Ch. 11 First Day Orders

Question 1

Bankruptcy Rule 6003: Cooling Off Period

Answer 1

1.Except to the extent necessary to “avoid irreparable harm” the court shall not grant the following orders within 20 days of the filing of the bankruptcy petition:

1. Retaining Professionals
2. KERPS
3. Request to pay prepetition claims (Critical vendors)
4. Request to sell assets outside the ordinary course of business
5. Request to assume or assign executory contracts
6. Request for DIP financing
7. Exceptions:
   1) authorization to obtain DIP financing
   2) authorization to use cash collateral

Question 2

Enlisted Professionals’ Duties to Disclose (In re Leslie Faye Companies)

Answer 2

1. The burden is on the professional to disclose all information of relationships and disinterests they have.
   (In re Leslie Faye Companies).
2. Attorneys working on a ch. 11 case cannot hold or represent an interest adverse to the estate, and the attorneys must also be disinterested. The word “disinterested” is a term of art, defined in section 101(14) of the Code as, among other things (not a creditor, equity holder, or insider, and not a director, officer, or employee within 2 yrs before date of filing), not having “an interest materially adverse to the interest of the estate ….”(327). iii. A handful of courts has held or implied that only “actual,” and not “potential,” conflicts of interest are disabling
3. The requirements of section 327 cannot be taken lightly, for they “serve the important policy of ensuring that all professionals appointed pursuant to [the section] tender undivided loyalty and provide untainted advice and assistance in furtherance of their fiduciary responsibilities

Question 3

§ 549 “Post-petition transactions”

Answer 3

1. A Debtor cannot make post-petition transfers that are NOT authorized by the court.
2. Courts have long held that payments to creditors on account of prepetition claims are among the types of unauthorized transfers that are prohibited

Question 4

§ 105 - Power of court

Answer 4

1. Allows court to convert or dismiss a case sua sponte, not when a party in interest requests it.
2. judge has “necessary or appropriate” permission to effectuate the code, not circumvent it.

Question 5

§ 363(b) - Power of court (sale of assets)

Answer 5

court can order a sale of assets free and clear of the liens, claims, and interests of others

Question 6

§ 503 - Allowance of administrative expenses

Answer 6

1. Admin expenses allowed after notice and hearing for expenses incurred for preserving the estate.
   1) Wages, salaries, commissions - all after the commencement of the case.
   2) Burden is on creditor to show that expense was for [1] ordinary course of business and for [2] preserving the estate. See Levine case - courts use vertical and horizontal tests to define ordinary course of business. Similar to § 363’s application of “ordinary course of business” and the need for notice.
   3) Admin expenses are not claims, but creditor requests payment of it.
   4) § 507(a)→ Admin expenses are prioritized above unsecured claims.

Question 7

Critical Vendor Payments (In re Kmart)

Answer 7

1. While it is possible to make critical vendor payments, debtor must show that all creditors will be better off if the payments are made.
2. 2 Prong “doctrine of necessity test”
   1) But for paying off critical vendor, vendor would cease doing business with the Chapter 11 Debtor

2) Non-critical vendors must benefit OR at least NOT be harmed by the critical vendor payments (idea is that payments to critical vendors benefit non-critical vendors)
3. If the debtor and the creditors come arm in arm to court while the stay is being violated -there is no one to complain of the violation. Some circuits allow critical vendor lists, some do not. Remember to show that this is in the ordinary course of business.

Question 8

§ 363 (a)- Use, sale, or lease of property

Answer 8

(a) In this section, “cash collateral” means cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents whenever acquired in which the estate and an entity other than the estate have an interest and includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a security interest as provided in section 552(b) of this title, whether existing before or after the commencement of a case under this title.

Question 9

§ 363(c)(2)-(4) - Trustee Use, sale, or lease of property

Answer 9

(2) The trustee may not use, sell, or lease cash collateral under paragraph (1) of this subsection unless—
(A) each entity that has an interest in such cash collateral consents; or
(B) the court, after notice and a hearing, authorizes such use, sale, or lease in accordance with the provisions of this section.

(3) Any hearing under paragraph (2)(B) of this subsection may be a preliminary hearing or may be consolidated with a hearing under subsection (e) of this section, but shall be scheduled in accordance with the needs of the debtor. If the hearing under paragraph (2)(B) of this subsection is a preliminary hearing, the court may authorize such use, sale, or lease only if there is a reasonable likelihood that the trustee will prevail at the final hearing under subsection (e) of this section. The court shall act promptly on any request for authorization under paragraph (2)(B) of this subsection.
(4) Except as provided in paragraph (2) of this subsection, the trustee shall segregate and account for any cash collateral in the trustee’s possession, custody, or control.

Question 10

§ 363 (e) - Trustee Use, sale, or lease of property: Adequate Protection

Answer 10

e) Notwithstanding any other provision of this section, at any time, on request of an entity that has an interest in property used, sold, or leased, or proposed to be used, sold, or leased, by the trustee, the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest. This subsection also applies to property that is subject to any unexpired lease of personal property (to the exclusion of such property being subject to an order to grant relief from the stay under section 362).

