Conference on Large

Chapter 11 Cases

January 30–February 1, 2003

Washington, D.C.

Judicial Conference Committee on the

Administration of the Bankruptcy System

and the Federal Judicial Center

2004

This document is a report of the Subcommittee on Venue-Related Matters of the

Judicial Conference Committee on the Administration of the Bankruptcy System. The

Federal Judicial Center is publishing the report at the request of the Bankruptcy

Committee. The report reflects the sense of the participants in the Conference on

Large Chapter 11 Cases; it is not intended to, nor does it, express the position of any

individual participant, the Federal Judicial Center, or the Judicial Conference of the

United States.
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iii

Contents

Introduction 1

Factors Affecting Choice of Venue 3

Nature of the Problem 3

Factors Affecting Choice of Venue May Vary 4

Should We Concern Ourselves with Venue Choices? 4

Would Uniformity Be Advantageous? 5

Possible Venue Drivers on the Conference Agenda 5

First-Day and Expedited Orders 7

Orders Approving Payment of Critical Vendors and Pre-Petition

Wages, and Other Orders Affecting Debtor’s Operations 7

Orders Authorizing Secured Borrowing (Debtor in Possession

Financing Agreements) 10

Administrative and Case-Management Orders 14

Claims 17

Omnibus Objections to Claims 17

Preference Actions 18

Claims Agents 18

Section 363 Sales 21

Sale of All Assets Outside the Plan 21

Transfer Tax Exception Under 11 U.S.C. § 1146(c) 24

Sale of Assets Not Determined To Be Property of the Estate 25

Appointment and Payment of Attorneys and Professionals 27

National Versus Local Fee Rates 27

Payment of Financial Advisors 28

Controlling Fees in Bankruptcy Cases 28

Review of Fee Applications 30

Retention of Ordinary Course Professionals 32

Plan Confirmation 35

Third-Party Releases 35

Plan Feasibility 36

Exclusivity 37
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iv

Proposals for Action 39

Revise FJC’s A Guide to the Judicial Management of Bankruptcy

Mega-Cases and Hold Educational Seminars 39

Resource List of Judges 40

Rules and Procedures Related to First-Day Orders 40

Official Forms 41

Omnibus Objections to Claims 41

Review of Venue Decisions 41

Additional Judicial Resources and Sua Sponte Venue Rulings 41

Conference Participants 43

Planning Committee 44
1

Introduction

In early 2003, the Judicial Conference Committee on the Administration of the Bankruptcy System (Bankruptcy Committee), with the

assistance of the Federal Judicial Center (FJC), held a conference of

judges and attorneys with established expertise in large Chapter 11

cases. Judges Dennis Montali (Northern District of California,

Bankr.), Marjorie O. Rendell (Third Circuit Court of Appeals), and

Wesley W. Steen (Southern District of Texas, Bankr.), each a member

of the Bankruptcy Committee and its Subcommittee on VenueRelated Matters, and staff from the Bankruptcy Judges Division of the

Administrative Office of the U.S. Courts worked with the FJC to plan

the conference. In addition to the planning committee, twenty-seven

judges and attorneys participated (see the participant list, page 43; and

the planning committee, page 44). Conference sessions were led by

participating attorneys and judges and consisted of discussions about

the policy and case-management issues related to large Chapter 11

cases.

At its June 2001 meeting, the Bankruptcy Committee had approved a number of recommendations for changing the venue statutes—the most notable recommendation would have prohibited corporate debtors from filing for bankruptcy in a district based solely on

the debtor’s state of incorporation or based solely on an earlier filing

by a subsidiary in the district. The Committee placed these recommendations on the discussion calendar for the September 2001

meeting of the Judicial Conference of the United States, but later

withdrew them. Also at the June 2001 meeting, the Bankruptcy

Committee established a Subcommittee on Venue-Related Matters.

That Subcommittee subsequently recommended that 28 U.S.C.

§1412 be amended to specifically authorize courts to raise an issue of

venue and to transfer a bankruptcy case sua sponte. The Bankruptcy

Committee and the Judicial Conference approved this recommendation, which will be forwarded to the Congress at an appropriate time.

The Subcommittee also recognized that its deliberations on the issue

of venue and related matters of case management could be substantially aided by additional study, which gave rise to the 2003 conference

of judges and attorneys.
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The purpose of the 2003 conference was to

• identify the factors that influence the selection of venue for

Chapter 11 cases of large companies irrespective of the statute;

• evaluate the effect of venue choice on parties-in-interest and

the courts; and

• determine whether legislation or judicial action related to

venue was necessary and appropriate.

Recognizing that the debtor’s choice of venue may depend greatly on

the procedures courts have in place for handling various aspects of

large Chapter 11 cases, an additional goal of the conference was to

critically examine the effectiveness of such procedures, the variations

in them among districts, and, ultimately, whether standard procedures for handling large Chapter 11 cases are needed.

This report summarizes the conference discussions, focusing first

on the factors that influence the choice of venue and, second, on the

proposals for further action recommended by the Bankruptcy Committee’s Subcommittee on Venue-Related Matters. To a large extent,

these recommendations are oriented toward expanding the expertise

in handling large Chapter 11 matters throughout the bankruptcy

bench and helping to establish more effective and standard procedures for large Chapter 11 cases throughout the nation.

This report, published at the request of the Bankruptcy Committee, reflects the sense of the conference participants; it is not intended

to, nor does it, express the position of any individual participant, the

Federal Judicial Center, or the Judicial Conference of the United

States on these matters.
3

Factors Affecting Choice of Venue

Several interrelated themes emerged from the discussion of factors

affecting the choice of venue.

Nature of the Problem

First, conference participants questioned whether the problem with

choice of venue is with the venue statutes per se. Participants suggested that the real problem relates to the inappropriate allocation of

judges, and also judicial familiarity, inadequate or perceived inadequate, with handling large or complex cases. Part of the solution arguably lies in obtaining additional authorized judgeships for Delaware

and continuing to support Delaware’s use of visiting judges. Not only

does the visiting judge program augment the judicial resources devoted to the Delaware caseload, it also allows judges outside the district to gain additional experience with complex Chapter 11 cases.

Another part of the solution, according to the participants, lies in

working to improve the competence of all judges and promoting the

predictability of large Chapter 11 procedures in all districts. A major

venue driver is avoiding the risk of the case being assigned to a judge

who is either unprepared or uncommitted to deal with the exigencies

of the case. One attorney compared the choice of venue with the

choice of counsel. A large corporate debtor would never select a bankruptcy attorney who had never handled a complex Chapter 11 case.

Nor would the debtor’s attorney recommend filing in a venue where

the debtor was likely to get an inexperienced judge or one believed to

be unwilling to accommodate the needs of a complex case. On-thejob training is not acceptable in either instance.

Educational opportunities can augment the competence of judges

to handle large Chapter 11 cases, and local rules and casemanagement orders can enhance the predictability and userfriendliness of a court. Even so, participants reported that attorneys

will steer away from a court in which even one judge does not make

an effort to learn how to handle complex cases or is disrespectful, unpredictable, biased, and otherwise lacking in judicial demeanor. Too

much is at stake to risk the case being assigned to such a judge. Dela-
Conference on Large Chapter 11 Cases

4

ware has been at the top of the list for choice of venue in part because

its two judges are extremely experienced and highly respected by the

bankruptcy bar.

Factors Affecting Choice of Venue May Vary

Second, participants noted that choice of venue is based on a number

of factors that shift from case to case. Expanding the expertise on large

Chapter 11 matters throughout the bankruptcy bench and establishing more efficient, standardized procedures for handling large Chapter 11 cases throughout the nation would broaden the list of “acceptable” districts. However, the choice of venue will always involve a

certain amount of subjectivity. The nature of the debtor’s business,

the existence of significant labor issues, the nature of claims (e.g.,

mass torts or significant personal injury claims), and the potential for

creditor hostility or cooperation may influence where the debtor will

file. And, as in any other type of case, whether the prevailing substantive law favors the client’s position can also drive the decision, although the advantage of filing in one district versus another may not

be marked given the large number of legal issues in a mega-case. An

attorney’s experience in a particular court and the treatment the attorney received by a particular judge in other cases may also play a

role in the attorney’s recommendation to the debtor.

