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.”
