The Enforceability Prefiling Stay Waivers: It’s a toss up

A prefiling stay waiver is a debtor's agreement with a creditor not to contest that creditor's motion for relief from the automatic stay should a bankruptcy be filed. In practical terms, it means that once a debtor files for bankruptcy the creditor who has a prefiling stay waiver can attempt to obtain payment of the debt owed to him while other creditors are frozen by the automatic stay. Historically, prefiling stay waivers were not enforceable. More recently courts have treated prefiling stay waivers as private contracts that are enforceable in bankruptcy. However, the current trend is for the courts to examine each case on its facts and then make an ad hoc determination, based on a series of factors, whether a prefiling stay waiver is enforceable. The existence of a signed prefiling stay waiver is only one such factor.¹

While the case by case, multi-factor approach allows courts the discretion to grant relief from the stay when justice so requires, it also injects uncertainty into the lending process. If prefiling stay waivers are routinely upheld, lenders have an incentive to enter workout arrangements with debtors because they can be assured that in the event of bankruptcy, the lender will still be able to obtain the full value of its collateral.

Practically speaking, the move towards a multi-factor approach does not mean that lenders should abandon the practice of obtaining prefiling stay waivers from debtors. A properly executed waiver may still be important factor in obtaining relief from the automatic stay. Lenders should focus attention on all factors used by courts in determining if a waiver is enforceable and should consult legal counsel familiar with the automatic stay provisions of the Bankruptcy Court before entering a workout with a debtor.