First Day Motions in a Small Business Chapter 11: 6 Orders Filed With the Petition

On filing a small business Chapter 11 case, the attorney typically files six additional motions;

• to keep bank accounts and cash management,
• to keep utilities on,
• to honor customer deposits,
• to pay critical vendors’ old bills,
• to pay prepetition payroll,
• and to use cash collateral.

Usually, the court must approve any use of estate funds that might have gone to creditors otherwise. The details depend on local practice.

Keep in mind that bankruptcy is a declaration that the business cannot pay its bills on its own. Courts are skeptical, then, about paying them while in bankruptcy. It’s the court’s responsibility to be sure all the creditors get paid fairly.

These motions are typically filed at the same time as the chapter 11 petition and, in most courts, within days of the filing, they are heard. It’s a matter of survival; if you’ve got no phone, no electricity, or no water, you need relief now.

That first hearing is to provide interim relief; that is, things the business needs right away while waiting for a hearing on a final order. Note that the final order may be two or three weeks away. That’s a relatively short time in the court’s schedule, but a lifetime for a business without heat and electricity. Final relief is typically deferred to give creditors time to object if they have concerns. In the first 21 days after filing a small business case, the court can’t approve paying old claims or using estate property unless you can show you need the money to avoid immediate and irreparable harm.

First-day Motions

The first, a cash collateral motion, asks for the right to use any cash in the possession of the debtor at the time of filing that is subject to a lien of one of the debtor’s creditors. Cash is the lifeblood of the business. Here, the court’s main concern is that the creditor with a lien (typically a bank) will not be paid if the debtor’s use of the cash is permitted. The general standard for using cash collateral is that the creditor must be provided ”adequate protection” of the value of the collateral. Often the debtor is required to make regular payments to the creditor as a term of use of the cash collateral, so that its creditor is adequately protected. Approval from lien holders or the court is needed to use their cash. Before the final hearing, only emergency funds are allowed. The court will limit payments to enough to stave off immediate and irreparable harm.

The next motion is to continue the business’ current banking accounts, where the business pays bills and collects money, intact. Without these accounts, a business will be paralyzed. When filing, you’re usually supposed to open up a new bank account that has to be at a federally insured bank. In the days of robo-pay and automatic bill pay, that would be a disaster.

The third motion is to pay wages owed employees for services already performed. All employees must be paid, or they will leave, and the business will be nonviable. Payrolls are almost always allowed to be paid. Your employees’ wages earned within the 180 days before filing are priority claims paid ahead of general unsecured creditors anyway. There is, however, a cap of $17,150 in wages per employee that are entitled to priority status.

There’s a separate motion to keep the utilities on. Without utilities, a business is likely dead. Being “in bankruptcy” doesn’t protect a debtor from a cutoff of service. The motion to keep utility service says you will give an adequate assurance of payment within thirty days of filing. The utility can refuse to give service if it doesn’t like the assurance. A utility can make you post a deposit or bond to cover future service.

Many companies take deposits from customers before the customers get their goods or services. A motion to honor the deposits tells the court you want to deliver on these prepayment contracts. Not honoring deposits can mean the end of that business. Nobody orders unless they have confidence the goods will be delivered.

Another motion is to pay ”critical vendors.” These are suppliers you rely on for goods and services so vital that you cannot survive without their delivery. This motion is only allowed where it is necessary to preserve the life of the business. Otherwise, in bankruptcy, creditors with invoices are on an equal playing field with no one creditor being paid more or sooner than others. Judges take a close look at these motions. You’re going to have to prove each vendor is truly critical, would refuse to ship on credit if not paid, and you couldn’t replace the vendor elsewhere. The idea is to help your business survive the bankruptcy process, not give you a free ride out of your debts at the creditors’ expense.

The debtor also submits a general overview of its business, its need to reorganize, and a full list of reasons supporting the critical nature of the matters discussed at the first hearing. This so-called first day declaration often gives a detailed description of the business, why it went into bankruptcy, and how it will be reorganized. It’s a factual background of who you are, where you are, and why you’re here. You need to provide evidence behind each first-day motion. One affidavit can cover all of them. It must be signed by someone who can swear under oath they know the facts. You must attach a copy of your latest tax return and balance sheet, profit and loss and statement of cash flow. Or you can swear you didn’t have any.

Subchapter V uses many of the same first-day motions as a regular Chapter 11, often slimmed down. Cash collateral, payrolls, bank accounts, and utilities are the typical items needing to be covered on the first day of filing. A Subchapter V trustee is appointed, but the owner stays in control.

Creditors can object to any of these requests. But at the first day hearing, they don’t have much time to object. Mostly that’s reserved for the final hearing a few weeks out. Wages and bank accounts rarely draw a fight; critical vendors and cash collateral terms more often do. If the judge won’t sign your requested order, you may not be able to keep the business afloat.

Be Prepared Before You File

There’s not a lot of time between filing and getting to the first-day hearing. You need to be prepared before you file so you’re not scrambling to get ready when you’re already in the emergency room. You need all the documents that evidence the facts in your declaration. You need to prepare a list of all your accounts, the number of people employed and their salaries. The filing decisions are not ones you want to make on your own. The best approach is to start talking to counsel early.