First-Day Hearings and the Due Process Balancing Act

Due process is a fundamental right, reiterated in the foundational documents of the U.S. [2] All lawyers are taught and tested on the requirements of due process, both in a procedural and substantive context. As a review, “procedural due process” requires that the deprivation of life, liberty or property by adjudication be preceded by notice and opportunity for hearing appropriate to the nature of the case. [3]

Chapter 11 bankruptcy proceedings are complex legal mechanisms designed to facilitate the financial restructuring of businesses facing insolvency. One critical aspect of this process is the filing and consideration of first-day motions, which are motions filed promptly after the debtor’s petition. These motions serve to expedite the debtor’s transition into chapter 11, addressing immediate financial concerns and procedural matters. First-day motions present unique notice issues given the need to balance the due-process rights of affected parties with the debtor’s need for expedited relief and the practical difficulty of providing adequate notice very early in the case.

Notice

“Notice is the cornerstone underpinning Bankruptcy Code procedure.” [4] A bankruptcy judge must “examine notice’s adequacy in light of the Bankruptcy Code’s statutory requirements, safeguards, and remedies.” [5] Section 102 of the Code defines the phrase “after notice and a hearing” to mean “after such notice as is appropriate in the particular circumstances” to be “prescribed by either the Rules of Bankruptcy Procedure or by the court in individual circumstances that the Rules do not cover.” [6] Thus, § 102 allows for the court to decide what notice is appropriate where the Code does not specify. There are no statutory notice provisions regarding first-day motions or hearings in the Code, thus opening the door for the presiding court to police due-process requirements pursuant to the discretion granted by § 102.

First-day motions serve as a tactical tool for debtor’s counsel to swiftly address crucial issues, such as making immediate payments on pre-petition debts, securing post-petition financing, and handling procedural matters like the employment of professionals. Further, chapter 11 has evolved into a platform for various business transactions, including mergers, acquisitions, asset sales, financial restructurings and debt financings. Notably, these transactions increasingly unfold during first-day motion hearings rather than in later stages.

The rapid nature of first-day hearings, sometimes occurring within 24-48 hours of a chapter 11 filing, raises concerns about due process for parties in interest not involved in pre-chapter 11 negotiations. Efforts to identify and notify all impacted parties are cut short, and parties in interest are often caught off guard by the sudden filing of both the bankruptcy petition and first-day motions. This often renders them ill-prepared to respond, if they are able to at all. This asymmetry can, and many times does, place debtor’s counsel in a favorable position. Decisions made during first-day hearings can potentially impact the distribution of assets throughout the entire bankruptcy case.

The flexible approach outlined in § 102(1)(A) acknowledges that what is appropriate notice may vary based on the circumstances. The Senate empowered bankruptcy courts to proceed without court action in the absence of objection, acknowledging that “speed is essential.” [7] Therefore, courts may very well enter relief for the debtor that prejudices other parties without giving them a reasonable opportunity to put up a fight.

There is no dispute about the urgency of first-day motions. However, § 102(1) is founded in fundamental notions of procedural due process. [8] It is therefore the ethical responsibility of debtor’s counsel not to take advantage of such scenarios. It is also the responsibility of the courts to consider the unfavorable position parties-in-interest may be in when considering the circumstances. Courts must ensure that the principles outlined in the Bankruptcy Code are upheld, and that parties-in-interest are afforded more than nominal due process. Without vigilance, the playing field may be tilted against certain nondebtor parties in interest from the outset.

Conclusion

The right to be heard is not merely a formality but a substantial right, ensuring that parties are informed of pending matters and have the opportunity to participate or contest. While first-day motions play a crucial role in expediting the chapter 11 process, concerns about due process cannot be ignored. As the bankruptcy landscape continues to evolve, it is imperative for bankruptcy courts to strike a balance, upholding the principles of the Code while ensuring that all parties-in-interest receive meaningful notice and an opportunity to be heard.

Likewise, counselors should be mindful of not deliberately using lack of notice as a strategy and should not hesitate to object on due-process grounds to bring concerns to the court’s attention. Only through such measures can the integrity of the chapter 11 process be maintained, fostering an equitable resolution.