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THE NUTS & BOLTS OF BANKRUPTCY LAW 2022: The Nuts & Bolts of a First Day Hearing

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THE NUTS & BOLTS OF BANKRUPTCY LAW 2022: The Nuts & Bolts of a First Day Hearing

Even when a bankruptcy petition is the result of a soft-landing rather than a freefall, filing a chapter 11 petition is a disruptive event. To facilitate the debtor’s entry into chapter 11 with as little disruption as possible, first day motions are filed to ensure that a debtor-in-possession can minimize interruptions and continue operating its business in order to achieve its goals in chapter 11. This webinar provides an overview of the administrative and operational first day motions typically filed by chapter 11 debtors and the process for requesting a first day hearing, providing notice of the hearing, and ensuring that the hearing runs smoothly.

Part of the webinar series: THE NUTS & BOLTS OF BANKRUPTCY LAW 2022

See more at https://www.financialpoise.com/webinars/

Even when a bankruptcy petition is the result of a soft-landing rather than a freefall, filing a chapter 11 petition is a disruptive event. To facilitate the debtor’s entry into chapter 11 with as little disruption as possible, first day motions are filed to ensure that a debtor-in-possession can minimize interruptions and continue operating its business in order to achieve its goals in chapter 11. This webinar provides an overview of the administrative and operational first day motions typically filed by chapter 11 debtors and the process for requesting a first day hearing, providing notice of the hearing, and ensuring that the hearing runs smoothly.

Part of the webinar series: THE NUTS & BOLTS OF BANKRUPTCY LAW 2022

See more at https://www.financialpoise.com/webinars/

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THE NUTS & BOLTS OF BANKRUPTCY LAW 2022: The Nuts & Bolts of a First Day Hearing