Should We Concern Ourselves with Venue Choices?

A third underlying theme was inquiring why the court should question a debtor’s choice of venue in a large Chapter 11 case when that

choice is based on the debtor’s best judgment of its likelihood of success, and debtor’s counsel, as an advocate, has analyzed which venue

will offer the debtor the best chance to reorganize successfully. The

response appeared to be that interests other than those of the debtor

are involved and the integrity of the system requires the court to examine the debtor’s choice. For example, employees and trade creditors might be disenfranchised when a case is filed outside the district

where the debtor is located.
Factors Affecting Choice of Venue

5

Would Uniformity Be Advantageous?

Finally, establishing national guidelines for managing large Chapter

11 cases was thought critical to the integrity of the system. Recently,

the media portrayed a court’s movement to establish large Chapter 11

guidelines at a local level as competing against Delaware for Chapter

11 cases and as a statement that Delaware is not providing sufficient

oversight of its cases. Both the perception that some courts will do

anything to bring cases to their district and the perception that the

Delaware court does not provide adequate review are damaging to the

system. The goal should be to improve the availability of services for

all in every court, in part by offering training to judges throughout the

country on procedures and issues in large Chapter 11 cases, and in

part by offering standard guidelines that can be modified as necessary

to meet the exigencies of individual districts, judges, and cases.

Possible Venue Drivers on the Conference Agenda

The conference agenda included sessions on first-day and other expedited orders, including orders approving the payment of critical vendors and other orders based on the doctrine of necessity, orders

authorizing secured borrowing (debtor in possession (DIP) financing

agreements), and administrative and case-management orders. It also

included sessions on claims, section 363 sales, appointment and payment of attorneys and professionals, and plan confirmation. The following sections present participants’ views about how these issues affect choice of venue.
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7

First-Day and Expedited Orders

An important venue driver is the debtor’s access to the court and opportunity to seek specific relief on the first day a case is filed. The

court’s procedural and substantive handling of first-day orders also

affects choice of venue, with answers to the following questions being

significant:

1. How important is the requested relief to the success of the

case? (For example, critical-vendor and wage motions,

while important, were reportedly not usually a make-orbreak proposition.)

2. Does a certain venue offer certainty or risk with regard to

the desired result?

3. Will the client have an easy time before the judge and will

the judge act quickly or slowly?

Procedures addressing notice, timing, and burdens of proof (or lack

thereof) factor into how these questions are answered.

The participants specifically discussed three types of first-day or

expedited orders: orders approving payment of critical vendors and

pre-petition wages, orders authorizing secured borrowing (DIP financing agreements), and case-management orders.

Orders Approving Payment of Critical Vendors and

Pre-Petition Wages, and Other Orders Affecting Debtor’s

Operations

In the early stage of large Chapter 11 cases, courts often approve the

payment of pre-petition debt to critical vendors and the payment of

pre-petition wages and retention bonuses to key employees. They also

commonly enter a myriad of other orders affecting the debtor’s operations, such as orders approving the continued use of an existing

cash-management system or approving the continuation of prepetition customer programs. Approval is often based on the “Doctrine

of Necessity,” which allows a court to authorize the payment of prepetition debt where necessary for the continued operation of the

debtor. The doctrine, however, is not universally accepted nor uni-
Conference on Large Chapter 11 Cases

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formly applied, and some courts rely on section 105 of the Bankruptcy Code or other authority when approving such first-day orders.

Participants disagreed on the role the court should play in reviewing the debtor’s request. Some thought the court should defer to

the debtor’s business judgment and rely on the creditors’ committee

to identify problems. Support of the creditors’ committee should be

sufficient to support approval of the relief requested. Others thought

that the court has a responsibility to ensure interested parties have

notice and an opportunity to object and must determine that the relief requested is necessary before entering any order granting such

extraordinary relief. In addressing first-day motions, a court is often

faced with balancing fundamental, but sometimes competing, policies

of the Bankruptcy Code: the successful reorganization of the debtor

and equitable distribution to creditors.

Most of the conference discussion focused on the payment of prepetition debt to trade creditors, which was seen as more problematic

than the payment of pre-petition wages.1 Participants agreed that

there is often a need to authorize quickly the payment of payroll obligations because employee retention is integral to the debtor’s continued operations and, in any event, wages are often priority claims that

must be paid at confirmation. Opinion on the payment of prepetition debt to trade creditors was divided. One view was that a

Chapter 11 debtor must be allowed to stabilize its business in the first

few days of the reorganization and that payment of critical vendors is

integral to that effort. The counterview was that selectively paying

creditors has a tremendous preferential effect and contravenes the

payment priority established by the Bankruptcy Code.2

1. The approval of retention bonuses pursuant to the “Doctrine of Necessity”

has also been criticized as overreaching in some instances, but there was insufficient

time to discuss the issue.

2. The Bankruptcy Code is not silent on the payment of pre-petition creditors.

Section 549(a) provides that certain unauthorized pre-petition debts paid after filing

are avoidable. On the other hand, at least one court has cited 11 U.S.C. § 364(b) as

authority for approving a quid pro quo critical-vendor arrangement whereby a debtor

obtains credit it otherwise would be unable to get in exchange for payment of prepetition debt. See In re Payless Cashways, Inc., 268 B.R. 543 (Bankr. W.D. Mo. 2001).

Section 364 requires notice, however, so final approval of such an arrangement presumably should not be given in a first-day order. Another view is that because the
First-Day and Expedited Orders

9

Debtors typically file critical-vendor motions very early in a case.

Usually a debtor is not prepared to present evidence showing the necessity of the relief requested or to provide formal notice to all creditors. At the same time, however, critical-vendor orders can significantly change the posture and leverage between the debtor and its

creditors—a creditor may find its position eroded before ever having

an opportunity to participate. In some cases, critical-vendor payments

have reduced trade debt to almost nothing. Creditors who know that

the debtor is required to pay for goods or services provided postpetition may nonetheless take advantage of first-day procedures and

refuse to trade with the debtor in order to get pre-petition debts paid.

Moreover, individuals in management, to protect their personal

standing in the industry and their job potential should the debtor fail,

may attempt to pay trade creditors.

For these reasons, some participants thought critical-vendor motions should not be heard before notice is given to the creditors’

committee or to at least the top twenty creditors and that an evidentiary hearing should be held regarding the necessity of the criticalvendor payments. Otherwise, the court has little means to assess the

accuracy of attorney representations and may be unaware of key relationships between debtors and particular creditors. This approach,

however, requires significant court time and may not meet the practical exigencies of the typical mega-case. Critical vendors may choose

not to trade with a debtor if the process is too cumbersome, and

Bankruptcy Code does not explicitly prohibit courts from authorizing business payments out of the ordinary course, courts are free to authorize such payments where

there is evidence of necessity after giving notice. See 11 U.S.C. § 363(b) (2000). Finally, section 1171(a) explicitly allows the post-petition payment of specific prepetition debt in railroad cases.

The Seventh Circuit recently considered a bankruptcy court’s authority to enter

a first-day order permitting a Chapter 11 debtor to promptly and fully pay all prepetition claims of critical vendors. See In re Kmart, 359 F.3d 866 (7th Cir. 2004)

(holding that sections 105(a), 364(b), and 503 of the Bankruptcy Code do not provide

support for orders approving the preferential payment of pre-petition debts to critical

vendors, and that even assuming that section 363(b)(1) could supply the basis for

such an order, preferential payments to a class of creditors are proper only on proof

that creditors disfavored by the transfers would be as well off with reorganization as

with liquidation and that the critical vendors would have ceased doing business with

the debtor).
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10

courts with heavy caseloads may not have the resources to hold an

evidentiary hearing within the critical time period.

In ruling on first-day critical-vendor motions, courts must balance the value of keeping a business operating (and preserving jobs)

against the possibility of negatively affecting the interests of parties

without notice. One alternative is limiting the breadth and finality of

the initial critical-vendor order and issuing a final order once notice

has been given and an evidentiary hearing held. For example, some

critical-vendor orders contain monetary caps and language indicating

their interim nature, leaving issues to be finally decided at a subsequent evidentiary hearing.

