grants the debtor the order for relief, the debtor's assets are transferred to a new entity, the bankruptcy estate. The stay is a right of the estate, not the debtor, so the debtor shouldn't be able to bargain it away (except to the extent the stay protects assets not included in the estate and/or enforcement against the debtor's person in a manner that doesn't impact the estate). It is important to note how this is different from assets of the estate that were once assets of the debtor's, where fraudulent transfer law would apply and look at adequacy of consideration. I don't think adequacy of consideration plays any role here because the debtor had nothing to bargain with--the stay is never among the debtor's personal bundle of rights. (Maybe this analysis changes if the waiver was in the context of an earlier aborted Chapter 11, but I don't see why--that would be a legally separate bankruptcy estate.)

(And if we did look at adequacy of consideration, why is de minimis consideration sufficient? This doesn't seem to be peppercorn land. Why aren't we looking at this in something more like a fraudulent transfer context, where we look not just as whether there was consideration, but whether the exchange was of reasonably equivalent value? Indeed, it's not clear how valuable the forbearance was--if the debtor hadn't received it, the debtor could and likely would have filed for bankruptcy immediately, rather than two months later.)

It's also worth noting the way a trend in bankruptcy analysis appears in this case, namely that an oversecured lien holder's collateral is really the property of the lien-holder, not the estate. The near equation of holding an oversecured lien with ownership is becoming increasingly common (see, e.g., the SPM decision in the First Circuit and the Motorola decision in the 2d Circuit (both gifting in chapter 11 plans), and in the carve-out provisions in DIP financing agreements and cash collateral agreements). But even if a lien-holder may end up owning the property, a lien is legally different from ownership. At least the court here, unlike in the Second Circuit in Motorola, first made a finding about the validity of the lien.

What worries me about this case is that the facts presented sufficient grounds for the lifting of the stay without making it hinge on enforcement of the prepetition waiver. I worry about the slippery slope that could develop from opinions like this as specific facts of the case (including the sufficiency of other facts for granting a lift stay motion) are forgotten, and only the fact that a prepetition waiver was enforced is remembered. Too often this is what happens with opinions, through no fault of the judge who authors them. The value of bankruptcy proceedings is determined largely by the extent of the stay and the discharge. The more they are chipped away, the less value bankruptcy has as a process. Allowing ever greater enforceability of prepetition waivers of the stay or discharge undermines the whole bankruptcy process.