  1. 1. 2 Practical and entertaining education for attorneys, accountants, business owners and executives, and investors.
  2. 2. 3 Thank You To Our Sponsors
  3. 3. Disclaimer The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. 4
  4. 4. Meet the Faculty MODERATOR: Ashley Jericho – McDonald Hopkins PANELISTS: Maria Carr – McDonald Hopkins LLC Trinitee Green – Polsinelli LLP Benjamin L. Wallen – Pachulski Stang Ziehl & Jones 5
  5. 5. About This Webinar The Nuts & Bolts of a First Day Hearing Even when a bankruptcy petition is the result of a soft-landing rather than a freefall, filing a chapter 11 petition is a disruptive event. To facilitate the debtor’s entry into chapter 11 with as little disruption as possible, first day motions are filed to ensure that a debtor-in-possession can minimize interruptions and continue operating its business in order to achieve its goals in chapter 11. This webinar provides an overview of the administrative and operational first day motions typically filed by chapter 11 debtors and the process for requesting a first day hearing, providing notice of the hearing, and ensuring that the hearing runs smoothly. 6
  6. 6. About This Series The Nuts & Bolts of Bankruptcy Law 2022 During the past few years, companies across a broad spectrum of industries have faced challenges stemming from the COVID-19 pandemic, supply chain interruptions, labor shortages, and inflation, among others things. Many businesses have been crippled by decreased revenues, increased debt, uncertain prospects and vaporized equity. Sometimes companies in distress cannot heal on their own and are forced to check into the hospital of Chapter 11 . . . or arrive at the door of the emergency room before negotiating a cure. If you need to understand Chapter 11 – whether to avoid it or learn how to harness its power – this program is for you. Designed for the corporate attorney, litigator, business consultant, executive and others not already experienced in Chapter 11, each episode in this Financial Poise webinar series takes a deep dive into one aspect of a Chapter 11 bankruptcy case at a level that can be understood by the non-expert. Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and executives without background in these areas, yet also invaluable to seasoned attorneys, accountants, and other professionals who need to refresh their understanding of this timely topic. Each episode brings you an engaging conversation designed to entertain as it teaches, and may be viewed independently so that your knowledge will be enhanced whether you attend one, some, or all episodes. 7
  7. 7. Episodes in this Series #1: The Nuts & Bolts of a Chapter 11 Plan Premiere date: 5/3/22 #2: The Nuts & Bolts of a Lift Stay Motion Premiere date: 6/7/22 #3: The Nuts & Bolts of DIP Financing Premiere date: 7/12/22 #4: The Nuts & Bolts of a 363 Motion Premiere date: 8/16/22 #5: The Nuts & Bolts of Retention Premiere date: 9/2/22 #6: The Nuts & Bolts of a First Day Hearing Premiere date: 10/25/22 8
  8. 8. Episode # 6 Nuts & Bolts of a First Day Hearing 9
  9. 9. Introduction to First Day Motions • “First day” motions seek immediate relief on an interim or final basis to ease a debtor’s transition into bankruptcy. • First day motions provide: o Relief that addresses administrative issues; and o Substantive relief that is needed to maintain the debtor’s operations. ▪ Substantive relief is often granted on an interim basis to provide for sufficient notice to interested parties and an opportunity for interested parties to object to the requested relief before it is granted on a final basis.
  10. 10. Introduction to First Day Motions (cont’d) • First Day Motions allow the debtor to: o Tell its story and map out a plan for the Chapter 11 case o Establish credibility with the bankruptcy court, United States Trustee, creditors, and other parties in interest o Maintain the support of its employees, customers, and suppliers o Obtain necessary relief to allow the debtor to continue its operations
  11. 11. Administrative First Day Motions • Joint Administration Motion o When affiliated debtors file petitions in the same court, the debtors may seek to jointly administer the cases under a main case, in the interest of efficiency and economy. o For administrative purposes only - does not involve pooling of assets or liabilities. o Joint administration allows for: ▪ Use of a single docket for the jointly administered cases; and ▪ Combined notices to creditors. • Motion for Extension of Time to File Schedules o Extensions are regularly granted in large Chapter 11 cases to extend the deadline to file the debtor’s schedules and statement of financial affairs beyond the Fed. R. Bankr. P. 1007 deadline (14 days from petition date).
  12. 12. Administrative First Day Motions (cont’d) • Notice and Case Management Procedures o May request that the court: ▪ Limit notice under Fed. R. Bankr. P. 2002(m) to parties likely to have an interest in the relief being sought and to any other parties that request notice instead of all creditors; ▪ Set omnibus hearing dates; ▪ Set procedures for telephonic or virtual appearances; ▪ Set procedures for filing and service of motions, applications, objections; and/or ▪ Set procedures for filing and service in adversary proceedings. o Check local rules to see if the court has adopted standard case management procedures.