Some courts have entered first-day orders granting the debtor

discretion to pay critical vendors without specifically identifying

them. This permits a debtor to retain leverage in its negotiations with

both critical and non-critical vendors, but requires the court to rely

on the debtor’s business judgment. As noted earlier, however, there is

a risk that individuals in management, based on their own interests,

could acquiesce to creditor demands. A number of participants

therefore strongly disagreed with this approach, stressing that the

court has a responsibility to determine that a vendor is in fact critical

and that any requested extraordinary relief is in fact necessary to the

debtor’s continued operations.

Orders Authorizing Secured Borrowing (Debtor in

Possession Financing Agreements)

Participants did not immediately identify debtor in possession (DIP)

financing as an issue that drove choice of venue. After further discussion, however, they concluded that because a lender can influence

choice of venue, a court’s willingness to approve certain financing

provisions can be a factor. Some courts will approve financing agreements containing provisions that roll a lender’s pre-petition debt into

its post-petition debt or grant pre-petition debt cross-collateralization

protection, whereas other courts will not. The issue of institutional

fees can also be a factor. Moreover, participants agreed that courts

with clear and predictable procedures and policies on DIP financing

are preferred.
First-Day and Expedited Orders

11

Rollup and cross-collateralization provisions

One view was that rollup and cross-collateralization provisions may

be necessary to secure uninterrupted financing necessary to a debtor’s

continued operations. If a court refuses to approve protection that an

existing lender demands and new lenders refuse to prime the existing

lender, a debtor can be left without funds to operate. In some instances, acquiescing to a rollup provision may benefit the estate by

allowing the debtor to continue to operate without disruption and to

negotiate better financing terms than it could with a substitute lender.

Further, the proposed financing agreement may prove to be the exit

facility that ensures a successful reorganization. Some believe this

analysis should be left to the business judgment of the debtor.

The opposing view was that these provisions should not be approved because they can transform pre-petition unsecured claims into

secured or administrative claims, undermining fundamental policies

of the Bankruptcy Code.3 Such provisions also foreclose options that

may be favorable to other creditors, such as the engagement of a new

post-petition lender. In any event, it is questionable whether an existing lender, unsure of its security, would refuse to finance without

these provisions. The debtor’s continued operations may be the best

way for the existing lender to preserve the value of its collateral and to

eventually get paid. Therefore, courts arguably should require a

showing of necessity before approving such provisions.

A creditors’ committee usually has time to review the proposed

financing agreement between the first-day hearing and the final

3. Rollup provisions can affect more than just the secured status of pre- and

post-petition debt. The Bankruptcy Code gives the post-petition lender administrative claim status, and rollup provisions can elevate pre-petition debt to administrative

expense status. Lenders are then in a position to assert super-priority claims against

preference actions. Additionally, rollup provisions can put lenders in an arguably toostrong position at confirmation. The Bankruptcy Code gives the post-petition lender

a veto over the plan by giving administrative status to new funds extended to the

debtor after the filing. The purpose underlying this Code provision may be undermined by a rollup provision that effectively gives the lender’s pre-petition claim the

same status as its post-petition claim. A lender’s strategy in demanding a rollup provision may be to undermine a debtor’s ability to negotiate a plan. Some courts have

addressed this possibility by limiting rollups to provide lenders a post-petition lien for

pre-petition debt, but no administrative claim.
Conference on Large Chapter 11 Cases

12

hearing on the agreement, therefore the committee has the opportunity to object to an agreement’s approval when warranted. Although

rollup and cross-collateralization provisions are not frequently approved on the first day, lenders may press for resolution of the issue at

that time. For example, a lender with letters of credit coming due in

the interim between the first-day hearing and the final hearing on the

financing agreement will likely ask that the debt be rolled into the

post-petition loan and cross-collateralized in the first-day order.

Moreover, lenders are increasingly insisting that aggressive provisions

be approved on the first day rather than in the final order to avoid the

provisions being challenged. In some cases, pre-petition lenders have

sought overreaching provisions, such as provisions that significantly

reduce the time allowed to challenge the validity of the lender’s prepetition lien or provisions that grant new liens on receivables or the

proceeds of avoidance actions to secure pre-petition debt.

DIP financing agreements often provide a look-back period, from

ninety days to as much as six months, for the purpose of allowing

parties in interest to determine whether the lien is valid and the

valuation accurate. If the court determines that the lender is not overcollateralized, a rollup provision can then be undone. At least one

judge gives liberal extensions to the look-back period to allow full investigation of the validity of the lien and the value of the collateral.

Participants disagreed on the complexity of unwinding a rollup provision. One view was that the unwinding is merely an accounting exercise whereby once the lender is determined to be under-secured, the

debt above the value of its security is simply treated like other unsecured claims. The other view was that unwinding the transaction may

be difficult.

Loan fees

Courts have allowed millions of dollars in institutional loan fees in

recent mega-cases. If significant institutional fees are allowed in a

first-day order, the second hearing will likely prove irrelevant because

it no longer makes economic sense to consider a substitute lender. On

objection, courts scrutinize the fees and often defer consideration until the final evidentiary hearing or when additional funds are actually

advanced. However, interested parties may not have notice and an

opportunity to object early enough to be of benefit.
First-Day and Expedited Orders

13

Most participants agreed that a new lender deserves the fee it

would earn in lending outside of the bankruptcy context, but the fee

awarded to an existing lender in an interim order is suspect. Typically,

the additional amount of new money is small, but the fee is paid on

the entire amount of the loan, both pre- and post-petition. Participants thought that sometimes a substantial fee to an existing lender

could be justified by the nature of a debtor’s business. For example,

the high institutional fees in the Enron case (No. 01-16034, S.D.N.Y.

Bankr., filed Dec. 2, 2001) were justified by the debtor’s immediate

need for access to credit to continue its trading business, even though

the debtor probably would not draw on that credit.

Procedures for the approval of financing

A number of courts have established guidelines for approval of secured financing that identify certain loan provisions, such as a lien on

avoidance actions, that will not be approved on a first-day or interim

basis. Attorneys reported that such guidelines help set limits for aggressive clients, thereby avoiding the inclusion of “abusive” provisions

in proposed financing agreements in the first instance. Some guidelines also require explicit notice that certain provisions are contained

in the agreements under consideration; these provisions should be

highlighted in the filed documents. Such guidelines appear to improve

the process without risking the debtor’s ability to obtain financing, as

long as flexibility to deal with unique situations is maintained.

Conference participants thought the time pressure on judges to

review complicated transactions and the power of first-day orders to

alter priorities and affect the leverage of parties warranted these requirements. Judges often receive complicated loan agreements on the

first day before becoming familiar with the debtor’s business and

must try to determine what is at issue. The judge’s fundamental job is

to provide due process, and this is difficult to do without adequate

information and time to review the proposed agreement. Moreover,

creditors and other parties in interest should have accessible information about proposed DIP financing so that they can determine

whether or not to object.
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Administrative and Case-Management Orders

Participants said that whether a court is user-friendly influences a

debtor’s choice of venue. Attorneys prefer courts that are accessible

and have clear and predictable procedures, but are nonetheless flexible when warranted. A court’s use of administrative and casemanagement orders may play a role in creating the desired transparency and accessibility.

In large reorganizations, case-management orders can relieve

some of the pressure on chambers and give the numerous participants

predictable procedures. Case-management orders often address such

issues as communication with chambers, noticing procedures, and the

scheduling of hearings. For example, some large-case orders have

scheduled omnibus hearing days for all matters in the case. Courts

have found this approach valuable in controlling the docket, particularly if attorneys are realistic in scheduling motions and their estimates of time requirements.4

Although a case-management order can be beneficial, it can also

unduly increase complexity if counsel must consult the order—in addition to chamber’s procedures, local bankruptcy rules, national

bankruptcy rules, and the relevant statute—to determine appropriate

procedure. This is particularly true if the various sources of authority

are in conflict. The dual goals of predictability and accessibility may

be better served by using local rules to set forth general procedures for

large reorganizations and using case-management orders to set out

case-specific details related to those procedures (e.g., on which day of

the month an omnibus hearing will be set).

