Bankruptcy
Aug. 3, 2002
Order Outlines the Procedures For Many Bankruptcy Motions
Focus Column - By Wesley H. Avery - The Bankruptcy Court of the Central District of California identified a need for new rules to apply to Chapter 11 cases to speed the process of business reorganization. A series of informal meetings between the judges and a working group of the bankruptcy and commercial law section of the Los Angeles County Bar Association recently took place establishing these new rules.
By Wesley H. Avery
The Bankruptcy Court of the Central District of California identified a need for new rules to apply to Chapter 11 cases to speed the process of business reorganization. A series of informal meetings between the judges and a working group of the bankruptcy and commercial law section of the Los Angeles County Bar Association recently took place establishing these new rules.
General Order 02-02, issued by the chief bankruptcy judge, applies to Chapter 11 cases in all divisions of the Central District, including cases pending as of its effective date of April 17. To the extent that this general order conflicts with any provisions of the Local Bankruptcy Rules, this order will prevail. In all other respects, existing Local Bankruptcy Rules will apply.
The new rules deal with several motions in a typical bankruptcy reorganization: cash collateral or debtor-in-possession financing motions, motions to employ professionals, motions to approve compensation procedures for professionals, motions for joint administration of cases, motions to approve prepackaged plans, motions for severance compensation and emergency motions. They also deal with service of process by electronic transmission.
• Cash collateral or debtor-in-possession financing motions. These motions typically feature both a preliminary hearing where interim relief is considered and a final hearing. Motions requesting approval of cash collateral, financing or cash management, whether brought on an emergency basis or on regular notice, now must identify whether the loan agreement contains any of the following provisions:
• Cross-collateralization provisions (other than replacement liens) that secure pre-petition debt with post-petition assets in which a secured creditor otherwise would not have a security interest.
• Provisions or findings of fact with respect to the validity, perfection or amount of the secured creditor's pre-petition lien or debt or the waiver of claims against the secured creditor.
• Provisions seeking to waive the estate's rights under Bankruptcy Code Subsection 506(c) to surcharge collateral for the reasonable and necessary expenses of preserving or disposing of that collateral.
• Provisions granting to a pre-petition secured creditor liens on the debtor's avoidance causes of action.
• Provisions deeming pre-petition debt to be post-petition debt or using post-petition loans from a pre-petition secured creditor to pay part or all of that secured creditor's pre-petition debt, other than as provided in Subsection 552(b), which deals with security interests in proceeds and profits.
• Provisions providing disparate treatment with respect to a fee carve-out for professionals retained by a creditors' committee from that provided for professionals retained by the debtor.
• Provisions that prime (that is, take precedence) over any existing secured lien.
In the absence of extraordinary circumstances, the court will not approve interim orders that include any of these provisions. Furthermore, the court may grant interim relief only to prevent immediate and irreparable harm to the estate pending a final hearing.
The motion must include a summary of the essential terms of the proposed use of cash collateral or financing (for example, interim borrowing limit, maximum borrowing available on a final basis, borrowing conditions, interest rates, maturity dates, default provisions, use-of-funds limitations and protections afforded under Sections 363 and 364 for cash collateral and obtaining post-petition credit, respectively.
Each motion requesting approval of a stipulation for use of cash collateral or financing must be accompanied by either Local Bankruptcy Rule Form 4001-2, which will provide the court with any easy-to-read summary of the relief sought, or a statement consistent with the form's requirements. Motions with provisions that prime any secured lien must identify the location of any such provision in the proposed form of order, cash collateral stipulation or loan agreement and contain specific justification for priming.
The court will enter a final cash collateral or financing order only after notice and a hearing under Federal Rule of Bankruptcy Procedure 4001(b). Ordinarily, the court will hold the final hearing at least 10 days after the appointment of the creditors' committee.
• Motions for orders establishing procedures for the sale of all or substantially all of a debtor's assets. A hearing on this motion may be scheduled on five court days' notice to applicable parties. The movant shall deliver the motion as soon as possible to any party requesting a copy. The new rules on emergency motions govern the procedures for obtaining a hearing.
