Bankruptcy Waivers

This last cold, gray drizzling day of April here in Boston might as well be the day on which we discuss bankruptcy, itself a gray subject.  I am sure all readers are fascinated by waivers in bankruptcy proceedings, so do read on.

When a company goes into bankruptcy, the law imposes an automatic “stay” on litigation against the bankrupt company which may be pending in another court.  The idea is that all claims should be brought before the same tribunal so that the relative rights of all aggrieved parties can be measured, and in light of the hopes in some cases of rehabilitating the bankrupt company.

A creditor can appear in bankruptcy court and argue that the stay be “lifted” so that litigation pending in another court can proceed, and the bankruptcy judges will apply principles of equity (fairness) to decide whether a stay should be lifted.  A secured creditor of a bankrupt, for example, having priority over other creditors by reason of its collateral, may successfully argue that it should be able to foreclose.

Prior to bankruptcy, clever creditors may seek a contract with a debtor which attempts to remove the risk of suffering a stay in event of default.  The creditor may obtain a pre-bankruptcy agreement from the debtor that the debtor will not file bankruptcy, or that the debtor will not object to the lifting of the stay in the event of a bankruptcy filing.  Federal bankruptcy courts historically have been loathe to enforce such private contract provisions which, after all, strip judicial power from the judge.

However, a new case in Boston’s bankruptcy court did in fact enforce a prior waiver of the stay to permit a creditor to proceed with collection during pendency of bankruptcy.  For us lawyers, this was sufficiently big news to find it reported on the front page of today’s issue of Massachusetts Lawyers Weekly.  All legal cases are of course fact-specific and there were many salient facts in this one (In Re: A. Hirsch Realty, LLC), but what interested me was the discussion that the pre-petition contractual waiver favoring the creditor was signed by a sophisticated debtor who had experienced counsel.  Judge Feeney distinguished this case as not involving a waiver which was contained in a loan agreement where an unsophisticated debtor just signed the form without really understanding the significant protection the debtor was surrendering.

Many loan documents contain pages of “boilerplate.”  Some of it (express here your shock) is highly technical and favors the creditor.  Debtors do not have much leverage in many of these situations.  And creditors extending credit in iffy situations are entitled to enhance their positions, where there is significant ongoing risk of non-payment.  But the law may be moving, ever so slightly, in favor of protecting your average debtor.  Institutional creditors with counsel may want to consider how much to rely on clauses that affect a future possible bankruptcy, such as the stay waiver, in evaluating their risk metrics.  They may for example provide specific disclosure of the meaning of the waiver, or insist that the waiving debtor have experienced counsel.


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