Insight

Getting Reorganized

Taking a second look at first day relief: an examination of recent bankruptcy trends through the lens of two important debtor motions and their impact on Chapter 11 bankruptcy proceedings.

Desk lamp with yellow background
SA

Sameer M. Alifarag and Seth H. Lieberman

September 8, 2022 09:04 AM

A Chapter 11 Bankruptcy often begins with a debtor filing an array of “first day” motions—requests for relief that a debtor deems necessary upon the case’s commencement. First day motions ease the transition into bankruptcy and enable a debtor’s operations to continue uninterrupted.

Obtaining first day relief is important to establish credibility with the bankruptcy court; maintain the support of the debtor’s suppliers, customers and employees; and maximize the value of the bankruptcy estate at the outset of the case. Notwithstanding its importance, such relief can feel routine, leading some to suggest that bankruptcy courts simply rubber-stamp first day motions. Lately, however, courts have increasingly scrutinized first day relief, adjudging that relief with an eye toward fairness and due process while ensuring that bargains between a debtor and its creditors maximize the estate’s value.

This is not to suggest that courts have ignored these considerations in the past—yet as commercial parties’ sophistication continues to evolve, analyzing whether to grant such relief warrants a closer look at the specifics of first day requests. Below, we’ll examine trends concerning two particular first day motions—utility motions and critical vendor motions—and the impact they’ve had on Chapter 11 proceedings over the past year.

Utilities Motions

Utility services are necessary for debtors to continue operating during bankruptcy (a period also known as “post-petition”). With few exceptions, a debtor’s utility providers are generally not required to continue service upon commencement of the case; indeed, utilities will themselves often be creditors resulting from debt owed for unpaid services provided pre-bankruptcy. In these circumstances, a utility would have little incentive to continue its service unless it can be assured that the debtor will comply with its payment obligations post-petition.

A utilities motion is a debtor’s request to compel its providers to continue service post-petition, contingent on the debtor offering “adequate assurance” of payment. Obtaining approval of a utilities motion is a safeguard against the risk that utilities essential to a successful Chapter 11 reorganization do not alter or discontinue service. Utilities are authorized to do exactly that if the debtor fails to furnish adequate assurance of payment within 30 days after the bankruptcy is filed. So, what constitutes adequate assurance: a two-week utility cost deposit? a two-month deposit? The question is, paradoxically, both fact-intensive and subjective, as disputes often arise concerning the form or amount of such assurance, despite the Bankruptcy Code containing few adequate assurance examples. Although utility motions are rarely litigated and usually granted upon resolution of adequate assurance objections, the parties don’t always get to a resolution quickly.

Bankruptcy courts have expressed concern over utilities’ control over first day relief. As a result, recent trends include procedures whereby the debtor and utility negotiate and resolve adequate assurance objections without further court intervention. This preserves rights belonging to both the debtor and utility and gives the parties breathing room to settle disputes without being bound to time requirements under the Bankruptcy Code.

To successfully reorganize under Chapter 11, a debtor’s business must continue to operate."

For example, recent trends also consist of, in part, a utility’s authority to request a disbursement from the debtor’s utility account if an amount related to post-petition services is unpaid, even during the adequate assurance negotiation period. This ensures continuing utility service during a crucial stage of the case; offers the utility assurance of payment; and prevents the utility from exerting disproportionate control over the debtor’s operations (i.e., by altering, refusing or discontinuing service).

Critical Vendor Motions

To successfully reorganize under Chapter 11, a debtor’s business must continue to operate. Contributing to ongoing operations are entities referred to as “critical vendors”—typically suppliers that a debtor deems vital to its daily business. Critical vendor motions are requests by a debtor to pay pre-bankruptcy obligations owed to suppliers as an incentive toward continued business with the debtor on favorable terms.

Such relief can result in critical vendors “jumping the line” by receiving material recoveries during the bankruptcy on account of their pre-bankruptcy claims. Because the evidentiary basis supporting this relief can be scant, bankruptcy courts have recently moved away from the knee-jerk granting of these requests in toto without imposing appropriate restrictions, particularly if sufficient evidence supporting the request is lacking.

For example, recent critical vendor orders might condition a debtor’s authority to make payments on the vendor continuing to do business on existing or better trade terms than those that existed pre-bankruptcy and agreeing that receipt of payment followed by the vendor’s failure to adhere to the agreed-upon terms will constitute an unauthorized post-petition transfer subject to disgorgement.

Notwithstanding recent court developments, debtors’ flexibility to pay critical vendors has become increasingly limited. This is largely due to a debtor once having had unchecked discretion to make payments on account of pre-bankruptcy debt outside the normal priority scheme, and the concern that creditors receiving such payments are not truly “critical” to the reorganization. If an unsecured creditors committee (which represents the interests of all unsecured creditors) has been established, debtors are often instructed to provide the committee with notice of proposed vendor payments and allow the committee to halt the payment absent further order of the court. This check restricts a debtor’s autonomy, but such a restriction might be welcome, as the committee’s involvement in critical vendor approval adds credibility to the requested relief.