  13. 13. Administrative First Day Motions (cont’d) • Motion for Designation as Complex Chapter 11 Case o Some courts have local procedures for complex Chapter 11 cases o Complex Chapter 11 case procedures may provide for processes and requirements, including: ▪ Expedited first day motions; ▪ Set omnibus hearing dates; ▪ Guidelines for paying professional fees, selling assets, or obtaining DIP financing. o If the court designates the case as complex, the court’s complex chapter 11 case procedures will apply.
  14. 14. Administrative First Day Motions (cont’d) • Retention of Claims Agent o Requests retention of an outside agent to provide claims and noticing services. o Claims agent may also provide additional services, including assistance with preparation of the schedules and statements of financial affairs, claims reconciliation, and solicitation and balloting services for the Chapter 11 plan. o Claims agent is paid from the estate (see 28 U.S.C. § 156(c)).
  15. 15. Operational First Day Motions • Employee Wage and Benefits Motion o Seeks authority to pay prepetition wages and benefits up to the statutory priority cap ▪ 11 U.S.C. § 507(a)(4): Wages and benefits earned within 180 days of the petition date that remain unpaid, including vacation, severance, and sick leave pay, are entitled to priority. ▪ 11 U.S.C. § 507(a)(5): Contributions to an employee benefit plan are entitled to priority. ▪ The statutory cap for priority treatment is $15,150 (amount changes periodically) per employee under each subsection. Amounts in excess of this cap or earned before the 180 day window are treated as general unsecured claims.
  16. 16. Operational First Day Motions (cont’d) • Critical Vendors Motion o Seeks authority to pay prepetition vendors that are deemed crucial and non-replaceable to ensure uninterrupted postpetition services or supply of goods under 11 U.S.C. § § 105 and § 363(b). o Critical vendor requests are generally conditioned on the vendor's agreement to favorable trade terms and an agreement to disgorge the payment if the postpetition agreement on terms is breached. ▪ Typically, a vendor must: (a) continue to do business with the debtor on existing or better trade terms; (b) agree to release goods or other assets of the debtor that are in the vendor’s possession; and (c) confirm that it has no lien on the debtor’s assets based on non-payment of prepetition claims.
  17. 17. Operational First Day Motions (cont’d) • Motions to Pay Possessory Lienholders o Seeks authority to pay these prepetition claims of possessory lienholders (shippers, mechanics, warehousemen, customs brokers) under 11 U.S.C. § § 105 and 363(b) on the following grounds: ▪ Under the doctrine of necessity as a critical vendor; ▪ To preserve value as a going concern; ▪ To avoid disruption in the delivery of goods that are in transit, have been repaired, or are warehoused that are subject to possessory or statutory liens; or ▪ To the extent that the claims are entitled to priority under 11 U.S.C. § 507(a)(8).
  18. 18. Operational First Day Motions (cont’d) • Honoring Customer Programs Motions o Seeks authority to pay prepetition claims arising from customer programs (for example, warranty programs, gift cards, reward programs, and service programs). o Courts have permitted debtors to honor such prepetition obligations on the basis that they are priority claims under 11 U.S.C. § 507(a)(7). ▪ Customers that made a deposit with the debtor before the petition date hold priority claims up to $3,350 (amount changes periodically) under 11 U.S.C. § 507(a)(7).
  19. 19. Operational First Day Motions (cont’d) • Insurance Motions o If prepetition insurance premiums remain unpaid as of the petition date, the debtor must obtain authority from the bankruptcy court to pay the premiums as prepetition claims under 11 U.S.C. § § 105, 363, 364, or 365. o The US Trustee operational guidelines and other applicable laws require companies to maintain certain insurance. • Motions to Pay Prepetition Taxes o Debtors frequently seek authority under 11 U.S.C. § § 105, 507(a)(8) and 541 to pay prepetition sales, use, and franchise taxes. ▪ Certain taxes are treated as trust funds under applicable law and entitled to priority treatment under 11 U.S.C. § 507(a)(8).
  20. 20. Operational First Day Motions (cont’d) • Utilities Motion o Debtors with multiple utilities often file a first day motion to establish procedures for providing utilities with adequate assurance of payment. ▪ 11 U.S.C. § 366 prohibits utilities from denying service to the debtor based on nonpayment of a prepetition debt if the debtor provides the utility with adequate assurance of payment for postpetition services within 20 days after the date of the order for relief. ▪ Under 11 U.S.C. § 366(c)(2), a utility may alter, refuse, or discontinue service if the utility does not receive satisfactory adequate assurance of payment during the 30 day period after the petition date. ▪ Typical forms of assurance of payment can include (a) a cash deposit; (b) a letter of credit; (c) a certificate of deposit; (d) a surety bond; (e) prepayment for the utility use; or (f) a mutually agreed form of security.