Participants thought a model case-management order addressing

procedural issues that routinely arise in mega-cases might be helpful

to judges, although they did not enumerate what specific issues it

should cover. Courts should retain the discretion, however, to tailor

the order to local practice and the needs of the case, and to determine

4. Implementation of the case management/electronic case filing (CM/ECF)

system has also allowed changes in case management that make scheduling and other

procedural matters in large Chapter 11 cases easier for both judges and practitioners.

A case-management order can direct that scheduling changes (e.g., adjournments)

will be posted on the court’s Web site. Parties then have immediate access to procedural developments in the case.
First-Day and Expedited Orders

15

whether a case-management order should be used at all. Participants

disagreed with the suggestion that 11 U.S.C. § 105(d) be amended to

require that a judge file a case-management order.
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17

Claims

Conference participants did not identify any claims-related matters as

major factors in the choice of venue, but reported that several claimsrelated matters do command the court’s attention in large Chapter 11

cases.5

Omnibus Objections to Claims

In some cases, debtors file objections covering hundreds of claims,

making it difficult for the court to ensure that claimants are properly

noticed, to determine which objections are unopposed and which

have generated a response, and to resolve the objections. The task is

compounded because not all responses are filed with the court—some

are just sent to the debtors or the creditors’ committees. The participants agreed that courts need to help balance the competing goals of

efficiently resolving claims and ensuring that claimants receive due

process. Otherwise, debtors could misuse omnibus objections, perhaps intentionally, to strip claims from unsecured creditors who do

not respond.

Delaware Bankruptcy Local Rule 3007-1 regarding omnibus objections contains several provisions to help ensure such objections are

used responsibly. First, the rule deems all objections to be substantive

unless they are based on one of five nonsubstantive grounds (duplicative, amended, or superceded; late-filed; filed in the wrong case; filed

without necessary supporting documentation; filed by a shareholder

based on ownership of stocks). Second, it requires that each omnibus

objection be filed as either substantive or nonsubstantive and that the

title of the objection clearly state this information (e.g., first omnibus,

duplicate claims). It also sets out the information to be contained in

supporting exhibits and the form in which the information is to be

presented, which helps identify which claims are being objected to

and on what basis. Third, the rule states that for substantive objections, the exhibit must include claim-specific declarations giving suffi5. Because of time constraints, the group did not discuss claims trading.
Conference on Large Chapter 11 Cases

18

cient detail as to why claims should be disallowed and covering all

substantive grounds for the objection. The rule goes one step further

to provide examples of “sufficient detail.” It also limits the number of

claims that can be included in a substantive omnibus objection to 150

and the number of omnibus substantive objections to two per month,

unless the court orders otherwise.

Even in the absence of an omnibus objection, a pivotal question is

how much due diligence should be required of the debtor before filing

an objection. To help minimize baseless substantive objections, the

court can require that objections be made with specificity and that a

corporate officer review claims with the claims agent and submit an

affidavit with any substantive objection.

Preference Actions

In some jurisdictions, debtors are allowed to name hundreds of unrelated parties in one adversary proceeding to recover preferential

transfers. Conference participants agreed that this practice was improper because of a lack of commonality among defendants and reported that the practice is disallowed in Delaware.

The group also reiterated the National Bankruptcy Review Commission’s proposal to increase the monetary amounts in 28 U.S.C.

§1409(b). Currently, the cost to defend a preference action often may

be greater than the alleged preference amount, which may encourage

the debtor to strategically file such actions.

Claims Agents

Pursuant to 28 U.S.C. § 156(c), the court may delegate various document-maintenance tasks to an outside agent paid by the estate. Under

section 156(e), however, the clerk of court remains the official custodian of the court’s records and dockets. The conference participants

identified several considerations to ensure the security and integrity of

the records when a claims agent is used.

First, A Guide to the Judicial Management of Bankruptcy MegaCases (Federal Judicial Center 1992) sets out operational guidelines

and orders regarding the use of claims agents—these guidelines need

to be updated to account for electronic case filing. Judges can tailor
Claims

19

this information to the needs of specific cases and should clearly

communicate expectations to the agents and parties.

Second, the notice period for the appointment of a claims agent

should provide sufficient time for the parties and clerk’s office to determine whether the agent is competent to handle the instant case and

to identify whether the agent has any conflicts of interests. At the

same time, if the notice period is too long, the 11 U.S.C. § 341 notice

will be mailed before the claims agent is appointed and claims will

start coming to the court. This may lead to errors in the claims resolution process and burden the clerk’s office with unnecessary work.

Appointment on ten days’ notice might properly balance the competing interests, particularly if the court maintains a list of agents already vetted for their general competency.
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21

Section 363 Sales

Participants agreed that a court’s willingness to approve an 11 U.S.C.

§363 sale of all assets outside of a plan of reorganization may affect

the choice of venue for some debtors. Other possible venue drivers for

a debtor planning to sell significant assets outside of the plan include a

court’s willingness to approve breakup fees and its flexibility regarding sale procedures. Tension exists between the need for procedural

flexibility to maximize the value of the estate and the need for predictability to ensure fairness and the integrity of the system.

Sale of All Assets Outside the Plan

Chapter 11 has become a mechanism for controlling the liquidation

process to maximize value. Participants discussed the threshold issue

of whether a sale of substantially all of the debtor’s assets outside of a

plan is a legitimate use of Chapter 11.

Some thought that a section 363 sale of all assets is not an appropriate use of Chapter 11 if it only benefits a secured creditor claiming

a lien on all assets. The Seventh Circuit U.S. trustee takes the position,

consistent with this point of view, that a trustee has no right to administer a Chapter 11 case unless a dividend can be paid to unsecured

creditors, and therefore a section 363 sale outside the plan should be

approved only when such a dividend is available. Some participants

thought that a section 363 sale of substantially all assets is sometimes

appropriate, even if the case is to be dismissed after the sale is complete, and that the facts and circumstances of a case are important in

determining the appropriateness of a section 363 sale. The debt

structure of the company, the benefits of the sale to employees and

others, and the identity of those who are participating in and supporting the sale may inform whether a sale should be approved. This

point of view is consistent with the Second Circuit’s holding in In re

Lionel Corp., 722 F.2d 1063 (2d Cir. 1983), which requires a judge to

expressly find evidence of a good business reason for approval of a

section 363(b) request.

Clearly, the timing of a section 363 sale is also important to its

appropriateness. Approval of a section 363 sale immediately after a
Conference on Large Chapter 11 Cases

22

case is filed is problematic because of the lack of opportunity for review and objection, but this concern is no longer present later in the

case. If time is of the essence, a fast prepackaged bankruptcy (confirmation in twenty days) may be preferable because of the protections

that confirmation affords, including the filing of a plan and disclosure

statement and a vote of creditors with an interest in the outcome.

Breakup fees

Breakup fees are intended to compensate a lead bidder for transaction

costs, incurred in the sale process, that are lost if the sale is not approved. A court’s position on breakup fees can be a consideration in

venue choice, particularly if the court will not approve breakup fees

under any circumstances.

Some people contend that breakup fees are necessary to attract a

lead bidder to start the bidding process, while others argue that such

fees discourage bidding by other interested purchasers. Certain courts

do not or only reluctantly approve breakup fees. For example, Arizona bankruptcy judges refuse to approve breakup fees, taking the

position that bidders have already factored the expense and risk involved in a discounted bid. Participants reported that some debtors

have avoided filing in Detroit because one bankruptcy judge there also

refuses to approve breakup fees.

