Bankruptcy Rule 6003 is a creditor driven rule
added to the Bankruptcy Code to restrict the relief available to debtors
in the early stages of the bankruptcy proceedings. Prior to Rule 6003,
debtors routinely filed, among other things, critical vendor motions,
motions to sell assets or assign leases, with the court in the first few
days of bankruptcy and often with little or no notice to creditors.
6003 became effective December 1, 2007, and limits the relief a debtor can
expect to receive during the first twenty days of the bankruptcy case.
Until now, creditors and trustees have generally ignored Rule 6003.
However, with the increase in corporate filings this year more attention
is being paid to the rule and its application. Many U.S. Trustees have
been invoking Rule 6003 in their objections to first-day motions.
the terms of Rule 6003 in order for a debtor to receive relief during the
first twenty days of bankruptcy he must prove that a denial would cause it
“immediate and irreparable harm”. And there lies the problem because
Rule 6003 does not define what evidence debtors must show to meet the
immediate and irreparable harm standard.
courts have published opinions on what the immediate and irreparable harm
standard really means and the few courts that have rendered opinions have
not been severe in their rulings, as a strict interpretation of the rule
would seem to demand. Courts have found that the possibility of serious
reduction to the value of the debtor’s estate was sufficient. Another
court ruled that the immediate and irreparable harm standard could be met
where the possibility existed that a debtor would be unrepresented by
counsel during the first twenty days of a bankruptcy case, causing
potential prejudice if a motion to dismiss was filed by creditors. Thus,
courts have adopted the opinion to the severe and uncompromising language
of Rule 6003, finding that the possibility of any real prejudice to a
debtor may qualify under the immediate and irreparable harm standard.
6003 affects three main types of first-day relief. The first being any
application to employ counsel, consultants, accountants, or other
professionals. Some courts have allowed this form of relief, particularly
with respect to the retention of counsel. Their conclusion is based on the
fact that a corporation cannot represent itself pro se, therefore, a
corporate debtor could face immediate and irreparable harm in a dismissal
hearing if retention of counsel was denied or postponed
second use of Rule 6003 is to limit the debtor’s ability to designate
certain creditors as critical vendors during the first twenty days of
bankruptcy. Denying this type of relief may not only harm the debtor’s
efforts to reorganize but also those creditors who rely on the debtor for
their own financial survivor. Critical vendor payments are generally
approved, regardless of Rule 6003, if the debtor can show that the
creditor has threatened to withhold post-petition goods or services if not
paid, or the creditor cannot be easily replaced; or a creditor requires
payment for prepetition services before post-petition performance will be
guaranteed This makes sense as the loss of a critical vendor that cannot
be easily replaced would undoubtedly cause a debtor immediate and
final use of Rule 6003 is in limiting a debtor’s ability to sell its
assets through a Section 363 sale, or assign its leases during the first
twenty days of the case. This prohibition could force many debtors with
rapidly depreciating assets into a Chapter 7 bankruptcy and destroy
substantial value for creditors.
Rule 6003 may appear to restrict a debtor during the first twenty days of
a bankruptcy case, courts have taken a generally liberal approach to
enforcement of the rule that is supposed to restrict abusive behavior and
protect creditors by providing notice of debtor motions that supposedly
are harmful to creditors.
should be obvious that it is in the debtor’s and creditors best interest
to try to avoid the restrictive limitations found in Rule 6003. The
ability of the debtor to retain counsel, sell assets and assign leases in
a speedy manner often preserves substantial value for the estate and far
outweighs the notice issues created by the rapid action that prompted
creditors to pressure Congress for the creation of Rule 6003 in the first
majority of courts have been willing to allow the debtor relief in the
first twenty days in spite of Rule 6003, as long as the debtor presents
evidence that their exists the potential for “immediate and irreparable
harm” if relief is not granted.
I wish you well
The information provided above is for
educational purposes only and not provided as legal advice. Legal advice
should be obtained from a licensed attorney in good standing with the Bar
Association and preferably Board Certified in either Creditor Rights or