The Toolbox: Timing: The Key to Almost Everything

This month I want to talk about watching the clock—and the calendar. Timing is always a central part of counsel’s job in working with debtors, trustees, and other parties to a bankruptcy case. The lawyer must learn to be acutely conscious of how timing and the passage of time will affect his or her client’s rights.

Some timing considerations are obvious from the specific requirements and limitations established by the Bankruptcy Code ¹11 U.S.C. §§101 et seq. (the “Code”). and the Federal Rules of Bankruptcy Procedure. ²Hereinafter “Rule” or “Rules,” as appropriate. Code Sections 108, ³Code Section 108 deals with the extension of time generally. 1121, ⁴Code Section 1121(b) provides that “only the debtor may file a plan until after 120 days after the date of the order for relief under” Chapter 11 of the Code. Thereafter, “[a]ny party in interest, including the debtor, the trustee, a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder, or any indenture trustee, may file a plan” if “the debtor has not filed a plan before 120 days after the date of the order for relief under this chapter” or if “the debtor has not filed a plan that has been accepted, before 180 days after the date of the order for relief under this chapter, by each class of claims or interests that is impaired under the plan.” Code §1121(c). Pursuant to Code Section 1121(d)(1), “after notice and a hearing, the court may for cause reduce or increase the 120-day period or the 180-day period referred to in this section,” subject to the limitations set forth in Section 1121(d)(2). Special timing rules apply in small business cases. See Code §1121(e). and 365(c)-(d), for example, set out a number of critical periods that limit the exercise or invocation of the rights and powers the debtor has and may exercise. For example, nonresidential real property leases will be lost if the practitioner ignores Code Section 365(d)(4). ⁵Section 365(d)(4) reads:

(A) Subject to subparagraph (B), an unexpired lease of nonresidential real property under which the debtor is the lessee shall be deemed rejected, and the trustee shall immediately surrender that nonresidential real property to the lessor, if the trustee does not assume or reject the unexpired lease by the earlier of—

(i) the date that is 120 days after the date of the order for relief; or

(ii) the date of the entry of an order confirming a plan.

(B)(i) The court may extend the period determined under subparagraph (A), prior to the expiration of the 120-day period, for 90 days on the motion of the trustee or lessor for cause.

(ii) If the court grants an extension under clause (i), the court may grant a subsequent extension only upon prior written consent of the lessor in each instance.

Similarly, failure to seek continuation of the automatic stay within 30 days as required by Section 362(c)(3) can cost an individual debtor protection critical to his or her rehabilitation. ⁶Section 362(c)(3)(A) provides that the stay in an individual bankruptcy “shall terminate with respect to the debtor on the 30th day after the filing of the later case.” Pursuant to 362(c)(3)(B), “on the motion of a party in interest for continuation of the automatic stay and upon notice and a hearing, the court may extend the stay in particular cases as to any or all creditors (subject to such conditions or limitations as the court may then impose) after notice and a hearing completed before the expiration of the 30-day period,” but “only if the party in interest demonstrates that the filing of the later case is in good faith as to the creditors to be stayed.” Likewise, Rules setting deadlines, such as Rule 4003 ⁷Rule 4003(b)(1) provides that, subject to exceptions listed elsewhere in the Rule,

a party in interest may file an objection to the list of property claimed as exempt within 30 days after the meeting of creditors held under [Code] §341(a) is concluded or within 30 days after any amendment to the list or supplemental schedules is filed, whichever is later. The court may, for cause, extend the time for filing objections if, before the time to object expires, a party in interest files a request for an extension.

and Rules 4006-4007, ⁸Rule 4006 provides: “If an order is entered: denying a discharge; revoking a discharge; approving a waiver of discharge; or, in the case of an individual debtor, closing the case without the entry of a discharge, the clerk shall promptly notify all parties in interest in the manner provided by Rule 2002.”In turn, Rule 4007(c)-(d) provides:

(c) Time for filing complaint under §523(c) in a chapter 7 liquidation, chapter 11 reorganization, chapter 12 family farmer’s debt adjustment case, or chapter 13 individual’s debt adjustment case; notice of time fixed

Except as otherwise provided in subdivision (d), a complaint to determine the dischargeability of a debt under §523(c) shall be filed no later than 60 days after the first date set for the meeting of creditors under §341(a). The court shall give all creditors no less than 30 days’ notice of the time so fixed in the manner provided in Rule 2002. On motion of a party in interest, after hearing on notice, the court may for cause extend the time fixed under this subdivision. The motion shall be filed before the time has expired.

(d) Time for filing complaint under §523(a)(6) in a chapter 13 individual’s debt adjustment case; notice of time fixed

On motion by a debtor for a discharge under §1328(b), the court shall enter an order fixing the time to file a complaint to determine the dischargeability of any debt under §523(a)(6) and shall give no less than 30 days’ notice of the time fixed to all creditors in the manner provided in Rule 2002. On motion of any party in interest, after hearing on notice, the court may for cause extend the time fixed under this subdivision. The motion shall be filed before the time has expired.

can result in forfeiture by creditors of their right to contest a debtor’s discharge or exemptions. Additionally, Rules like Rule 3015(b) govern the timeframe during which the debtor may file a plan. ⁹Rule 3015(b) reads:

The debtor may file a chapter 13 plan with the petition. If a plan is not filed with the petition, it shall be filed within 14 days thereafter, and such time may not be further extended except for cause shown and on notice as the court may direct. If a case is converted to chapter 13, a plan shall be filed within 14 days thereafter, and such time may not be further extended except for cause shown and on notice as the court may direct.

