First Day Motions in Chapter 11 Bankruptcies: How Businesses Can (and Should) Use Them to Their Advantage

When seeking to reorganize their debts under Chapter 11, businesses can leverage several aspects of the bankruptcy process to their advantage. This includes using so-called “first day motions” to seek approvals and protections prior to an unsecured creditors’ committee being formed. While unsecured creditors may ultimately be able to challenge these approvals and protections in court, making effective use of first day motions can buy distressed debtors critical time while also setting the stage for a favorable outcome from the reorganization proceeding. Learn more from an experienced Miami Chapter 11 bankruptcy lawyer at Edelboim Lieberman:

Understanding First Day Motions in Chapter 11 Business Bankruptcies

In Chapter 11 bankruptcy cases, filing a bankruptcy petition is just one small step in the process. Companies seeking to reorganize their debts under Chapter 11 may need to file various motions (in addition to other pleadings and forms) as well, and filing certain types of motions early in the process can offer several distinct advantages.

In many cases, this means filing motions on the same day as the bankruptcy petition—or on the “first day” of the bankruptcy proceeding.

These first day motions can address a variety of issues (as discussed below); and, by filing them early, debtors can secure the bankruptcy court’s approval—at least temporarily—without their unsecured creditors’ involvement. Not only can this help to streamline the bankruptcy process; but, in many cases, it can effectively limit the options that unsecured creditors have available, thus helping to maximize the benefits of going through with a bankruptcy filing.

Common First Day Motions in Chapter 11 Cases

How can (and should) distressed debtors use first day motions to their advantage? Here are some common examples of first day motions in business bankruptcy proceedings filed under Chapter 11:

Motion for Permission to Use Cash Collateral

Once a business files for bankruptcy under Chapter 11, it is not allowed to use any cash collateral in its possession without its creditors’ consent. However, Chapter 11 debtors can avoid the need to obtain creditors’ consent by obtaining permission to use cash collateral from the bankruptcy court. Seeking permission to use cash collateral—including cash on hand, accounts receivable, rent payments, inventory held for sale, and proceeds from capital asset sales—through a first day motion can preserve debtors’ access to critical funds during the early stages of the bankruptcy process.

Motion for Approval of Debtor-in-Possession Financing

Obtaining debtor-in-possession financing during a Chapter 11 bankruptcy case requires court approval; and, here too, seeking approval before an unsecured creditors’ committee has been formed can avoid unnecessary costs, risks and delays. If preserving the debtor’s ability to use its cash collateral isn’t enough, then filing a first day motion to secure approval for debtor-in-possession financing could be critical to the debtor’s viability as a going concern as well.

Motion for Approval to Pay Employment-Related Expenses

While companies can generally continue to pay payroll and other employment-related expenses during the Chapter 11 bankruptcy process, they may need to seek approval to pay wages, salaries and benefits owed at the time of filing. If this is necessary, filing a first day motion to secure approval for payment of employment-related expenses can help avoid unpaid wage claims as well as general concerns and discontentment within the debtor’s workforce.

Motion for Approval to Pay Insurance Premiums

Likewise, if a company has outstanding insurance premiums at the time it commences a Chapter 11 bankruptcy proceeding, it can file a first day motion to secure the court’s approval to pay its insurers. Since losing insurance coverage can present substantial risks (in addition to potentially violating contracts with customers or clients), this is a key consideration for companies that are behind on their payment obligations under their insurance policies.  

Motion for Approval to Pay Critical Vendors

Along with approval to pay their insurers, businesses that file under Chapter 11 can also file first day motions to secure approval to pay their critical vendors. While businesses seeking approval must be able to demonstrate that each identified vendor is in fact “critical” to its operations, an experienced Miami Chapter 11 bankruptcy lawyer will be able to assist with making this demonstration. Generally speaking, if a vendor’s products or services are essential to a debtor’s operations (i.e., delivering critical materials or providing essential cybersecurity services), a first day motion for approval to pay the vendor will be justified.

Motion to Honor Customer Deposits in the Ordinary Course of Business

Under Chapter 11, if a company is holding customer deposits at the time it files for bankruptcy, these deposits become part of the company’s bankruptcy estate. To prevent this from happening, the business must file a first day motion to honor its customer deposits in the ordinary course of business. Similar to protecting relationships with employees, insurers and critical vendors, protecting relationships with the company’s customers can be essential to its ongoing viability as well.

Deciding Which First Day Motions to File

If you are getting ready to take your company through a Chapter 11 reorganization, which first day motions should you be prepared to file? Should you be prepared to file all of the motions discussed above (potentially in addition to others)?

As with all aspects of the business bankruptcy process, the answers to these questions depend on the specific circumstances at hand. While filing a broad swath of first day motions will often make sense, it is critical that business owners and executives make informed and strategic decisions. If you are considering a Chapter 11 filing, we invite you to contact us for more information.

Schedule a Call with a Miami Chapter 11 Bankruptcy Lawyer at Edelboim Lieberman

Are you considering a Chapter 11 bankruptcy filing in South Florida? If so, we encourage you to get in touch. To schedule a call with a Miami Chapter 11 bankruptcy lawyer at Edelboim Lieberman, please call 305-768-9909 or tell us how we can reach you online today.