Question 11

§ 362(d)(2) - Automatic stay: Relief

Answer 11

(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay—

(2) with respect to a stay of an act against property under subsection (a) of this section, if—
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization;

Question 12

§ 361 - Adequate protection

Answer 12

When adequate protection is required under section 362, 363, or 364 of this title of an interest of an entity in property, such adequate protection may be provided by—

(1) requiring the trustee to make a cash payment or periodic cash payments to such entity, to the extent that the stay under section 362 of this title, use, sale, or lease under section 363 of this title, or any grant of a lien under section 364 of this title results in a decrease in the value of such entity’s interest in such property;
(2) providing to such entity an additional or replacement lien to the extent that such stay, use, sale, lease, or grant results in a decrease in the value of such entity’s interest in such property; or
(3) granting such other relief, other than entitling such entity to compensation allowable under section 503(b)(1) of this title as an administrative expense, as will result in the realization by such entity of the indubitable equivalent of such entity’s interest in such property.

Question 13

Rule 4001. Relief from Automatic Stay; Prohibiting or Conditioning the Use, Sale, or Lease of Property; Use of Cash Collateral; Obtaining Credit; Agreements

Answer 13

(a) General. A motion for relief from the automatic stay or from the codebtor stay is a contested matter governed by Bankruptcy Rule 9014.

(b) Notice, Service of Motion and Hearing. Upon the filing of such a motion, the preliminary hearing will be consolidated with the final hearing unless the Court orders otherwise. The clerk’s office or some other person as the Court may direct must prepare a notice of such hearing and transmit a copy of the notice to the following:
• the movant;
• the debtor or the debtor in possession;
• the Trustee;
• any committee appointed in the case, or if no committee is appointed and it is a chapter 9 or 11 case, then on all creditors; and
• any other entity as the Court may direct.

The movant must serve a copy of the motion upon all of the aforesaid parties and attach a certificate of service to the motion. The hearing will be a final evidentiary hearing, and parties must be prepared for trial.

(c) Fact Summary Sheet: For a motion for relief from stay, a motion for relief from the codebtor stay, a motion to renew a relief from stay motion, or a motion for adequate protection filed in a chapter 7 or 13 case, the movant must complete and file a fact summary sheet. The fact summary sheet must substantially comply with the fact summary sheet form found on this Court’s website at www.alnb.uscourts.gov/localforms.cfm. The movant must file and serve the fact summary sheet completed in full at least 14 days prior to the first hearing date on the motion. The movant must ensure that, when the fact summary sheet is filed, it is filed as a separate event using the proper event from CM/ECF, not as an attachment to the motion. To file the fact summary sheet, the movant must select “Bankruptcy,” “Miscellaneous,” and “Fact Summary for Motion for Relief from Stay.” The movant will serve the fact summary sheet using CM/ECF. If the movant does not fully complete, timely file, and properly serve the fact summary sheet, the Court may continue, dismiss, or deny the motion.

Question 14

Can the court grant debtors’ cash collateral request when record indicates that the collateral base will suffer a decline of approx. $540,000 shortly after petition? (In re Dynaco Corp)

Answer 14

Cash collateral does not maintain a constant value throughout the case, the court must look at it as a motion picture because the collateral is constantly turning over and recycling into new cash. To achieve this you must look at; (1) levels of collateral; (2) cash flowing through the business; (3) debtor’s chances of successfully rehabilitating.

Question 15

§ 1102 - Creditors’ and equity security holders’ committees

Answer 15

1. (a)(1) US Trustee must appoint committee of creditors holding unsecured claims soon after order for relief and may appoint additional committees of creditors or equity security holders as seems appropriate;
2. (a)(2) Court may order the appointment of additional committees (other creditors and equity holders) if party in interest requests it. US Trustee shall appoint any such committee upon request;
3. (a)(4) Trustee may change make-up upon request and notice and hearing to ensure adequate representation of creditors or equity security holders
4. (b)(1) Creditors Committee ordinarily consists of 7 largest claim holders who are willing to serve; Can a holder of a disputed claim serve as a committee member?
5. (b)(2) Equity Share Holder Committee ordinarily consists of 7 largest equity holders (no “willing to serve provision”).

Question 16

§ 1103 - Powers and duties of committees

Answer 16

1. (a) When a majority of the members are present and with court approval the committee may employ attorneys, accountants, or other agents;
2. (b) An agent employed under §1102 may not, while employed by such committee represent any other entity having an adverse interest in connection with the case. Representation of one or more creditors of the same class as represented by the committee shall not per se constitute the representation of an adverse interest.
3. (c) List of activities committee may do:
   a. (1) Consult w/ trustee/DIP about administration of case;
   b. (2) Investigate the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor’s business and the desirability of continuance of such business and any other relevant matter;
   c. (3) Participate in formulation of plan;
   d. (4) Request trustee or examiner;
   e. (5) Perform other services as are in the interest of those represented
4. (d) Trustee must meet with the committees soon after formation to transact any necessary or proper businesses.

Question 17

Under what circumstances can an entity be removed from the creditors committee?(In re America West Airlines)

Answer 17

1. UST has authority to remove and appoint official committee members if the creditor no longer holds a claim for the purpose of committee representation, and is not representative of the claims comprising the committee.

Question 18

Do credit committee disclosure rules apply to other “groups or ad-hoc committees? (In re Northwest Airlines)

Answer 18

1. Yes, Disclosure requirements apply to ad hoc committees and groups.
2. Amended Rule 2019 applies to “every group or committee that consists of or represents, and every entity that represents, multiple creditors or equity security holders that are (A) acting in concert to advance their common interests, and (B) not composed entirely of affiliates or insiders of one another.”
3. Disposable econ interest must be disclosed (Any claim, option, derivative instrument); Doesn’t require members to disclose what they spent to purchase claims
4. Under amended Rule 2019, a party is no longer required to provide the date on which an interest in the debtor was acquired except in limited circumstances, although where a group or committee purports to represent the interests of parties beyond its members that the members are required to disclosure the quarter and year in which their respective interests were acquired.