  21. 21. Operational First Day Motions (cont’d) • Cash Collateral and DIP Financing Motions o A Chapter 11 debtor typically requires DIP financing and the ability to use cash collateral to fund the debtor's postpetition operations and the costs of the bankruptcy case. ▪ Both require bankruptcy court approval and are typically necessary to fund the debtor from the first day of the case. ▪ Without access to cash or financing, the debtor cannot fund payroll, utilities, rent, and other necessary postpetition expenses. o Check out Episode 3 of this series to learn more about DIP financing motions and hearings.
  22. 22. Operational First Day Motions (cont’d) • Cash Management Motions o Debtors with complex cash management systems frequently seek a variance from the United States Trustee operational guidelines that require a Chapter 11 debtor to close existing bank accounts and open new debtor-in-possession accounts. o Debtors file cash management motions to request authority under 11 U.S.C. § § 363 and 105 to continue to use their existing accounts, cash management systems, and checks. ▪ Without this relief, a large Chapter 11 debtor's operations may come to a halt while the debtor makes the required changes to its financial system.
  23. 23. Operational First Day Motions (cont’d) • Reclamation and 503(b)(9) Procedures Motions o Debtors often seek approval of uniform procedures for asserting reclamation demands and section 503(b)(9) claims. ▪ Reclamation procedures provide a mechanism for addressing reclamation demands in an organized way and provide assurance to vendors that valid claims are recognized and paid. o If a debtor anticipates that it will receive multiple reclamation demands, it can file a motion seeking approval of procedures that require vendors to assert an administrative claim under 11 U.S.C. § 503(b)(9) instead of exercising a right to reclaim goods.
  24. 24. Non-First Day Motions/Applications • Other motions or applications may be filed shortly after the petition date, but are not heard at the first day hearing, including: o Motions to retain bankruptcy professionals; o Motions to retain ordinary course professionals; o Motions to approve interim compensation procedures; and o Motions for pro hac vice admission.
  25. 25. First Day Hearing • Service of Notice of Hearing o Once the hearing is schedule, the debtor typically serves the notice of hearing via facsimile, email, or overnight mail on the following parties and their counsel, if known: (a) United States Trustee; (b) prepetition secured lender; (c) top twenty unsecured creditors; (d) DIP lender; (e) U.S. Attorneys’ office; (f) SEC; and (g) IRS. • First Day Agenda o Counsel for the debtor should prepare and file a proposed agenda of matters to be heard at the first day hearing.
  26. 26. Structure of a First Day Hearing • Introductory Statement o Debtor’s counsel describes the events leading up to the Chapter 11 filing, the general relief sought on a first day basis, and the debtor’s plan for the case. o Counsel typically asks the court for permission to present the first day motions in the order reflected in the first day agenda. • Introduction of first day witness/declarant o The facts that provide the basis for a debtor's first day motions are typically collected in an affidavit or declaration of an officer of the debtor that is available, if necessary, to testify at the first day hearing. • Presentation on administrative motions • Presentation on operational motions • Submission of first day orders
  27. 27. About the Faculty 28
  28. 28. About The Faculty Ashley Jericho - ajericho@mcdonaldhopkins.com Ashley is an associate in the Strategic Advisory and Restructuring Department at McDonald Hopkins LLC. She has over 10 years of insolvency experience, including representing consumer and business debtors, creditors and trustees in bankruptcy proceedings, contested matters and adversary proceedings. Before joining McDonald Hopkins, she gained experience as a shared law clerk at the United States Bankruptcy Court for the Eastern District of Michigan, law clerk to Hon. Walter Shapero (ret.) in the United States Bankruptcy Court for the Eastern District of Michigan, and as an associate attorney at a metro-Detroit bankruptcy and litigation firm. Ashley earned her J.D., magna cum laude, from Western Michigan Cooley Law School in 2008, where she served as the associate editor of the Thomas M. Cooley Law Review. She received a B.A. in political science from Washington and Jefferson College in 2004. 29
  29. 29. About The Faculty Maria Carr - mcarr@mcdonaldhopkins.com Maria Carr is associate counsel at PRA Group, a distressed debt buyer based out of Norfolk, Virginia. Before joining PRA in April 2022, Maria was an associate at McDonald Hopkins LLC who focused her practice on corporate restructuring, commercial bankruptcy, business counseling, and creditors’ rights matters. Maria frequently counseled businesses and fiduciaries in chapter 11 bankruptcy proceedings, state or federal receiverships, out of court workouts, or other insolvency proceedings. Maria also represented secured and unsecured creditors in these proceedings, and handled litigation arising out of and related to bankruptcy or receivership cases. Maria also has experience representing purchasers of assets of distressed businesses and liquidating trustees in various bankruptcy and distressed matters. 30
