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Navigating The Crucial Initial Days Of A Chapter 11 Filing – First Day Motions
The initial stage of a Chapter 11 filing is the most crucial and debtors must be ready for the tactics of aggressive creditors and stakeholders jockeying for priority in the restructuring proceedings. As part of this phase, “first day motions” are typically filed on the first day of a case. These motions are to obtain permission to take certain actions necessary to maintain the debtor’s business operations that cannot be taken unless the court first issues an order authorizing the debtor to take the actions. These motions also serve the dual purpose of dealing with the urgent concerns of major players in the debtor’s operations. Commons examples of first day motions include: (1) Motion to Use Cash Collateral; (2) Motion to Pay Prepetition Payroll; and (3) Motion for Order Authorizing Payment of Critical Vendors.
Motion to Use Cash Collateral
Cash collateral is a liquid asset that is subject to a lien or security interest of a creditor. Cash collateral may include cash on deposit or on hand, accounts receivable, rent payments from tenants, insurance policy proceeds, inventory held for sale, and/or the proceeds arising from the sale of any asset, including real estate, if subject to the lien of a creditor.
Under law, the debtor is not allowed to use any cash collateral in a Chapter 11 filing without getting prior consent from the creditor who has the lien on that cash collateral. Although a court order is not necessary if the creditor consents, as a practical matter, creditors will usually not consent to the use of cash collateral without the entry of a court order. The order authorizing the use of cash collateral will typically contain certain provisions protecting the creditor’s position in connection with the use of cash collateral.
Motion to Pay Prepetition Payroll
Before payroll can be issued, it may be necessary to file a motion with the bankruptcy court to obtain approval to use any funds that are subject to a security interest of a lender. Such motions are also known as motions to use cash collateral and as described above.
Motion for Order Authorizing Payment of Critical Vendors
Authority can be sought to pay claims incurred prior to the bankruptcy filing owed to “critical vendors” that supply goods and services. Chapter 11 debtors typically argue that, unless such motions are granted, the vendors will cease supplying them, and jeopardize their ability to reorganize. Court orders that grant critical vendor motions require vendors to continue supplying debtors on specified business terms in return for payment of the prepetition amounts owed. As part of these motions, vendors sometimes insist on cash in advance or cash on delivery terms, or obtaining a stand-by letter of credit to secure future payments.