To commence a chapter 11 case, the debtor must file a bankruptcy petition, as well as items set forth in Fed. R. Bankr. P. 1007, which generally are described as lists, schedules, and statements. The official forms prescribe the content of many of these documents. Local bankruptcy court rules or procedures may require additional information or otherwise change the official requirements. The United States Trustee should ensure that the schedules, statement of financial affairs, and other required documents are filed in a timely manner.

1. determine whether the transaction properly is characterized as use of cash collateral as opposed to postpetition financing;
2. insist on adequate notice and opportunity for interested parties to be heard;
3. alert the court to substantive issues that should be preserved until interested parties are able to be heard; and
4. where necessary, take substantive positions to prevent overreaching.

Section 363 of the Bankruptcy Code deals with the use of cash collateral, while 11 U.S.C. § 364 addresses obtaining new credit. Under 11 U.S.C. § 363, the court can order that the cash collateral be used, even if the creditor objects, so long as the debtor provides "adequate protection," as defined in 11 U.S.C. § 361. By contrast, since a potential lender obviously cannot be ordered to extend funds, 11 U.S.C. § 364 affords "an escalating series of inducements that the debtor in possession may offer while attempting to obtain credit for use in the reorganization." In re Photo Promotion Assocs., Inc., 87 B.R. 835, 839 (Bankr. S.D.N.Y. 1988) (providing overview of provisions of 11 U.S.C. § 364), aff'd, 881 F.2d 6 (2d Cir. 1989). Among the inducements of 11 U.S.C. § 364 are superpriority status (giving priority over 11 U.S.C. §§ 503(b) and 507(b) administrative expenses); granting a lien on unencumbered property or a junior lien on encumbered property; and granting a priming lien. 11 U.S.C. § 364(c) and (d). See also In re Defenders Drug Stores, Inc., 145 B.R. 312, 316-18 (B.A.P. 9th Cir. 1992) (upholding payment of enhancement fee under 11 U.S.C. § 364). 11 U.S.C. § 364(e) also provides a "safe harbor" on appeal, assuring lenders that even if the authorization to obtain credit under 11 U.S.C. § 364 is reversed or modified on appeal, the validity of the debt to a good faith lender, as well as any priority or lien granted to secure the debt, is not affected.

Because of the enhanced protections available for postpetition financing, creditors often will strain to characterize their financing arrangement as such. For example, a typical situation might involve a prepetition lender who has a lien on inventory to secure the debt. The debtor may agree to pay down the secured interest from the sale of the inventory in exchange for the lender extending "new credit" that is secured by a lien on the debtor in possession's postpetition inventory. Functionally, this arrangement is indistinguishable from an agreement to use cash collateral with adequate protection in the form of a lien on postpetition assets. However, if the transaction is characterized as postpetition financing rather than the use of cash collateral, the lender may be entitled to a superpriority, as well as the "safe harbor" on appeal. Thus, the parties' characterization of the arrangement should not endthe inquiry regarding the actual nature of the relationship. For a more complete discussion of this issue,see Warfield, Is It Use of Cash Collateral or Postpetition Borrowing: How Much Protection Does the Creditor Deserve, 94 Commercial L. J. 369 (1989).

1. General Requirements

The rules governing the scope and timing of notice for cash collateral motions (Fed. R. Bankr. P. 4001(b)) and postpetition financing motions (Fed. R. Bankr. P. 4001(c)) are virtually identical. Both require at least 15 days notice to any appointed or elected committees or their authorized agents, or, if there is no committee, to the twenty largest unsecured creditors, and to such other entities as the court may direct. The United States Trustee also must receive notice (Fed. R. Bankr. P. 9034). The only difference is that for cash collateral motions, the entity with an interest in the cash collateral also must be served. Where there has been agreement to use cash collateral or where the debtor and a secured creditor have agreed to the creation of new liens to facilitate postpetition financing, the Code does not require a hearing. Instead, there must be notice of the motion and a 15 day period for the served parties to object (Fed. R. Bankr. P. 4001(d)(1), (2) and (3)). If no objection is filed, the court can approve or disapprove the agreement without conducting a hearing. If there is objection and the court determines that a hearing is appropriate, then a hearing may be held with no less than five days notice to the appropriate parties (Fed. R. Bankr. P. 4001(d)(3)).

2. Interim Relief

If requested, the court can conduct a preliminary hearing with less than 15 days notice, but it may only authorize the use of that amount of cash collateral or credit as is necessary "to avoid immediate and irreparable harm" to the estate pending a final, adequately noticed hearing. (Fed. R. Bankr. P. 4001(b)(2) and 4001(c)(2)). However, occasionally a debtor, arguing exigent circumstances, will seek approval of a financing order on the day the case is filed. The question then becomes whether it is necessary to conduct a hearing at all and how much, if any, notice is required.

Under 11 U.S.C. §§ 363 and 364, the court can issue an interim order only "after notice and a hearing." However, 11 U.S.C. § 102(1), which defines the phrase "after notice and a hearing," provides that there need not be an actual hearing if there is notice and if "there is insufficient time for a hearing to be commenced before such act must be done, and the court authorizes such act." The section also states that notice means "such notice as is appropriate in the particular circumstances."

