What does a little game of tag have to do with construction contracts? If you ever come by my house on a Saturday afternoon, you will find about 10-15 kids running through my backyard playing the "You’re it!" sensation. Oftentimes, when I am sitting on the back deck with a cool glass of iced tea, one of these runts will run right towards me in hopes of finding assylum in my presence. Reaching out to touch my arm, the kid yells: "HOME BASE!!!"
"How did I become home base?" I ask myself. If you don’t know what I am talking about, home base in this childhood game is a safe haven … a resting area … a zone of protection. I delight in the idea of being a "home base" to any one of these kids. Fun times.
The little game of tag came to mind last week when I was reviewing a construction contract, which included a new clause that I had never seen before. It read something like this:
Subcontractor hereby waives the protection of the automatic stay provisions under federal bankruptcy laws, 11 U.S.C. section 362, or any other similar stay provisions under any present or future state or federal law relating to bankruptcy or insolvency.
Wow! That cannot be enforceable, can it? What’s the point of home base … the automatic stay of litigation that is guaranteed by filing for bankrupty protection … if you can waive it? Certainly, the bankruptcy courts do not appreciate their jurisdiction and powers being waived. Right?
Wrong. The issue is not so simple. Courts have treated pre-petition waivers differently and inconsistently throughout the country. The courts generally fall into the following categories:
- Those jurisdictions where pre-petition waivers are enforceable, whether on public policy grounds or freedom of contract grounds.
- Those jurisdictions where pre-petition waivers are unenforceable, as against a statutory policy or to protect other creditors.
- Those jurisdiction where pre-petition waivers are viewed on a case-by-case basis.
If you understand the purpose of the automatic stay, then you understand why there might be divergent views from the courts. The waiver of automatic stay provision should not be confused with a blanket prohibition against filing for bankruptcy, which would not be enforceable. In other words, the automatic stay is not to provide an absolution of liability, but rather to "stay" the litigation of claims that exist outstide the bankruptcy court. The "stay" … or home base … gives the debtor, the creditors, the trustee and the court a resting area to begin, assess, and analyze the restructuring process.
<8/26/09> Update: I have received a number of inquiries about the case law supporting the various approaches above. For an good review of the law, see Michael L. Bernstein’s article for the American Bankruptcy Insitute entitled, "Enforceability of Prepetition Waivers of the Automatic Stay."