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First-day Orders

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We had a new chapter 11 case filed today. Not a very big one by Delaware standards, of course—less than $5 million in annual revenues—but the case still required "first-day orders," which we duly heard on the first day. Notice was given to the appropriate parties, and we had a couple of hours of hearing, culminating in the entry of essential orders needed to keep the company going for a few weeks until we could have a more developed (and more fully noticed) hearing.

My law clerk (fresh out of law school) had never heard of first-day orders. In the course of explaining the whys and wherefores of chapter 11 tradition, I got to thinking about how the process has changed over the years.

The first thing that has changed is how infrequently it happens in my neck of the woods. My colleagues over in Delaware seem to be awash in chapter 11 filings and their attendant first-day orders. Relatively few chapter 11 cases of any size are being filed elsewhere in the country, it seems (though there are some notable exceptions, like the seed company "roll-up" recently filed in Las Vegas). As a result, the Delaware courts have begun to develop their own special precedents for what is and is not permissible in first-day orders—the doctrine of necessity (used for justifying paying trade payables via first-day orders) has, for example, come to be much more relaxed as applied in the Delaware courts. I wonder to what extent those precedents will become the standard in other parts of the country, assuming other parts of the country ever get any significant number of filings! By the same token, Delaware courts are making certain that counsel cut square corners in the manner that such first-day orders are presented to the court. Gone apparently are the days when a lawyer could drop in on the judge at his home on the weekend, with a sheaf of motions and orders for the judge to examine and rule on (that is apparently how Texaco got filed in New York many years ago). I'm frankly hopeful that, at some future Federal Judiciary Center (FJC) training program, the Delaware judges share their experience in handling very large chapter 11 cases—especially the first-day orders aspect.

Which leads me to my next thought about first-day orders—a thought borne of the recent "correction" taking place in the Dow Jones Industrial Average. A few more bumps in the road (a major correction, a bump up in interest rates, a drop in consumer confidence), and we could see a flood of chapter 11 filings—far more than the Delaware courts will ever hope to be able handle with any sort of efficiency. When that happens, I would not be surprised to find the Delaware courts far more willing to transfer venue of cases. Nor will I be surprised if lawyers, in evaluating their filing options, counsel their clients that Delaware might not, after all, be their best choice for a given case, despite the "user-friendly" systems that the Delaware bench has developed for large chapter 11 cases. Sheer volume, coupled with the often higher cost of administration (mostly in legal fees), may encourage many to file in other places, especially if the volume of case filings dramatically increases.

Then I got to thinking about why people might be less willing to file in other places. Let's be perfectly frank here. Let's not pull punches. Many litigants fear filing in certain jurisdictions because they fear the judge that might be assigned to their case. Those of us who are currently judges should not be too affronted by this simple truism. When we were practitioners, we made exactly the same type of pragmatic evaluations. Some jurisdictions should have little difficulty realizing why it is that big cases never seem to come their way—arcane procedures that fail to accommodate the need for speed in many large cases, a punitive or overly suspicious approach to the award of compensation, or simple unpredictability. (My colleagues, remember how important a factor that was to you as a practitioner when you were making those pragmatic evaluations on behalf of your client?) Others are simply not set up to handle the sheer administrative burden of a large chapter 11 case.

I know that some courts have actually taken a close look at the way they have done business in the past and have devised special procedures designed to accommodate the needs of large chapter 11 cases in the hopes of at least making their jurisdictions more "filing friendly"—and that should not be confused with being "debtor-friendly." Maybe that's a good thing—a sort of "market approach" to case administration. Also, we are currently going through an interesting period, when many of our older colleagues are retiring from the bench, bringing a whole new breed of practitioner to the bench. With so few bench positions available, the competition is keen, and the quality of judges coming onto the bench is predictably quite high. Will these new judges change the attitude of lawyers advising their clients on the best place to file? I suspect they just might.

This leads me to my last thought on first-day orders. These new judges are fresh from the trenches of the bankruptcy practice, and there is much they can teach those of us who have been isolated from the practice for a number of years. They can teach us first about the modern economics of the law practice (and its attendant impact on fee structure). It has, of course, changed quite a bit. They also can teach us quite a bit about the new kinds of businesses that are showing up (or are likely to show up) on the doorstep of the bankruptcy judge in this new millennium. The little case we had this morning was a simple example—a telecommunications company that interfaces the telephones in hotels and hospitals with long-distance carriers. Just 10 years ago, such a business did not even exist because the telecommunications market then was still dominated by one long distance carrier, with but a few competitors nipping at its heels. The case absolutely depends on excellent customer relations because changing service providers is as easy as typing in a line of code on a computer screen. How much that has changed in the last 10 years!

First-day orders are likely to change because the nature of businesses seeking assistance in chapter 11 is likely to change. For example, consider the first-day orders that were needed for the Singer Corp., which had operations around the world. Or consider the first-day orders required for a large hospital system, with many employees, special government relationships (and regulations that read like an arcane foreign tongue to the average bankruptcy judge). Or the special challenges of a nursing home enterprise. (Can you compel a state to release Medicaid funds, given the law on sovereign immunity, or will you have to tolerate the prospect of residents being wheeled out onto the street in front of the local television cameras?) Then, I suppose, there will be the "dot.com" companies. Some, at least, will file with no particular need to have permission to use cash collateral because they have no bank lender; they raise their operating money by selling more stock. And what will they do with their non-exclusive licensed software, in the face of current case law about assuming patent licenses?

Lawyers, when you bring us those first-day orders, please educate us a little on the company—especially if it's a company that we likely didn't see in our practice before we became judges. I know that you need to exercise some care to avoid overstepping, to avoid inappropriate ex parte communication, but we cannot hope to make intelligent decisions for new kinds of companies based on old or outdated assumptions. While you are at it, please don't be shy about working with your local courts and judges about designing systems that make your local courts less intimidating places to file a large chapter 11 case—things like ways to handle noticing, public access to filed documents, special settings for matters arising in just that case and sensible procedures for processing professional compensation requests. You will find most courts receptive and eager to learn.

My law clerk learned quite a bit today about first-day orders. As it turns out, so did I.

Journal Date: 
Saturday, April 1, 2000

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