First-day Orders

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.

</p><p>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.

</p><p>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
<i>Texaco</i> 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.

</p><p>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.

</p><p>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 <i>you</i> 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.

</p><p>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.

</p><p>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 <i>that</i> has changed in the last 10 years!

</p><p>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?

</p><p>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 <i>ex parte</i> 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.

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