A large breakup fee can sometimes unduly reward the unsuccessful bidder. Conference participants said this problem could be solved

in one of several ways. The court could apply the probate concept of a

minimum overbid to limit the amount of the breakup fee—as long as

a breakup fee is less than the minimum overbid, there is no risk of loss

to the estate. Or the court could require that the breakup fee be reduced as the bidding increases with the lead bidder losing the fee altogether if bidding goes high enough. Most judges who approve

breakup fees already require that the fee be based on some reasonable

estimate of out-of-pocket expenses. Some courts also have other requirements or criteria for approval of breakup fees, such as the existence of a signed sales agreement. Attorneys emphasized that flexibility in applying such requirements remains important.
Section 363 Sales

23

Private sale or public auction

In determining the appropriate method of sale, there is tension between the need for flexibility to maximize value for the estate and the

desire for predictability and due process. Participants did not agree on

whether a thorough pre- or post-petition marketing effort is sufficient

for approval of a private sale or whether courts should require an incourt auction procedure to ensure the highest and best bid. Some

contend that pre-petition sale efforts sometimes overlook serious bidders, whose participation at an in-court auction can produce higher

bids. Interested buyers, not willing to bid on distressed assets outside

of bankruptcy, often come forward when the bankruptcy case is filed

because a sale of assets in bankruptcy, free and clear of liens, can offer

a buyer more value. Moreover, the integrity of the bankruptcy system

and public confidence in it require a public sale. Others contend that

buyers are more likely to give their highest bid at the outset (and not

require breakup fees) if confident that a sale will be private.

Currently, however, most bidders expect that there will be an

auction, formal or informal, before the court will approve a sale.

Judges at the conference disagreed as to whether the court should entertain a higher walk-in bid at a hearing on a private sale. An interested buyer who enters into an agreement, subject to court approval,

does not anticipate an auction, but the sale agreement must nevertheless be approved at a public hearing and interested parties can object to it. Arguably, a breakup fee is warranted if a court will entertain

such walk-in bids.

The use of a sealed bid auction can sometimes yield the highest

return for the estate in cases where there is widespread interest in the

debtor’s assets. Because the highest bid is sometimes subject to additional contingencies and because the high bidder does not always have

the ability to close, the highest bid is not always the best offer.

Bidding procedures

In response to the concern that practitioners overuse alleged “emergencies” to persuade the court to dispense with thorough bidding

procedures, participants suggested that courts should establish standard bidding procedures that include requirements such as deposits.

In Nevada, for example, bidders are required to post earnest money,

although the court is permitted to consider previously unqualified
Conference on Large Chapter 11 Cases

24

bids. Notice of the requirement goes out with the notice of the sale

and its procedure. The prequalification of bids also can minimize the

participation of sham bidders. One practitioner indicated that the

most efficient way to complete a sale is to present the court with an

agreed order establishing bidding procedures, and therefore counsel

should encourage the debtor to negotiate agreed bidding procedures

with the creditors’ committee and the secured lender.

With complex sales, practitioners often prefer out-of-court auctions, but some judges at the conference reported problems in determining whether bidding procedures were followed outside the courtroom. One attorney stressed the importance of putting bidders on

notice that bidding procedures are flexible and can be changed when

it is in the estate’s best interests. Other participants, however, questioned whether the court could provide proper supervision if procedures are changed during the course of the bidding process. Taking

transcripts of out-of-court auctions may facilitate appropriate oversight. Some participants also expressed concern over the sequestration

of bidders in out-of-court auctions. While sequestration may diminish the opportunity for improper collusion and produce higher prices

in some cases, it may also encourage parties to make questionable representations and impair the integrity of the process. The possibility of

insider involvement also makes out-of-court bidding procedures

problematic.

Participants thought sales to insiders must be scrutinized closely.

Although participants agreed that a sale should not be approved or

should be voided if insider wrongdoing has occurred, most also agreed

that an insider sale can go forward provided stringent procedures are

met. One judge suggested the insider must be divorced from the

debtor before negotiations commence, sale terms must be approved

by independent persons, and an auction must be held.

Transfer Tax Exception Under 11 U.S.C. § 1146(c)

Participants considered whether the transfer tax exception of section

1146(c) can be applied in the context of a section 363 sale that goes

forward before confirmation; the Third and Fourth Circuits have
Section 363 Sales

25

ruled that it cannot.6 One judge at the conference suggested that, at a

minimum, an escrow to provide payment of the transfer tax to the

taxing authority should be required in the event a plan is not confirmed.

Sale of Assets Not Determined To Be Property of the

Estate

Participants disagreed as to whether the court should approve a section 363 sale without determining the nature of the estate’s interest—

whether the estate holds an ownership interest in the property or just

a leasehold interest. One position is that the court can allow the sale to

go through and then allow interested parties to fight over the proceeds. The counter position is that the court must determine the nature of the interest, because that determines the proper procedure to

be followed—a sale or an assumption and assignment—and, in any

event, not deciding this issue early may create problems.

6. See In re Hechinger Inv. Co. of Del., Inc., 335 F.3d 243 (3d Cir. 2003) (real

estate transfers made prior to confirmation do not qualify for tax exemption under

statutory provision prohibiting a stamp or similar tax on transfers under a confirmed

plan); In re NVR, LP, 189 F.3d 442 (4th Cir. 1999) (Chapter 11 debtor’s preconfirmation transfers of real estate did not fall within the scope of the statutory provision

prohibiting a stamp or similar tax on transfers under a confirmed plan, even though a

plan was eventually confirmed).
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27

Appointment and Payment of

Attorneys and Professionals

Certain issues related to the appointment and payment of attorneys

and professionals may affect a debtor’s choice of venue. Possible

venue drivers include whether a court approves national rates for

counsel and how the court handles the payment of financial advisors.

Participants also discussed methods courts employ for retention and

payment of ordinary course professionals, the review of fee applications, and controlling fees in bankruptcy. A court’s efficient review,

approval, and management of fees may enhance its image as a userfriendly venue where a large corporate debtor can effectively reorganize.7

National Versus Local Fee Rates

Whether a court will approve fees at national rates may influence

where a case is filed. Many courts approve higher rates for out-oftown counsel and some conference participants reported having no

problem getting their typical rates approved. However, some courts

only approve fees at the local rates and attorneys will avoid filing in

those districts, all else being equal. In response to courts’ differing

treatment of fee rates, some law firms have developed two sets of

rates—national and local—and charge according to the court’s location. One attorney reported that he applied for retention on specific

terms under 11 U.S.C. § 328(a) rather than under section 327(a) if he

was unsure what rate the court would approve.

Participants observed that courts should consider the nature of a

case in determining whether national counsel (and therefore a national rate) is required. Bankruptcy judges who have handled megacases recognized the benefit of attorney expertise in a complex case,

and while local counsel can be of assistance, mega-cases require experienced counsel.

7. The group raised but did not discuss variations among the districts in 11

U.S.C. § 327(a) conflicts standards.
Conference on Large Chapter 11 Cases

28

Payment of Financial Advisors

Some courts allow financial advisors (including investment bankers)

to be paid a flat monthly fee, whereas other courts require financial

advisors to submit time records. This difference in approach may affect choice of venue because of the significant influence investment

bankers often have over debtors.

The use of financial advisors in Chapter 11 cases is a relatively

recent phenomenon, only seen within the last fifteen years, so their

role is not clearly defined. The absence of a written work product or

other overt indication of a financial advisor’s work raises the question

of whether an advisor’s retention has value to the estate. Accordingly,

many U.S. trustees contend that financial advisors should keep time

records, and some courts (e.g., Delaware) require advisors to submit

time records for review by the U.S. trustee. In any event, without such

records, financial advisors may be unable to justify any success fee. To

demonstrate what they have done to deserve a success fee, they must

be able to present evidence of the work done and its value.

Controlling Fees in Bankruptcy Cases

Participants discussed the high attorney fees awarded in recent bankruptcy cases and considered whether the system was failing to control

fees appropriately.

Participants thought several aspects of the bankruptcy system may

make it difficult to contain fees. Objecting to fees can be problematic

in the context of the ongoing negotiations of bankruptcy because lawyers need to remain on good terms for the benefit of their respective

clients; the lawyers cannot afford to risk alienation from the process

by objecting to a key player’s fees. Moreover, although corporations

ordinarily scrutinize legal fees charged even in routine transactions,

corporate debtors may be less likely to quibble over hourly rates or

object to the fees of their bankruptcy lawyers because of debtors’

heavy reliance on the lawyers’ guidance. Because fees are paid from

estate funds, parties may not perceive an economic incentive to challenge or control attorney fees.

