First Day Motions in Mega Chapter 11 Bankruptcy Proceedings

 

Overview

A debtor-company that commences chapter 11 business bankruptcy proceedings in front of a federal bankruptcy court is generally permitted under applicable law to operate its business and manage its properties. That may occur during the entire duration of the bankruptcy proceedings. The debtor will usually continue operations through directors, officers, and key personnel who served in those roles before the debtor commenced bankruptcy proceedings. Pre-bankruptcy, management will have retained highly specialized attorneys to ensure that the debtor properly takes actions in compliance with applicable law.

Immediately or within a short time period after filing a voluntary bankruptcy petition, attorneys acting on behalf of the debtor will generally seek court approval to preserve the debtor’s ability to continue normal-course business operations. To do so, they will file formal legal documents with the bankruptcy court that are more commonly known as “first day motions."

The purpose of first day motions, in large part, is to obtain court approval for the debtor to run its business largely as it had done so immediately before it commenced chapter 11 bankruptcy proceedings. By receiving such authority, the debtor may have a smoother landing into bankruptcy that is essential for it to engage in operational or financial restructuring efforts. Those types of restructuring efforts include, for instance, negotiating with lenders and creditors to whom the debtor is indebted, rejecting or assuming certain types of contracts and leases, and seeking support from stakeholders for a plan of reorganization to restructure its debts and other obligations, among other matters.

A debtor is more likely to file first day motions on the same day that it commences bankruptcy proceedings, for example, if it engages in complex operations, or if the total amount of its estimated assets and liabilities exceeds hundreds of millions or billions of dollars. The debtor will typically seek relief by way of these court filings on a temporary or interim basis — not on a final basis. The bankruptcy court will usually hold a subsequent hearing(s) to approve such motions for the duration of the bankruptcy proceedings — on a “final” basis.

Typical first day motions cover a wide range of procedural issues and operational matters that most companies undertake on a day-to-day basis outside of bankruptcy. In support of its first day motions, the debtor will submit a declaration of a key officer of the company that provides the background of the debtor’s operations, key financing arrangements, and events that led to the in-court chapter 11 proceedings, among other information. This declaration, known as a “first day declaration,” will also often provide a factual basis for each of the debtor’s first day motions.

Please note that the below discussion is intended to serve as an illustrative example of operational first day motions and is not an exhaustive list.

Operational first day motions

The debtor will typically file a first day motion seeking authority to maintain rank-and-file employee compensation and benefits programs during its bankruptcy proceedings. If it receives approval to do so, the debtor will preserve its ability to pay salaried or hourly employees, continue vacation and sick leave benefits programs, and maintain health and life insurance programs, among other benefits packages. If the debtor were instead disallowed from providing such compensation or benefits to its employees, it would likely suffer an immediate loss of staff that would render it unable to function. Note that a debtor might seek approval to pay pre-bankruptcy wages as part of an “employee benefits motion.”

The debtor will also file a first day motion to continue its insurance programs. Through this filing, the debtor might seek court approval to continue making periodic payments on account of insurance premiums, premium financing arrangements, and related obligations. By doing so, the debtor will ensure that it continues to receive insurance coverage to guard against the risk of loss from natural disasters, customer injuries, or other risks or hazards that the debtor regularly faces given its industry and operations.

Further, the debtor will seek court approval to continue operating its bank accounts and cash management systems for the duration of the chapter 11 proceedings. By receiving such approval through a “cash management motion,” the debtor will save the costs of opening new bank accounts that would inevitably delay payments to key vendors and other creditors. Delaying those types of payments might leave the debtor unable to obtain products or services required for it to continue operations. As part of its cash management motion, the debtor will often seek authority to continue making payments among debtor subsidiaries or affiliates that are co-debtors in the bankruptcy proceedings, known as “intercompany payments,” as part of a continuation of its pre-bankruptcy accounting practices. By doing so, the debtor will aim to preserve administrative and operational efficiencies, among other benefits.

The debtor will seek approval to provide deposits, cash reserves, or other adequate assurance of payment to utility providers by way of a “utilities motion.” Examples include entities that provide the debtor with electricity, water, and natural gas, among other types of utility providers.

The debtor will also seek court approval to continue paying tax obligations, including property taxes, sales taxes, franchise or business taxes, and all other taxes the nonpayment of which would disallow the debtor from remaining in good standing with government officials. Without receiving approval to make tax payments as part of a first day “tax motion,” the debtor would potentially be subject to penalties or sanctions, up to and including ceasing operations, depending on the circumstances.

The debtor may further seek authority to pay pre-bankruptcy claims of shippers, mechanics, materials suppliers, and other parties that could assert liens or other collateral interests in the debtor’s property if those claims were to remain unpaid. Often included in a “lienholder motion” are the claims of suppliers of goods that the debtor receives within a short period of time before it commences the chapter 11 proceeding, which claims are treated as cash-pay claims under federal bankruptcy law.

Depending on the nature of the debtor’s industry, it might file a first day motion seeking authority to pay pre-bankruptcy claims of critical vendors and suppliers on account of products or services without which the debtor would be unable to operate. For instance, a debtor in the food industry might file a “critical vendor motion” to seek approval to satisfy invoices of a supplier that provides the company with key ingredients. A debtor in the original equipment manufacturing industry might seek authority to satisfy the outstanding invoices of chip suppliers without which it would be unable to produce motor vehicles.