The notice of the motion must describe the proposed bidding procedures and include a copy of the proposed purchase agreement. If the purchase agreement is not available, the moving party shall describe the terms of the sale proposed, when a copy of the agreement will be available and from whom it may be obtained. The notice must describe marketing efforts taken, the anticipated marketing plan or why no marketing is required. Finally, the notice must recite that any opposition is due on or before one court day before the hearing.
Parties shall serve any opposition and accompanying declarations by e-mail, fax or personal delivery. A filed copy of the opposition shall be delivered to chambers the same day as filed.
The court shall set a date and time for a hearing on the motion to approve the sale at or before the hearing on the sale procedures motion. The hearing shall be scheduled, if practicable, no more than 30 days following the hearing on the sale procedures motion.
If a breakup fee or other form of overbid protection is requested in the sales procedure motion, it must be supported by evidence establishing that such a fee likely will enhance the ultimate sale price and the reasonableness of the fee.
• Motions to employ professionals. Each motion to employ professionals shall highlight the section of the Bankruptcy Code under which it is brought. Professionals may be employed by the debtor-in-possession, a trustee or an official committee on an hourly or contingent basis or on a combination thereof. If the court approves the terms of employment, including the hourly rate, monthly fee or contingency fee, the court shall not reconsider terms of employment at a subsequent time.
This shall not limit the court in exercising its discretion pursuant to Subsection 330(a)(2) to lower the compensation awarded to the professional when all work is done based on the circumstances. If the court determines a hearing is necessary to approve the terms of employment, then the court shall set a hearing within 30 days of the expiration of the normal 15-day objection period specified by Local Bankruptcy Rule 2014-1(b)(2)(D).
The court shall inform the professional of the specific issues to be addressed at the hearing. The professional may file supplemental pleadings not less than three court days before the hearing.
• Motions to approve compensation procedures. Professionals may seek a "Knudsen" order allowing payment of compensation monthly. See In re Knudsen, 84 B.R. 668 (9th Cir. BAP 1998). Normally, under Local Bankruptcy Rule 2016-1(a)(2), compensation may not be sought more frequently than once every 120 days.
• Motions for joint administration of cases. It is often necessary to throw two or more related entities into bankruptcy at the same time. Moving several reorganization cases forward simultaneously can become a logistical nightmare, however, for the court and the debtors' counsel. Until the parties obtain an order for joint administration of the cases, they must file and serve motions in every case, even if the facts and relief sought are identical.
Under the new rules, a party can seek joint administration of such cases ex parte: If two or more petitions are pending before the same judge by or against a debtor and an affiliate, the court may order a joint administration of the estates, without notice or hearing.
Joint administration of the respective debtors' estates eases the administrative burden for the court and the parties and protects creditors against potential conflicts of interest. Joint administration under this general order shall not effect a substantive consolidation of the respective debtors' estates.
• Motions to confirm prepackaged plans. The court shall schedule a hearing on confirmation of a plan on which voting was conducted before the start of the case under Bankruptcy Code Subsection 1126(b), if practicable, no more than 30 days after the order for relief.
• Motions to approve severance compensation or employee incentives. These motions shall be heard on regular notice, absent exigent circumstances. Motions must be supported with evidence establishing that the employees still are employed, that a severance compensation package or stay bonus is necessary to retain personnel essential to a successful reorganization, if the employees are insiders, and that the proposed severance compensation package or stay bonus is beneficial to the estate.
• Service by electronic transmission. Whenever a party is required to serve a notice, pleading or copy of an order, and another party has requested service by electronic transmission, the sender may serve the document by electronic transmission. Service will be deemed completed on receipt by the sender of an electronic confirmation of the electronic transmission.
• Emergency motions. The rules define an emergency motion as one that requests relief on less than two court days' notice. See Local Bankruptcy Rule 9075-1(a). The changes made by General Order 02-02 regarding emergency motions are extensive and are covered in a prior article. See David M. Reeder, "New Central District Rules Aim to Prevent 'Procedural Roulette,'" Focus, June 7.
Wesley H. Avery, a partner at the Los Angeles office of Sulmeyer, Kupetz, Baumann & Rothman, is a certified specialist in both personal and business bankruptcy law.
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