For these reasons, participants highlighted the need for an objective third party to review fee applications and for the court to manage

the fee process so that lawyers are required to justify the work that is
Appointment and Payment of Attorneys and Professionals

29

done. In addition, the debtor’s management and the creditors’ committee have important roles in deciding what legal services are necessary and in containing costs.

Lodestar versus value billing

Participants questioned whether the “lodestar” method (hours multiplied by rate) of calculating fee awards is the best method to use in the

bankruptcy context. Some practitioners pointed out that real estate

brokers, financial advisors, and contingent-fee lawyers are not required to report hours or to use lodestar methods in order to get paid

in Chapter 11 cases, but no consensus was reached on an alternative

substitute system. The lodestar approach arguably rewards inefficiency because firms have no incentive to limit the number of attorneys assigned to the case or the number of hours that are worked.

One suggested alternative was a sliding scale similar to that for

trustees under section 326 of the Bankruptcy Code. Section 326(a)

allows reasonable compensation for trustee services not to exceed a

percentage of the amount disbursed or turned over in the case—the

percentage allowed varies depending on the amount dispersed.

One attorney championed value billing as another alternative,

asserting that the relevant inquiry for each significant task performed

by the lawyers is not how much time it took but rather how much the

estate is paying compared to what value the estate is receiving. Many

firms already categorize fees by task so it would be just one more step

to calculate the overall cost of significant tasks (e.g., a total for the disclosure statement, a total for the plan of reorganization). Even if

lodestar billing is used, fee applications that list the total fees incurred

for each significant task would assist in their review.

Reasonableness of hourly rates and overall fees

Participants discussed whether hourly rates and overall fees in bankruptcy cases were unduly inflated. One participant observed that although current hourly rates and fees may be perceived as excessive in

the political world, they are accepted as fair value in the financial

world where it is customary to pay a specified percentage of any transaction to a financial institution. In concurring, another participant

noted that 11 U.S.C. § 330(a)(3)(E) requires courts to consider

whether compensation is reasonable based on customary compensa-
Conference on Large Chapter 11 Cases

30

tion paid outside of bankruptcy. Some participants thought the public

perception of the fees as inappropriately high was problematic, even if

they were objectively justified, and suggested that the fee-review process should lead to both the reality and the perception that the fees

awarded by the court are reasonable and necessary.8

Review of Fee Applications

Participants considered the burden of reviewing lengthy and detailed

fee applications in large cases, with the implicit assumption that

courts will consider interim fee applications as the case progresses.

Some courts allow counsel to submit monthly or quarterly fee applications for approval and payment, subject to a final review. This review process strains courts, especially courts with a significant number of mega-cases. A judge handling a mega-case can be quickly overwhelmed if a procedure to handle fee applications is not established as

soon as is practicable. Although the award of fees is ultimately the

judge’s responsibility, effective review of fee requests requires interested parties to inform the court whether the data supporting a fee

application indicate that the compensation sought is reasonable and

appropriate.

8. Press reports of attorneys’ fees in bankruptcy may include legal fees that cannot be attributed to the bankruptcy case itself. For example, a significant amount of

fees approved in a Chapter 11 case, such as fees for Securities Exchange Commission

filings or real estate transactions, would be incurred in the debtor’s ordinary course of

business absent the bankruptcy. One practitioner suggested that although the total

amount of legal fees in a large Chapter 11 case may seem high, it is a small fraction of

the money involved (e.g., 6% of assets, or less than the sales commission on a suburban house). Professor Elizabeth Warren contends that Chapter 11 is actually cheaper

than many of its alternatives, such as the automatic sale of debtor companies, because

there is only one creditors’ committee negotiating on behalf of a multitude of creditors. Newspaper accounts of Chapter 11 cases may not include this type of information and thus may unduly perpetuate the perception of excessive fees. For a fuller

exposition of this issue, see Stephen J. Lubben, The Direct Costs of Corporate Reorganization: An Empirical Examination of Professional Fees in Large Chapter 11 Cases, 74

Am. Bankr. L.J. 509–52 (arguing on both analytical and empirical grounds that the

costs of Chapter 11 are comparable to the costs of other significant corporate transactions).
Appointment and Payment of Attorneys and Professionals

31

Participants noted that in some districts the U.S. trustee takes an

active role in reviewing fee applications. The Executive Office of the

United States Trustee (EOUST) is developing software that identifies

duplicate entries and otherwise assists in review of fee applications.

Arguably, the U.S. trustee can do only what a fee examiner would

do—ensure that the description of work is accurate and expenses are

documented and compare what other firms are charging for similar

work in other cases. The U.S. trustee cannot delve into the substantive

issue of whether an attorney should have performed a given task.

Fee examiners

Participants discussed the value of appointing a fee examiner to relieve a busy court of the burden of reviewing detailed fee applications.

Several judges maintained that they had appointed fee examiners with

mixed results. Examiners do not do much more than the U.S. trustee,

reviewing the cost of line items but not determining whether work

was necessary or not. Moreover, fee examiners may feel compelled to

find something wrong in order to justify their appointment.

Budget committees

A number of participants recommended the use of a budget committee, in lieu of an examiner, to contain costs. Dow Corning, a corporate debtor facing significant asbestos litigation, used this approach

successfully. Such committees are usually comprised of mostly business people, with a U.S. trustee representative and one or two representatives from the creditors’ committee. A budget committee can be

given a mandate to control fees and to consider whether a proposed

course of action would be cost effective. The committee can do a great

deal of work behind the scenes to pare down fee applications before

they are submitted to the court, making it easier for the judge to review them. The process arguably works because business people ask

whether proposed tasks will create value, and parties in interest reportedly support the process because their money is at stake and they

know it.

The budget committee can require that task codes, uniform for

every professional, be used so that the cost of case activities are clear

and expenses for like activities can be compared. (The EOUST is reportedly developing such a set of codes.) The committee can review
Conference on Large Chapter 11 Cases

32

the budget by task and project monthly costs based on proposed tasks

to be done. It can establish some tolerance for divergence (e.g., within

10% of the budget) and require justification if monthly legal fees are a

certain percentage over budget (e.g., 2%–3%). The committee can

also review fee applications and can file objections, or if it has no objections, file a report to that effect with the court.

It may be difficult to find people willing to serve on a budget or

fee committee because the work required, even if limited to reviewing

fee applications, is significant, and members are only compensated for

expenses. One participant suggested that service on a creditors’ committee be conditioned on willingness to serve on the budget committee, but others felt that parties will participate on the budget committee because they consider the money at stake to be their own.

District court appointed monitor

Another suggested surrogate for a fee examiner or budget committee

is a district court appointed monitor, as in In re WorldCom (No. 02-

13533, S.D.N.Y. Bankr., filed July 21, 2002).

Retention of Ordinary Course Professionals

Prior to filing a Chapter 11 bankruptcy case, a large corporation may

have a score of law firms across the country handling routine legal

work (e.g., real estate, tax). Some courts allow these ordinary course

professionals to be paid in the ordinary course of business as long as

their fees are within a specified amount. This is a common practice in

Delaware and is acceptable to the local U.S. trustee office. In Delaware, a law firm that represented a Chapter 11 debtor pre-petition

and wants to continue to do so must file a retention application and

show disinterestedness. If the court approves retention, the firm can

continue to work for the estate, but does not have to file a fee application as long as the fees are less than $50,000 per month. This procedure permits the debtor’s business operations to continue undisturbed.

The Bankruptcy Code does not explicitly provide for this procedure, and courts that use it often reference section 105. It may be a

practical necessity for a court handling a large case. Ordinary course

professionals retained pursuant to section 327(a) must file fee appli-
Appointment and Payment of Attorneys and Professionals

33

cations, which would significantly increase the number of applications

the court must review. It may not be feasible for a court to review fee

applications for every professional doing the routine work that a large

corporation requires on a daily basis, such as negotiating leases or

other contracts.9

Another view, however, is that for the court to maintain adequate

scrutiny over fees, every professional should go through the formal

retention procedure under section 327, and if a debtor wants to hire

an attorney on a flat monthly fee or other similar payment arrangement, the professional can indicate this in the fee application.

