  |
  |
  |
    
  
   |
 | |||
|
|
|
|
| |||
I. FIRST DAY ORDERS
A debtor with an operating business, particularly a service-oriented or retail business, will likely need to obtain a variety of orders from the bankruptcy court almost immediately upon filing its chapter 11 petition ("first-day orders") to allow it to continue its operations uninterrupted. For example, a debtor may seek authority to allow it: (1) to pay prepetition wages, salaries or commissions to or reimburse business expenses incurred by its employees;1
(2) pay the prepetition claims of certain essential suppliers who may otherwise refuse to continue supplying the debtor postpetition2; (3) to honor refund or other agreements with customers or entities such as credit card issuers; and (4) to continue to maintain and utilize its prepetition bank accounts so as to avoid an interruption in cash flow. The debtor's operation under these first-day orders may result in some prepetition creditors receiving what are essentially preferential payments over other prepetition creditors.
Courts have recognized that in some circumstances, unequal treatment of prepetition debts may be permitted when necessary for the survival and rehabilitation of the debtor.3 However, at least one Court of Appeals has restricted the applicability of the "necessity doctrine" to cases concerning railroads and has refused to apply it to other types debtors,4
1 See, e.g., In re CEI Roofing, Inc., 315 B.R. 50 (Bankr. N.D. Tex. 2004)(authorizing payment of prepetition employee claims up to priority amount); In re Equalnet Communications Corp., 258 B.R. 368 (Bankr. S.D. Tex. 2000)(payment of contract employee, but limited to priority amount, and recognizing customers' prepetition billing credits); In re Lehigh and N.E. Railway Co., 657 F.2d 570, 581 (3rd Cir. 1981); In re Boston and Maine Corp., 634 F.2d 1359 (1st Cir. 1980); In re Sharon Steel Corporation, 159 B.R. 730 (Bankr. W.D. Pa. 1998); In re Gulf Air, Inc., 112 B.R. 152 (Bankr. W.D. La. 1989); In re Ionosphere Clubs, Inc., 98 B.R. 174 (Bankr. S.D.N.Y. 1989).
2 E.g., In re KMart Corp., 359 F.3d 866 (7th Cir. 2004); In re Payless Cashways, Inc., 268 B.R. 543 (Bankr. W.D. Mo. 2001); In re Wehrenberg, Inc., 260 B.R. 468 (Bankr. E.D. Mo. 2001); In re Just for Feet,Inc., 242 B.R. 821
(D. Del. 1999).
3
See In re Adams Apple, Inc., 829 F.2d 1484 (9th Cir. 1987).
4
See Matter of B & W Enterprises, Inc., 713 F.2d 534 (9th Cir. 1983) (equitable doctrines, known as six months rule or necessity of payment, stem from railroad receiverships and were intended to protect railroad trustees faced with threats to continued operations during reorganization and could be invoked as justification of payment paid
1