Detailing all the timing restraints in the Code and Rules, however, is not my purpose. Most lawyers are savvy enough to read the statutes or rules pertinent to the needs of their clients and will be (or will become) familiar with these sorts of timing considerations. What I am really interested in addressing is timing issues presented by the facts of a case. These types of issues arise not only during the case, but even prior to filing.

Some—like when to start negotiating a plan’s terms—tend to be subjective. While collection of necessary data or the need to resolve a so-called gatekeeper issue will influence when negotiations can commence, other factors may affect when the proverbial iron is hot. Factors that might play a role in assessing whether the time is right might include the level of cooperation and trust between the debtor and creditors, confidence in management, completion of any committee investigations, exploration of alternative plan scenarios, and available credit.

Other time limitations are more objective, and are akin to statutory limitations. How long does the debtor have to close a transaction? What is the proper timing to issue operational results? What timing constraints are created by other law, like securities regulations? When are payrolls due?

These are time constraints that will dictate the order in which events occur during a case. For example, a sale that is necessary to raise the cash required for a debtor to emerge from a Chapter 11 reorganization is typically best concluded before confirmation. Advance notice of when acts outside the ordinary course must be taken is essential to being able to obtain timely court approval. ¹⁰See Code §363(b).

The lesson, of course, is to plan ahead. During the case this requires educating the client as to what sorts of acts will require prior approval from the court. Similarly, as I’ve noted in prior columns, the attorney must ensure that commitments to the court, the United States trustee, lenders, and committees are commensurate with the client’s capabilities. Promising data (including in reports) before they will be available may cost the client a loss of rights and will surely not foster the client’s credibility. Having to request emergency hearings on motions to extend times under Code Section 365(d) or 1121 will at best aggravate the court: couldn’t you see the deadline coming in time to file on a normal time schedule instead of turning the issue into an emergency?

The best time to plan is prior to filing. Sometimes, of course, it isn’t possible to plan ahead before filing; events may catch up with a debtor before the debtor even appears for the first time in counsel’s office and a filing cannot be delayed while taking stock of what will be required in the early days of a case. Just as often, however, there are days or even weeks between the time the debtor retains counsel and the time filing must occur.

In these circumstances, much can be done to fit the date of filing with the needs of the client and to prepare so that the early days of the bankruptcy case will proceed more smoothly. This is true, incidentally, not only in Chapter 11 cases, but also in cases under other chapters, such as Chapters 12, 13, and sometimes even 7, albeit on a smaller scale.

First, counsel and the debtor must identify transactions that are time-sensitive. If possible (and prudent, given voidable transfer laws and the need to maintain credibility), these matters should be concluded before filing, or times should be adjusted to suit the limitations of Rule 6003. ¹¹Rule 6003 states:

Except to the extent that relief is necessary to avoid immediate and irreparable harm, the court shall not, within 21 days after the filing of the petition, issue an order granting the following:

(a) an application under Rule 2014;

(b) a motion to use, sell, lease, or otherwise incur an obligation regarding property of the estate, including a motion to pay all or part of a claim that arose before the filing of the petition, but not a motion under Rule 4001; or

(c) a motion to assume or assign an executory contract or unexpired lease in accordance with §365.

The debtor must also develop a budget for the initial weeks of the bankruptcy case. To the extent possible, prospective expenses should be satisfied before filing or deferred until after the 14 day time limit of Rule 4001(b). ¹²Rule 4001(b)(2) states:

The court may commence a final hearing on a motion for authorization to use cash collateral no earlier than 14 days after service of the motion. If the motion so requests, the court may conduct a preliminary hearing before such 14-day period expires, but the court may authorize the use of only that amount of cash collateral as is necessary to avoid immediate and irreparable harm to the estate pending a final hearing.

This suggests some building of inventory and the timing of the filing to avoid cash requirements for regular, predictable operating expenses. While courts are likely to be reasonable in applying the “immediate and irreparable harm” standard for early expenditures of cash collateral as stated in Rule 4001(b)(2) ¹³See supra note 12. (or the similar test under Rule 6003 ¹⁴See supra note 11.), the leaner the budget for the initial weeks of a case, the more certain a debtor’s business will suffer minimal disruption in that time frame.

This is not to say that prepetition budgeting should be limited to the first 14 days of the case. Rather, a longer term budget that can serve as well as projections should be developed if time permits.

This brings us to the next topic: Financing, whether through use of cash collateral, borrowing, or both, should be addressed prepetition if possible. If a debtor’s post-petition financing is arranged before filing, it will greatly ease the difficulties and uncertainties that can plague or even derail a restructuring effort. If working with the debtor’s lender prepetition is simply not feasible, the period before filing should be used to put together a strong case for use of cash collateral.

There are other things that can—and should—be done in anticipation of filing. Professionals who will be needed should be identified and their paperwork readied for the court and retainers paid. Expense accounts should be cleared and filing should be timed to fit payroll requirements (i.e., don’t file the day before payroll is due). Authority for filing (a directors’ resolution for most corporations) should be obtained. There may be other steps that could be taken as well, depending on the case.

As you can see, counsel has homework to do to prepare for a bankruptcy. Using the prepetition time well and keeping an eye on the calendar during the case will help ensure a successful result. The practitioner should accordingly see his or her calendar as a key tool for coordinating each bankruptcy case.