Also depending on the nature of the industry in which the debtor does business, it will typically file a motion for authority to maintain ongoing customer programs. For example, a national retail clothing chain might seek court approval through a “customer programs motion” to continue honoring gift cards, gift certificates, or warranty programs during the pendency of the chapter 11 proceedings. The purpose of continuing those programs would be to maintain customer loyalty needed to allow the debtor to continue selling merchandise, products, and other inventory.

Procedural first day motions and other matters

Debtors with high-dollar assets and liabilities also often file a suite of procedural motions near the time that they submit to the bankruptcy court the above-described operational first day motions. For instance, debtors in mega chapter 11 bankruptcy proceedings typically file motions for joint administration. By doing so, they may obtain court authority to run the bankruptcy proceedings as a single matter, instead of as a series of separate matters that require duplicate court filings and hearings. Such a practice saves time and money and preserves assets for the benefit of creditors. As another example, debtors often submit a procedural motion for authority to extend the deadline for filing required financial statements and related documents in chapter 11, known as “schedules and statements.” A debtor may further seek to establish procedures for setting pleading deadlines and holding hearings in front of the bankruptcy court, known as a “case management motion.”

Around the time that the debtor submits the above-described operational and procedural first day motions for court approval, it may also seek authority to obtain bankruptcy financing, known as “debtor-in-possession financing,” to give it access to cash resources during its chapter 11 proceedings. If the debtor has sufficient pre-bankruptcy financing arrangements or other sources of liquidity, it may instead seek court approval to use cash that may, for instance, be subject to security or other collateral interests of pre-bankruptcy lenders and creditors. That type of motion is known as a “cash collateral motion.”

Corporate Restructuring and Key Participants

Chapter 11 bankruptcy reorganization provides business organizations with an opportunity to reduce or eliminate debt and other liabilities, adjust their organizational structure by selling or liquidating underperforming lines of business, and implement changes in corporate governance and management structures to provide for enhanced opportunities for future operations, among other benefits.

A business organization may pursue either an in-court or out-of-court restructuring. If an organization flies a voluntary petition for relief under the United States Bankruptcy Code, it will be required to work with legal and financial professionals, judicial officers, and other stakeholders, such as governmental entities and regulators, groups of creditors and parties that have an interest in the outcome of the proceeding, the media, and the public.

Before it commences a chapter 11 bankruptcy proceeding, the organization will typically retain bankruptcy counsel to analyze its organizational structure, business operations and financial performance, debt structure and lienholders, employee compensation, and tax liabilities, among other information. Depending on the size and scope of its operations, the organization will also work with a financial advisor and investment bank, both of which will help it study its operations and finances, as well as determine optimal paths forward.

The organization must remain aware that, once it becomes the subject of a bankruptcy proceeding, a federal bankruptcy judge will be named to administer its legal proceedings in front of the applicable federal bankruptcy court. At that time, the organization will be identified as the “debtor.” The bankruptcy judge must approve all matters outside the ordinary course of the organization’s business operations. For instance, the court must approve the retention and compensation structure for the debtor’s attorneys and financial advisors. Ultimately, whether the court approves of the debtor’s plan of reorganization will determine whether the debtor will emerge out of bankruptcy.

Also involved in the bankruptcy process is the Office of the United States Trustee, or “UST.” The UST is an agency within the United States Department of Justice that is responsible for ensuring the fairness and integrity of the bankruptcy process. Typically, the UST will closely monitor the debtor’s court filings, hearings, and spending to ensure that it acts in compliance with the Bankruptcy Code. The UST will, for instance, file an objection with the bankruptcy court if the debtor’s professionals seek to charge unreasonable fees, costs, or expenses to provide the debtor with their services.

Typically, in chapter 11, the organization’s pre-bankruptcy management will continue to operate the debtor’s business and manage its properties. That may change, however, if management has previously engaged in prohibited conduct, including, for example, intentional misconduct. If that occurs, the court has the authority to appoint a chapter 11 trustee to manage the debtor’s affairs.

Other key players in chapter 11 include organized groups of creditors or interested parties whose formation the bankruptcy court may approve to protect the interests of the group’s members. That includes, for instance, an official committee of unsecured creditors whose role is to protect the interests of vendors, suppliers, customers, service providers, and other entities that have claims against the debtor that are not secured by collateral. Another such committee includes holders of the organization’s equity interests, such as common or preferred stock. Certain parties may separately form ad hoc committees to protect their interests. That includes, for example, tort claimants, noteholders, and other parties that have shared interests regarding the debtor’s bankruptcy estate.

Other parties that are involved in a chapter 11 include other government regulators that had regulated the debtor’s pre-bankruptcy business, such as the Internal Revenue Service, Securities and Exchange Commission, and Bureau of Land Management, among other similar types of agencies.

As part of a chapter 11 bankruptcy, the debtor must plan to work with other stakeholders that have a more general interest in the matter. That includes the media, the organization’s employees, and its customers, especially if the debtor had provided pre-bankruptcy services to the wider public.

The debtor must ensure that its management and professionals navigate its relationships with the parties, officials, and stakeholders named above. Doing so may allow the debtor the opportunity to more smoothly and quickly emerge from bankruptcy to resume normal course operations.