9. One conference participant reported that some courts approve retention of

ordinary course professionals pursuant to section 327(b), which seems to refer to inhouse counsel. Section 327(e) may be a better fit for this situation than section

327(b), although this section was not referenced during the conference.
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35

Plan Confirmation

Participants identified several confirmation issues that may play a role

in the venue decision, including a court’s treatment of third-party

releases, assessment of feasibility, and willingness to extend exclusivity.

Third-Party Releases

Most participants agreed that a court’s willingness to confirm a plan

of reorganization containing third-party releases can drive a venue

decision, and cases are often filed in jurisdictions where a plan containing a third-party release might be confirmed.

Several circuits have ruled that bankruptcy courts have no power

to grant releases to anyone other than the debtor. In other jurisdictions, however, courts have approved nonconsensual releases in exceptional circumstances. For example, courts approved third-party

releases in In re A.H. Robins Co., Inc., 880 F.2d 694, 702 (4th Cir.

1989), MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89, 93 (2d Cir.

1988), and In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285,

293 (2d Cir. 1992). The courts in each of those cases determined that

consideration was given in exchange for the releases and that the releases were critical to the reorganization. In some jurisdictions, courts

will also approve third-party releases with the consent of creditors. In

determining how a creditor’s consent to a release is determined,

courts may deem a vote for a plan to be consent to the release or require parties to check a box opting in or opting out of the release.

Plans sometimes provide that failure to vote is deemed acceptance of

the plan and therefore consent to the release, but not all courts allow

such provisions.

Participants also discussed whether inclusion of prohibited releases in a plan of reorganization compromises the integrity of the

bankruptcy system and whether judges should take a more active role

in determining whether a plan with release provisions should be confirmed. One judge indicated that, absent consent, a release provision

should be stricken unless there is proof of exceptional circumstances

to justify it.
Conference on Large Chapter 11 Cases

36

Plan Feasibility

Most conference participants agreed that the feasibility standard a

court applies and the extent of financial projections it requires may be

factors in choice of venue. They did not agree, however, on what time

period should be covered by financial projections. One attorney

commented that projections should mirror the duration of the plan,

while another indicated that projections beyond one to two years are

too speculative.

Some participants questioned Professor Lynn LoPucki’s criticism10 that courts are not adequately assessing feasibility. Feasibility is

often not at issue because a debtor and its creditors have high-paid

financial professionals who agree that the plan is feasible. Several

judges, however, stressed that the court has an obligation to make

certain determinations even in the absence of an objection (e.g., good

faith, best interests, and feasibility). See In re Perez, 30 F.3d 1209 (9th

Cir. 1994). However, a judge must determine feasibility based on the

evidence before the court. This raises the issue of whether the feasibility assessment advocated by Professor LoPucki may require the appointment of an independent financial expert, distinct from those

employed by the debtor and creditors’ committees. One judge suggested that perhaps a court-appointed financial expert could dispense

with the need for the others. Many participants disagree with this approach, contending that it infringes on the adversarial process. They

also argue that committees are statutorily authorized to hire financial

advisors and need such advisors for more than assessing feasibility or

testifying at confirmation. The appropriateness of a court-appointed

financial examiner was also questioned, given that the rules do not

authorize the appointment of a special master in bankruptcy.

10. Lynn M. LoPucki & Joseph W. Doherty, The Failure of Public Company

Bankruptcies in Delaware and New York: Empirical Evidence of a “Race to the Bottom,”

54 Vand. L. Rev. 231 (2001); Lynn M. LoPucki & Joseph W. Doherty, Why Are Delaware and New York Reorganizations Failing?, 55 Vand. L. Rev. 1933 (2002).
Plan Confirmation

37

Exclusivity

A debtor has an exclusive right to file a plan of reorganization for the

first 120 days of the case; the court may either increase or decrease the

amount of time for cause. Participants did not agree on whether exclusivity issues drive venue decisions. Some believe that debtors may

avoid a jurisdiction that develops a reputation for refusing to extend

exclusivity, while others believe that a competing plan can help to

move a case forward because the debtor is forced to negotiate with the

creditor who sponsors it. Most participants thought it too restrictive

to prohibit discussion of alternative plans until the exclusivity period

is terminated.

Participants considered several questions related to exclusivity:

1. Do complex cases require extended exclusivity?

2. Does extended exclusivity promote equitable and efficient

resolution of cases?

3. What factors should be considered in extending or extinguishing exclusivity?

4. Should a judge extinguish exclusivity selectively, as to

only this or that committee?

The 1994 amendment granting an appeal of right as to interlocutory

decisions on exclusivity was intended to address the concern that

continued exclusivity extended the length of cases. Arguably, however,

exclusivity sometimes assists in controlling expenses and moving the

case forward, and competing plans sometimes delay real negotiations.

If creditors know exclusivity is going to be terminated on a certain

date, they may refuse to negotiate. On the other hand, a debtor should

not be allowed to prolong indefinitely a stagnant case. In attempting

to balance the interests at stake, some courts leave exclusivity in place

until a party in interest presents an alternative plan with significant

support while others require the debtor to demonstrate progress toward reorganization before extending exclusivity.
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39

Proposals for Action

In light of the conference discussion, the Subcommittee on VenueRelated Matters recommends that the following actions be taken to

help ensure all bankruptcy judges are prepared to handle complex

Chapter 11 cases and that effective, reasonably standard procedures

are established in all courts.

1. Revise FJC’s A Guide to the Judicial Management of

Bankruptcy Mega-Cases and Hold Educational Seminars

The FJC should update A Guide to the Judicial Management of Bankruptcy Mega-Cases (Federal Judicial Center 1992) and make it available online. The Center should consider establishing an advisory

group of judges and attorneys to assist with this project and should

work closely with the Subcommittee on Venue-Related Matters. (The

FJC has agreed to do this.)

The updated publication should provide guidance on a wide

range of topics, including the following: (1) motions based on the

doctrine of necessity; (2)DIP financing; (3) case-management orders;

(4) appointment and oversight of the claims agent, claims processing,

and objections to claims; (5) sales; and (6) appointment and compensation of professionals. The online guide should also include

model orders, which could be downloaded and adapted for a particular case. Courts, for example, could require attorneys to use the model

orders and highlight any changes made to them. The guidelines and

model orders should reflect the variety of local rules and practices

across the country and, as appropriate, present alternative provisions

to meet the needs of a particular district or case. Other material of use

to the court, such as a “term sheet” of financial and other terms particular to mega-cases, could also be posted online.

The Subcommittee on Venue-Related Matters and the FJC should

monitor whether and when future updates to the guide are needed,

with a means for obtaining input from judges and attorneys. Small

group sessions, with both judges and practitioners participating, could

be held on a periodic basis to help expose judges and attorneys to

emerging problems related to large Chapter 11 cases, to identify

needed improvements to the system, and to correct misperceptions
Conference on Large Chapter 11 Cases

40

about how matters are being handled by attorneys and judges in different districts. Such sessions could be held at, or in conjunction with,

FJC continuing education seminars for bankruptcy judges.

2. Resource List of Judges

The Federal Judicial Center or Administrative Office should develop a

resource list of judges who have experience with large Chapter 11

cases and who have agreed to consult with other judges who have

been assigned a large Chapter 11 case perhaps for the first time. Although bankruptcy judges already regularly consult with one another,

an established panel might encourage more communication.

3. Rules and Procedures Related to First-Day Orders

The Bankruptcy Committee and the Advisory Committee on Bankruptcy Rules should study the effectiveness of the rules regarding firstday orders, including post-petition financing and the use of cash collateral. With respect to the latter, debtors should be required to provide the court with a plain-English material term sheet for any cash

collateral or financing agreement it asks the court to approve. This

would allow the court to evaluate more reliably the impact of complex

financing arrangements and to rule more expeditiously. The court

could thereafter revisit any material disparity between the term sheet

and the order. (Finance attorneys often provide summary sheets to

the debtor’s counsel and the same summary sheets could be passed

along to the court.)11

The two bankruptcy committees should also study the procedures

for reviewing first-day orders and study whether the current practice

of entering interim orders for later review by the court is effective.