Debtors have also addressed a bankruptcy court’s concerns about whether vendors are truly critical by assessing:

• the general availability of goods or services provided by a vendor or supplier;

• whether a debtor’s current inventory levels or service coverage is sufficient to meet customer demands while an alternative vendor or service provider could be located or qualified;

• whether failure to pay all or part of a vendor’s claim could cause the vendor to refuse to provide inventory or critical services post-petition; and

• whether a debtor would be unable to obtain comparable goods or services from alternative sources cost-effectively within a reasonable time.

Conclusion

Bankruptcy courts’ recent enhanced scrutiny and debtor trends in response are significant not only to utility and critical vendor motion practice, but to Chapter 11 proceedings in their entirety. First day motions set the stage for a bankruptcy case—and thus a debtor’s approach to seeking such relief and a court’s consideration of the same go hand in hand. If first day relief is not granted, the prospect of a successful reorganization diminishes. And while courts’ greater scrutiny might bring challenges to debtors at the outset, debtors’ employment of new and creative relief trends might ultimately lead to a more structured and streamlined bankruptcy process.

Seth H. Lieberman, a partner and chair of Pryor Cashman’s Bankruptcy, Reorganization + Creditors’ Rights Group and co-chair of the Corporate Trust Practice, is an experienced restructuring attorney and litigator who represents clients ranging from indenture trustees and agents to distressed debt funds, trade creditors and landlords. Seth helps lead one of the most well-known and highly regarded default-side corporate trust practices, and he has an active creditor-side bankruptcy practice.

Sameer M. Alifarag is an associate and a member of Pryor Cashman’s Bankruptcy, Reorganization + Creditors’ Rights Group and the Corporate Trust practice. Sameer represents a diverse array of clients, including trustees, creditors, investors and secured and unsecured lenders in complex Chapter 11 reorganizations, out-of-court restructurings, assignments for the benefits of creditors and other distressed situations. He has particular experience in representing default-side corporate trust clients and sophisticated creditors.

Headline Image: ISTOCK/ BGBLUE

Related Articles

Accommodation Reigns


by J. Lott Warren and Kara E. Shea

A recent 6th Circuit Court decision could have big implications for employers who don’t follow reasonable-accommodation standards within disability and medical-leave law to the letter.

Blue lungs behind white clock

COVID-19 and a Cloud of Dust


by John J. Song and Theodore M. Becker

Think ERISA health plan litigation was convoluted before? The pandemic—and future pathogens such as the monkeypox virus currently causing consternation among health authorities worldwide—will further upend the legal landscape as new regulations and statutes take effect.

Masked man with airborne germs

The Great Debate: Do You Arbitrate Commercial Disputes?


by David K. Taylor

In a civil case, is it wiser for a business to try to persuade the counterparty to agree from the outset to arbitration—or potentially to place its very solvency in the unpredictable hands of a judge and jury?

Hand moving multicolor blocks

Before the Claim Hits


by George L. Lankford

General liability insurance is rarely as simple as it might seem—and if you wait to examine your policy specifics until your business has been sued, it’s too late.

Ship sinking surrounded by money

Find the Best Lawyers for Your Needs


by Jennifer Verta

Discover how Best Lawyers simplifies the attorney search process.

A focused woman with dark hair wearing a green top and beige blazer, working on a tablet in a dimly

"Lawyer of the Year"


Lawyer poses for legal headshot in purple dress

Eva Davis

Corporate Law

Los Angeles, CA

2025

One of NY’s Top Personal Injury Lawyers on 2 Surprising Trends Transforming the Industry


by Gregory Sirico

Lawyer Jeff Korek talks emerging personal injury law trends in IVF litigation and trial scarcity.

Doctor consoles couple in medical office

"Lawyer of the Year"


Lawyer in suit smiles for professional headshot

Kevin M. Levy

Technology Law

Miami, FL

2025

History Eraser


by Gregory Sirico

Penguin Random House and several other major book publishing houses filed litigation against Florida education leaders who recently passed a book ban law.

Penguin logo in front of black and white books

Scarlett Law Group: Mastering TBI Trial Law


by Justin Smulison

Randall H. Scarlett shares successes in traumatic brain injury cases, fueling Scarlett Law Group's growth across Northern California with specialized insights.

Two lawyers, suited, standing in front of law firm sign

"Lawyer of the Year"


Man in suit and tie smiling for professional headshot

Dylan D. Rudolph

Litigation - ERISA

San Francisco, CA

2025

"Lawyer of the Year"


Lawyer poses for professional firm headshot

Mindi M. Richter

Copyright Law

Tampa, FL

2025

One of the Greatest Ever...


by Justin Smulison

Steve Yerrid, a top catastrophic injury lawyer, has secured over 300 verdicts of $1M+ and has been recognized as "Lawyer of the Year" multiple times in Tampa.

