7 Code Sections in Chapter 11 Bankruptcy Laws That Protect an Operating Business

The protection an operating business receives in Chapter 11 is written in about a dozen sections of Title 11, and most of them are shorter than the lease they override. Each grants the debtor a power, and each carries, a clause or two later, the price of using it.

Seven of those sections do the daily work of keeping a company open. The statutory text comes first below, because the text is the protection; the commentary only explains where it stops.

1. Section 362 Halts Collection the Moment the Petition Is Filed

"[A] petition filed under section 301, 302, or 303 of this title ... operates as a stay, applicable to all entities." So reads the opening of 11 U.S.C. 362(a), and the list that follows reaches lawsuits, enforcement of judgments, acts to obtain possession of estate property, lien enforcement, and setoff of debts owed to the debtor.

No motion is needed and no order is entered. The protection exists because the petition exists. Section 362(b) then lists the exceptions, criminal proceedings against the debtor among them, and a creditor may move for relief from the stay. The protection belongs to the debtor, which means a guarantor who has not filed generally remains exposed.

2. Section 363 Lets the Business Spend Money, With One Account Held Back

An operating debtor "may use property of the estate in the ordinary course of business without notice or a hearing," says section 363(c)(1). That sentence is what allows a restaurant in Chapter 11 to buy produce on Tuesday without asking a judge.

The held-back account is cash collateral, defined in section 363(a) to include "deposit accounts, or other cash equivalents" in which a creditor also holds an interest. Using it requires the creditor's consent or a court order after notice and a hearing, and under section 363(e) the court "shall prohibit or condition" any use as necessary to provide adequate protection. The provision works the way a hospital pharmacy works: open all night, and every dose logged against a name.

3. Section 364 Allows New Credit, Ranked Above the Old Creditors if Necessary

A senior or equal lien on already encumbered property may be granted "only if (A) the trustee is unable to obtain such credit otherwise; and (B) there is adequate protection of the interest of the holder of the lien." That is section 364(d)(1), the priming lien, and it is the most aggressive power in the chapter.

The section climbs toward it in steps. Ordinary unsecured trade credit needs no order under 364(a). Other unsecured credit needs court approval under 364(b). When unsecured credit is unavailable, 364(c) permits superpriority status or liens on unencumbered property. Only then does 364(d) allow a new lender to stand ahead of an existing one, and the debtor carries the burden of proving adequate protection. A lender whose collateral is about to be primed tends to object with some energy, and the objection is where most financing hearings are won or lost.

4. Section 365 Gives the Debtor a Choice About Every Contract, and a Deadline for the Leases

"[T]he trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor." With that sentence, section 365(a) converts a company's contracts into options. Profitable contracts are assumed and continue. Burdensome ones are rejected, and the rejection is treated under section 365(g) as a breach occurring immediately before the petition, which turns the counterparty's damages into a prepetition claim paid alongside other unsecured debts.

Assumption has a price. Under section 365(b)(1), a debtor in default must cure the default or provide adequate assurance of a prompt cure, compensate the other party for actual pecuniary loss, and provide adequate assurance of future performance. The debtor cannot keep the favorable parts of a contract while discarding the rest. Section 365(e) adds a protection that owners rarely know to look for: a contract may not be terminated or modified after the filing solely because of a clause keyed to the debtor's insolvency, financial condition, or bankruptcy, the so-called ipso facto clause, with exceptions in 365(e)(2).

Commercial leases run on a stricter clock. Under section 365(d)(4), an unexpired lease of nonresidential real property is deemed rejected, and the debtor "shall immediately surrender that nonresidential real property to the lessor," unless the lease is assumed or rejected by the earlier of plan confirmation or the 120th day of the case. The court may extend that period once, for 90 days, for cause, if the motion is made before the 120 days run; any later extension requires the landlord's prior written consent in each instance. In practice that yields up to 210 days absent the landlord's agreement, and for a retailer with a dozen locations it compresses the most consequential real estate decisions of the company's life into roughly seven months.

Whether a merchant cash advance agreement is an executory contract, a purchase of receivables, or a disguised loan is a question courts answer on the documents. Section 365(c)(2) separately bars assuming a contract to extend new credit to the debtor, which keeps a debtor from forcing a lender to keep lending.

Until a nonresidential lease is assumed or rejected, section 365(d)(3) requires the debtor to perform the lease's postpetition obligations, rent included, on time.

5. Section 366 Keeps the Lights On for Thirty Days

A utility "may not alter, refuse, or discontinue service to, or discriminate against," the debtor solely because of the filing or an unpaid prepetition bill. In a Chapter 11 case, though, section 366(c)(2) lets the utility discontinue service if within 30 days of the petition it has not received adequate assurance of payment "that is satisfactory to the utility," and an administrative expense priority does not count as assurance.

The deposit is usually the answer.

6. Section 1121 Reserves the First Draft of the Plan to the Debtor

The debtor's exclusive period "may not be extended beyond a date that is 18 months" into the case, says section 1121(d)(2), and the period it limits begins with section 1121(b), which reserves plan filing to the debtor for the first 120 days. That reservation is the reason creditors in the opening months of a case can object to a plan but cannot write a competing one. Small business cases under 1121(e) run on a 180 day exclusive period with a 300 day filing deadline.

Exclusivity protects the debtor's pen. It does not protect the debtor's time.

7. Section 1129(b) Allows Confirmation Over a Class That Says No

On the proponent's request, "the court ... shall confirm the plan notwithstanding the requirements of such paragraph," provided the plan treats each dissenting impaired class without unfair discrimination and in a manner that is "fair and equitable." The paragraph referred to is 1129(a)(8), the requirement that every class accept or be unimpaired, and section 1129(b)(1) is the provision that lets a plan survive without universal consent.

The words "fair and equitable" carry the limits. For secured classes, they preserve the lien and the value of the collateral. For unsecured classes, they impose the absolute priority rule, under which equity keeps nothing over a dissenting unpaid class. Critics of cramdown (who tend to be the creditors being crammed) describe it as coercion; the statute describes it as a floor, and the floor is higher than most owners expect. Whether the business can climb over it is the question each of the six sections above was built to give the debtor time to answer.

What the Statutes Do Not Reach

These seven sections protect the company. They do not negotiate its debts, and they do not protect an owner who has signed personally. For a business whose merchant cash advance obligations might be restructured without a petition, Delancey Street reviews the file without charge and in confidence. The company settles debt; it is not a law firm, files no bankruptcy cases, makes no court appearances, and it works with independently licensed counsel when legal questions arise. A company that needs the stay, the lease rejection power, or a priming loan needs bankruptcy counsel instead, and should call one.