11. Such a rule provision might read as follows: “The proponent of any financing or cash collateral agreement who requests interim or expedited relief on less

than fifteen days’ notice must attach to the motion a short summary or term sheet

setting forth the critical structure of the proposed financing arrangement. Notwithstanding any contrary provision in any related order, a bankruptcy judge may order

appropriate relief if a material discrepancy is discovered between the explanation in

the summary and the language of the order or documentation approving the financing or cash collateral arrangement.”
Proposals for Action

41

4. Official Forms

The Bankruptcy Committee and the Bankruptcy Rules Committee

should reevaluate the role of Official Forms and whether the rules

should require their use. The rule requiring the use of Official Forms

is largely ignored in very large Chapter 11 cases with respect to

disclosure-statement notices, confirmation-hearing notices, and planconfirmation orders. Updated and more realistic orders might play an

important role in standardization of practice.

5. Omnibus Objections to Claims

The Bankruptcy Committee and the Bankruptcy Rules Committee

should study whether the rules should be modified to address explicitly the use of omnibus objections to claims.

6. Review of Venue Decisions

The Bankruptcy Committee should continue to consider whether the

procedure for reviewing venue decisions needs to be modified. An

interlocutory appeal of a venue decision would likely prove futile because of the time involved. The case has to proceed, and once it moves

forward it is difficult to disentangle. A workable alternative might be

to provide for a motion to reconsider without a change in the burden

of proof.

7. Additional Judicial Resources and Sua Sponte Venue

Rulings

Finally, recognizing the great burden on the judges in Delaware

caused by the overwhelming caseload, the Bankruptcy Committee

should reiterate its support for additional judicial resources in Delaware and its recommendation that 28 U.S.C. § 1412 be amended to

explicitly authorize a bankruptcy judge to consider venue sua sponte.

Federal Rule of Bankruptcy Procedure 1014 currently provides that

venue can be transferred on motion of a party-in-interest. Case law in

some jurisdictions has interpreted this rule to limit judicial action

absent such a motion. Other jurisdictions have supported the notion

of sua sponte transfer, either relying on section 105 of the Bankruptcy

Code or the interaction of various statutory provisions. The recom-
Conference on Large Chapter 11 Cases

42

mended statutory change would eliminate this conflict in case law.

The Rules Committee might consider the option of amending the rule

as well. The Judicial Conference has approved the recommendation to

amend 28 U.S.C. § 1412 and the recommendation to establish four

additional judgeships in Delaware.
43

Conference Participants

Honorable Arthur J. Gonzalez, United States Bankruptcy Court for

the Southern District of New York

Honorable Robert F. Hershner, Jr., United States Bankruptcy Court

for the Middle District of Georgia

Honorable Barbara J. Houser, United States Bankruptcy Court for the

Northern District of Texas

Honorable David S. Kennedy, United States Bankruptcy Court for the

Western District of Tennessee

Honorable Randall J. Newsome, United States Bankruptcy Court for

the Northern District of California

Honorable Barry Russell, United States Bankruptcy Court for the

Central District of California

Honorable Susan Pierson Sonderby, United States Bankruptcy Court

for the Northern District of Illinois

Honorable Mary F. Walrath, United States Bankruptcy Court for the

District of Delaware

Honorable Peter J. Walsh, United States Bankruptcy Court for the

District of Delaware

Honorable Gregg W. Zive, United States Bankruptcy Court for the

District of Nevada

Professor Laura B. Bartell, Wayne State University Law School

Professor S. Elizabeth Gibson, University of North Carolina, School of

Law

D. Jansing Baker, Skadden, Arps, Slate, Meagher & Flom LLP, New

York, New York

Martin J. Bienenstock, Weil, Gotshal & Manges LLP, New York, New

York

Tina L. Brozman, Bingham McCutchen LLP, New York, New York

Stephen H. Case, Davis Polk & Wardwell, New York, New York

Dillon E. Jackson, Foster Pepper & Shefelman PLLC, Seattle,

Washington

Laura Davis Jones, Pachulski, Stang, Ziehl, Young, Jones & Weintraub

P.C., Wilmington, Delaware
Conference on Large Chapter 11 Cases

44

Richardo I. Kilpatrick, Kilpatrick & Associates P.C., Auburn Hills,

Michigan

Richard B. Levin, Skadden, Arps, Slate, Meagher & Flom LLP, Los

Angeles, California

Gerald F. Munitz, Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz

Ltd., Chicago, Illinois

Patrick A. Murphy, Murphy Sheneman Julian & Rogers, San Francisco, California

Sally S. Neely, Sidley Austin Brown & Wood LLP, Los Angeles, California

Kevyn D. Orr, Jones Day, Washington, D.C.

Thomas J. Salerno, Squire, Sanders & Dempsey LLP, Phoenix,

Arizona

H. Rey Stroube III, Akin, Gump, Strauss, Hauer & Feld LLP,

Houston, Texas

Robert J. White, O’Melveny & Myers LLP, Los Angeles, California

Planning Committee

Honorable Michael J. Melloy, United States Court of Appeals for the

Eighth Circuit

Honorable Marjorie O. Rendell, United States Court of Appeals for

the Third Circuit

Honorable Dennis Montali, United States Bankruptcy Court for the

Northern District of California

Honorable Wesley W. Steen, United States Bankruptcy Court for the

Southern District of Texas

Patricia L. Levy, Bankruptcy Judges Division, Administrative Office of

the United States Courts

Denise M. Neary, Federal Judicial Center

Francis F. Szczebak, Bankruptcy Judges Division, Administrative

Office of the United States Courts

Elizabeth C. Wiggins, Federal Judicial Center
The Federal Judicial Center

Board

The Chief Justice of the United States, Chair

Judge Pierre N. Leval, U.S. Court of Appeals for the Second Circuit

Judge Terence T. Evans, U.S. Court of Appeals for the Seventh Circuit

Judge James A. Parker, U.S. District Court for the District of New Mexico

Judge Sarah S. Vance, U.S. District Court for the Eastern District of Louisiana

Judge Bernice B. Donald, U.S. District Court for the Western District of Tennessee

Chief Judge Robert F. Hershner, Jr., U.S. Bankruptcy Court for the Middle District of Georgia

Magistrate Judge Robert B. Collings, U.S. District Court for the District of Massachusetts

Leonidas Ralph Mecham, Director of the Administrative Office of the U.S. Courts

Director

Judge Barbara J. Rothstein

Deputy Director

Russell R. Wheeler

About the Federal Judicial Center

The Federal Judicial Center is the research and education agency of the federal judicial system. It

was established by Congress in 1967 (28 U.S.C. §§ 620–629), on the recommendation of the

Judicial Conference of the United States.

By statute, the Chief Justice of the United States chairs the Center’s Board, which also

includes the director of the Administrative Office of the U.S. Courts and seven judges elected by

the Judicial Conference.

The Director’s Office is responsible for the Center’s overall management and its relations

with other organizations. Its Systems Innovation & Development Office provides technical support for Center education and research. Communications Policy & Design edits, produces, and

distributes all Center print and electronic publications, operates the Federal Judicial Television

Network, and through the Information Services Office maintains a specialized library collection

of materials on judicial administration.

The Education Division plans and produces educational programs, services, and resources

for judges and for nonjudicial court personnel, such as those in clerk’s offices and probation and

pretrial services offices. Its products include travel-based and in-court programs that participants attend in person, Web-based programs and publications, television programs broadcast by

satellite, and manuals, monographs, and other print publications.

The Research Division undertakes empirical and exploratory research on federal judicial

processes, court management, and sentencing and its consequences, often at the request of the

Judicial Conference and its committees, the courts themselves, or other groups in the federal

system.

The Federal Judicial History Office develops programs relating to the history of the judicial

branch and assists courts with their own judicial history programs.

The Interjudicial Affairs Office provides information about judicial improvement to judges

and others from foreign countries and identifies international legal developments of importance

to personnel of the federal courts.