U.S. Bankruptcy Court for the Western District of NY considers

Daily Record (Rochester, NY), May 17, 2005 by Nora A. Jones

Where a debtor sought the court's approval to carry out short- term operational tasks immediately after filing for Chapter 11, the U.S. Bankruptcy Court for the Western District of New York determined that many of the requests were reasonable and appropriate, but deferred final judgment on post-petition financing and other matters.

Reviewing the case of In re: Colad Group, Inc., Bankruptcy Judge Carl L. Bucki considered the standards for approval of first day motions, sharing his rationale for granting and denying various requests at the start of the debtor's reorganization.

Background

The Colad Group, Inc. is a specialty printer involved in the production and sales of various stationery products. On Feb. 3, Colad filed a petition for Chapter 11 relief. The following day, debtor's counsel contacted the court to schedule an opportunity to seek the court's approval on several first day orders.

In bankruptcy practice, the phrase first day motions refers generally to any variety of requests made shortly after filing a Chapter 11 petition, for prompt authorizations needed to continue operation of the debtor's business.

On Feb. 7 the debtor presented eight motions, seeking authorization or approval for:

* payment of pre-petition employee compensation and benefits;

* payment of pre-petition sales and use taxes;

* assurance of continued utility services;

* implementation of a key employee retention program;

* employment of a restructuring consultant;

* retention of bankruptcy counsel;

* maintainence of an existing cash management system and bank accounts; and

* post-petition financing.

Who's Who

At the Feb. 7 hearing on the motions, several interested parties were present.

Continental Plants Group, LLC is the primary secured creditor of Colad. Also attending the conference were Daniel Williams, the largest creditor in the Chapter 7 case of William P. Brosnahan, Jr., an individual who at one time was affiliated with Colad.

Colad recognized the bankruptcy estate of Brosnahan as its largest unsecured creditor.

Discussion Of Rulings On Motions

Although the court rendered oral decisions on all aspects of the motions except for final authority to obtain post-petition financing, the court detailed its rationale for those rulings in the instant decision before addressing the final financing agreement.

Judge Bucki explained that the so called Doctrine of Necessity has a historical relationship to the provisions of the Railway Labor Act, 45 USC Section 151 et. seq. *** but Nonetheless, Section 105(a) does not create authority and rights that do not otherwise arise from the express provisions of the Bankruptcy Code.

Discussing the purpose of first day motions, the court wrote, the requested relief should be limited to that which is minimally necessary to maintain the existence of the debtor. In particular, a first day order should avoid substantive rulings that irrevocably determine the rights of parties.

Next Judge Bucki explained, [F]irst day orders must maintain a level of clarity and simplicity sufficient to allow reasonable confidence that an order will effect no unanticipated or untoward consequences.

[F]irst day orders are not a device to change the procedural and substantive rights that the Bankruptcy Code and Rules have established, he continued. In particular, first day orders should provide no substitute for the procedural and substantive protections of the plan confirmation process.

Lastly, Judge Bucki noted that [N]o first day order should violate or disregard the substantive rights of parties, in ways not expressly authorized by the Bankruptcy Code.

With these principles in mind, the court then explained its rulings in regard to the eight motions in the case at bar.

Payments To Employees

And Taxing Authorities

In the papers filed with the first two motions, the debtor recognized that most of the wages and taxes would constitute priority claims - and these obligations were incurred during the ordinary course of operations. Further, the debtor explained that failure to make wage and benefit payments could affect its ability to maintain a work force.

The court acknowledged that no other priority claims appeared to be outstanding. Although secured creditors might typically hold a superior interest in the cash, the secured creditor in this case consented to the proposed distribution. Therefore, the court granted the motions to pay wages and taxes incurred prior to the bankruptcy petition.

Post-Petition Utility Services

Next the debtor sought to avoid a disruption of ultility service during its bankruptcy.

The motion sought relief with respect to issues that Congress had already addressed in Section 366 of the Bankruptcy Code, wrote the court. Section 366 protects a debtor's access to utility service during the first 20 days after the filing of a bankruptcy petition. Then, ... the court may order ... adequate assurance of payment. 11 USC Section 366.