  30. 30. About The Faculty Trinitee Green - tggreen@polsinelli.com Trinitee Green focuses her practice on complex restructuring and insolvency matters, primarily representing Chapter 11 debtors. Although Trinitee has represented debtors in a variety of industries, such as manufacturing, distribution, retail, real estate, and distressed health care, her expertise is most significant in the health care space. In addition to mega debtors, Trinitee has represented debtors (and creditors) in Subchapter V cases since the Bankruptcy Code was amended in 2020. In just two years, she co-led two Subchapter V cases and helped two small business healthcare companies confirm plans of reorganization in Delaware and Texas. Trinitee regularly represents creditors, secured and unsecured, in restructuring matters. She has represented committees, trustees, and receiverships in federal and state court. Trinitee has substantial experience defending and prosecuting avoidance actions and she routinely represents secured lenders in contested bankruptcy matters. With this experience, Trinitee has developed strong negotiation skills, which she uses to obtain the best result for each client. She regularly achieves successful agreements between parties even when a successful outcome seems unlikely, and often exceeds the expectations of clients. When parties are unable to reach an agreement, Trinitee is ready to take her client’s case to trial. 31
  31. 31. About The Faculty Benjamin L. Wallen - bwallen@pszjlaw.com Ben Wallen graduated from the University of Oklahoma in 2013 and from the University of Houston Law Center in 2016. While in law school, he was a judicial intern for the Honorable David R. Jones, U.S. Bankruptcy Court for the Southern District of Texas, and for the Honorable Harold R. DeMoss Jr., U.S. Court of Appeals for the Fifth Circuit. Ben also worked for the Mexican government as a legal intern for la Comisión Nacional de Hidrocarburos. In addition, Ben was a research assistant to Professor Jim Hawkins and served as the chief articles editor for the Houston Business and Tax Law Journal, where he currently serves on the board of trustees. Shortly before graduating law school, Ben was awarded the American Bankruptcy Institute Medal of Excellence. 32
  32. 32. Questions or Comments? If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar On Demand, please do not hesitate to email us at info@financialpoise.com with any questions or comments you may have. Please include the name of the webinar in your email and we will do our best to provide a timely response. IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. 33
  33. 33. Commercial Bankruptcy Litigation is a must-have resource for any non-bankruptcy attorney who is involved in a chapter 11 bankruptcy case. It is also a handy “take on the road” treatise for the experienced chapter 11 professional. This 2,000- plus page treatise, updated yearly, and with contributions from some of the country's most respected practitioners from top firms across the U.S., covers topics from general bankruptcy and procedure to appeals. Commercial Bankruptcy Litigation, 2d, 2022 ed. eBook available through Thomson and Reuters and Amazon 34
  34. 34. Strategic Alternatives For And Against Distressed Businesses, 2022 ed. Strategic Alternatives for And Against Distressed Businesses is one of a kind. It is the only resource that provides comprehensive state-by-state comparisons of assignments for the benefit of creditors and receiverships. This alone makes the book a must-have for every insolvency professional. “If you can only own one book about corporate restructuring and insolvency, there is a compelling case that this should be the one.” eBook available through Thomson and Reuters and Amazon 35
  35. 35. 37
  36. 36. ABOUT DailyDAC DailyDAC.com is the leading source of information about assignments, article 9, bankruptcy, receiverships, out-of-court workouts and vulture investing, designed for business owners and vulture investors. Visit us at www.dailydac.com. Premium Public Notice Service DailyDAC’s Premium Public Notice Service helps market asset sales on behalf of fiduciaries (e.g., Chapter 11 debtors- in-possession and committees, trustees, receivers, assignees), secured lenders selling collateral under UCC Article 9, and auctioneers to a very large and self-selected group of potential bidders and their advisors. The Service also assists with noticing other events, deadlines, and milestones – including tombstones and other press releases. Our free weekly newsletter, DailyDAC contains our latest bankruptcy article, current Public Notices and all opportunistic deals added to our proprietary database that week. Sign up at: https://www.dailydac.com/dacyak-weekly-newsletter-signup/
  37. 37. About Financial Poise 39 Financial Poise™ has one mission: to provide reliable plain English business, financial, and legal education to individual investors, entrepreneurs, business owners and executives. Visit us at www.financialpoise.com Our free weekly newsletter, Financial Poise Weekly, updates you on new articles published on our website and Upcoming Webinars you may be interested in. To join our email list, please visit: https://www.financialpoise.com/subscribe/

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