Case Administration

Chapter 3 of the bankruptcy Code deals with case administration and is generally applicable in both liquidation cases under Chapter 7 and rehabilitation cases under Chapters 11 and 13 of the bankruptcy code. It is applicable in part in cases under Chapter 12.

Section 303 provides for the filing involuntary bankruptcy petitions by creditors or their attorneys. It requires a petition by three entities holding claims aggregating $10,775 and a finding that the debtor in bankruptcy is generally not paying such debtor's debts as they become due unless the debts are the subject of a bona fide dispute or that a custodian was appointed or took possession of substantially all the bankruptcy debtors property within the previous 120 days. If there are fewer than 12 holders of claims then only one petitioning entity is required.

One of the most important parts of the bankruptcy Code deals with stays of creditor action, the right to use, sell, or lease collateral in the bankruptcy debtors business and the obtaining of credit. Matters arising under sections 361, 362 (stays), 363 (use, sale, or lease of property), and 364 (obtaining of credit) are often issues of great importance to both debtors and secured creditors in the early days of a Chapter 11 bankruptcy case. The basic requirement is that affected entities be afforded adequate protection of their interest in property of the bankruptcy estate; failing which relief from the automatic stay will be granted or the use of or borrowing against collateral will be prohibited. The term adequate protection is not formally defined in the Code, but some guidelines are offered in § 361, which suggests that adequate protection might include cash payments, additional collateral, or replacement collateral, but would not include the giving of an administrative priority. Section 361 does not apply in Chapter 12 bankruptcy cases since § 1205 sets forth illustrations of adequate protection applicable in Chapter 12. As will be discussed in Chapter 12, § 1205 is substantive in some respects. Section 507(b) provides a super-priority claim to a secured creditor in the event adequate protection fails to protect the secured creditor against loss.

No precise definition of the term executory contract exists and none is attempted in the Code. Bankruptcy Code Section 365 deals with executory contracts and unexpired leases and precludes the operation of automatic or optional bankruptcy termination clauses in most leases and contracts. The Code permits the cure of other contractual defaults by debtors or their lawyers on terms approved by the court as long as adequate assurance of future performance is given and compensation afforded for any pecuniary loss. The Code also permits the assumption and assignment of most contracts and leases as long as adequate assurance of future performance is given. Case law dealing with executory contracts is in substantial disarray and section 365 of the bankruptcy code has been the subject of sporadic special interest legislation with unfortunate results.

Section 366 protects bankruptcy debtors from utility service being cut off because of the commencement of a bankruptcy case. While the utility is required to continue service for 20 days it may thereafter discontinue service unless the debtor furnishes adequate assurance of future payment.  

San Diego, California

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