Lawyer in blue suit poses in office for headshot

IN PARTNERSHIP

Georgia Car Accident: How to File a Car Accident Case


by Robert Hammers

In a car accident in Georgia? Read this guide for key steps from actions at the scene to settlement talks and lawsuit filing. Stay informed and prepared.

Figure with clipboard assesses the scene of an accident

How a New Maryland Bike Safety Law Honors a Client’s Legacy


by Justin Smulison

Four-time Lawyer Of The Year Patrick Regan discusses how a client’s bicycling tragedy led to a result that improved Maryland traffic law to protect riders.

Group of lawyers posing for a photo

"Lawyer of the Year"


Lawyer wearing glasses and suit smiles in headshot photo

Duane C. Pozza

Advertising Law

Washington, D.C., DC

2025

Trending Articles

2025 Best Lawyers Awards Announced: Honoring Outstanding Legal Professionals Across the U.S.


by Jennifer Verta

Introducing the 31st edition of The Best Lawyers in America and the fifth edition of Best Lawyers: Ones to Watch in America.

Digital map of the United States illuminated by numerous bright lights

Unveiling the 2025 Best Lawyers Awards Canada: Celebrating Legal Excellence


by Jennifer Verta

Presenting the 19th edition of The Best Lawyers in Canada and the 4th edition of Best Lawyers: Ones to Watch in Canada.

Digital map of Canadathis on illuminated by numerous bright lights

Legal Distinction on Display: 15th Edition of The Best Lawyers in France™


by Best Lawyers

The industry’s best lawyers and firms working in France are revealed in the newly released, comprehensive the 15th Edition of The Best Lawyers in France™.

French flag in front of country's outline

Presenting the 2025 Best Lawyers Editions in Chile, Colombia, Peru and Puerto Rico


by Jennifer Verta

Celebrating top legal professionals in South America and the Caribbean.

Flags of Puerto Rico, Chile, Colombia, and Peru, representing countries featured in the Best Lawyers

Announcing the 13th Edition of Best Lawyers Rankings in the United Kingdom


by Best Lawyers

Best Lawyers is proud to announce the newest edition of legal rankings in the United Kingdom, marking the 13th consecutive edition of awards in the country.

British flag in front of country's outline

Unveiling the 2025 Best Lawyers Editions in Brazil, Mexico, Portugal and South Africa


by Jennifer Verta

Best Lawyers celebrates the finest in law, reaffirming its commitment to the global legal community.

Flags of Brazil, Mexico, Portugal and South Africa, representing Best Lawyers countries

Prop 36 California 2024: California’s Path to Stricter Sentencing and Criminal Justice Reform


by Jennifer Verta

Explore how Prop 36 could shape California's sentencing laws and justice reform.

Illustrated Hands Breaking Chains Against a Bright Red Background

Announcing the 16th Edition of the Best Lawyers in Germany Rankings


by Best Lawyers

Best Lawyers announces the 16th edition of The Best Lawyers in Germany™, featuring a unique set of rankings that highlights Germany's top legal talent.

German flag in front of country's outline

Celebrating Excellence in Law: 11th Edition of Best Lawyers in Italy™


by Best Lawyers

Best Lawyers announces the 11th edition of The Best Lawyers in Italy™, which features an elite list of awards showcasing Italy's current legal talent.

Italian flag in front of country's outline

Tampa Appeals Court ‘Sends Clear Message,” Ensuring School Tax Referendum Stays on Ballot


by Gregory Sirico

Hillsborough County's tax referendum is back on the 2024 ballot, promising $177 million for schools and empowering residents to decide the future of education.

Graduation cap in air surrounded by pencils and money

Find the Best Lawyers for Your Needs


by Jennifer Verta

Discover how Best Lawyers simplifies the attorney search process.

A focused woman with dark hair wearing a green top and beige blazer, working on a tablet in a dimly

Key Developments and Trends in U.S. Commercial Litigation


by Justin Smulison

Whether it's multibillion-dollar water cleanliness verdicts or college athletes vying for the right to compensation, the state of litigation remains strong.

Basketball sits in front of stacks of money

Woman on a Mission


by Rebecca Blackwell

Baker Botts partner and intellectual property chair Christa Brown-Sanford discusses how she juggles work, personal life, being a mentor and leadership duties.

Woman in green dress crossing her arms and posing for headshot

Best Lawyers Celebrates Women in the Law: Ninth Edition


by Alliccia Odeyemi

Released in both print and digital form, Best Lawyers Ninth Edition of Women in the Law features stories of inspiring leadership and timely legal issues.

Lawyer in green dress stands with hands on table and cityscape in background

The Human Cost


by Justin Smulison

2 new EU laws aim to reshape global business by enforcing ethical supply chains, focusing on human rights and sustainability

Worker wearing hat stands in field carrying equipemtn

Beyond the Billables


by Michele M. Jochner

In a recently conducted, comprehensive study, data reveals a plethora of hidden realities that parents working full-time in the legal industry face every day.

Women in business attire pushing stroller takes a phone call