When it rains and the kids cannot got out to play, our house can get a little chaotic. A few weeks ago, I lost my cool demeanor. Jackson (below) was screaming at the top of his lungs and was chasing three other kids with a light-saber. I yelled: "Time out! Everyone!" They all stopped dead in their tracks.
This kind of "time out" is occurring more and more frequently in the construction industry. It is called the automatic stay and it can affect the entire construction project when one of the parties files for bankruptcy protection. Sometime, parties attempt to get around the automatic stay of bankruptcy by including a waiver provision in their contracts, which can 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.
That cannot be enforceable, can it? What’s the point of a time out … the automatic stay of litigation that is guaranteed by filing for bankruptcy protection … if you can waive it? Certainly, the bankruptcy courts do not appreciate their jurisdiction and powers being waived? 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 outside the bankruptcy court. The stay … or "time out" … gives the debtor, the creditors, the trustee and the court a resting area to begin, assess, and analyze the restructuring process. For an good review of the law, see Michael L. Bernstein’s article for the American Bankruptcy Institute entitled, "Enforceability of Prepetition Waivers of the Automatic Stay."
What are the lessons learned when dealing with the automatic stay? There are a few: (1) read your contracts before you sign them; (2) understand what the laws are in your jurisdiction and whether a pre-petition waiver is valid; and (3) don’t violate automatic stay once the "time out" is in place. Penalties can include voiding the action, damages, and even contempt of court.