In In re Blumer, 66 B.R. 109, 113-14 (B.A.P. 9th Cir. 1986), aff'd, 826 F.2d 1069 (9th Cir. 1987), the Ninth Circuit Bankruptcy Appellate Panel held that, whether or not a hearing takes place, notice is always required. The court noted that while the Bankruptcy Code permits nbsp; shortened notice "as is appropriate in the particular circumstances," it does not permit dispensing with notice altogether (as is expressly allowed for relief from stay requests or motions to prohibit or condition the use, sale, or lease of property in Fed. R. Bankr. P. 4001). See also 9 Lawrence P. King, Collier on Bankruptcy, ¶ 4001.06[4] (15th ed. rev. 1998).

Moreover, the Blumer court held that notice is not only a statutory requirement, but also is dictated by the due process clause of the Fifth Amendment. Relying on Supreme Court holdings that the bankruptcy power is subject to the Fifth Amendment, United States v. Security Indus. Bank, 459 U.S. 70, 75 (1982), and that the right to due process before property is taken is meaningless without notice, Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950), the court concluded that the United States Constitution requires at least some notice before a court can order even interim relief on a cash collateral or financing motion.

The amount of notice required necessarily will depend on the circumstances. Thus, the court in Blumer noted "in an emergency situation, telephonic notice may suffice." 66 B.R. at 113. But see In re Center Wholesale, Inc., 759 F.2d 1440 (9th Cir. 1985) (holding that one day's notice was inadequate in light of the facts and circumstances present). In essence, the determination of whether a hearing is necessary and what constitutes adequate notice -- whether or not there is a hearing--is a matter of balancing the asserted need for emergency relief against the necessity of preserving the due process rights of the parties involved.

3. Notice Issues

The United States Trustee should review the proof of service to determine whether notice of cash collateral and financing motions is appropriate. Any deficiencies should be brought to the court's attention.

Often, the interim order proposed by the parties will fail to specify that a final hearing will be held or that appropriate parties will have an opportunity to object. A final hearing (or at least an opportunity to object) is always required even when all parties received appropriate notice of the interim hearing. Thus, at the interim hearing, the United States Trustee should ensure that the order approving financing or use of cash collateral is not final and that appropriate notice of a final hearing is served in accordance with the Federal Rules of Bankruptcy Procedure.

4. Scheduling of the Final Hearing

Although Fed. R. Bankr. P. 4001(b) and (c) establish a 15 day requirement before a final hearing can be held, this is a minimum rather than a maximum time for holding the hearing. In many cases, the creditors' committee will have been recently appointed. In order to assure that the unsecured creditors will have a say, the United States Trustee should request that the final hearing not be set until after the duly appointed unsecured creditors' committee has had an opportunity to review the terms of the proposed cash collateral or financing order.

In the alternative, the United States Trustee may request that the unsecured creditors' committee, when appointed, be permitted to request reconsideration within a reasonable time of court rulings on such issues as superpriorities, cross-collateralization, and the validity of the secured creditors' liens. Such an arrangement also would provide the committee an opportunity to express its viewpoint.

1. Overview

The United States Trustee is principally concerned with preserving the right of the unsecured creditors to review and comment on the early financing motions which can have a substantial impact on the future conduct of the case. Assuring adequate notice and the opportunity for creditors' committee input before a final ruling are essential in this regard, but these generic concerns may not be enough to convince the court to burden the debtor with the delay that such considerations would necessitate. Thus, whenever possible, the United States Trustee should highlight those specific issues that are likely to raise concerns for unsecured creditors at the interim hearing, thereby bolstering the argument for preserving the creditors' opportunity for review. Of course, once the interested parties have responded, the United States Trustee generally should refrain from asserting positions.

The situation becomes more complex when, in a given case, it becomes apparent that it will not be possible to appoint a committee and no creditors become actively involved. In such circumstances, the United States Trustee must quickly ascertain whether the terms of the financing arrangement raise concerns significant enough to justify taking a substantive position.

2. Relevant Substantive Issues

• Review by the United States Trustee to Prevent Overreaching

In reviewing whether the substantive provisions of a proposed financing order are objectionable, the United States Trustee should focus on the effect that the order will have on the general creditor body. This usually involves balancing the benefit to the estate from obtaining the financing against the detriment to the creditor body of providing special benefits to a particular creditor. This is inherent in the requirement established in 11 U.S.C. §§ 364(c) and 364(d)(1)(A) that the trustee must be unable to obtain the credit otherwise.

The need for financing may be so desperate that the debtor in possession will agree to almost any terms the creditor demands, which can lead to overreaching by the creditor. An example of a case where the court found overreaching is In re Tenney Village Co., 104 B.R. 562 (Bankr. D.N.H. 1989). There, the debtor agreed to a provision waiving a prepetition fraudulent conveyance and preference claims against a secured creditor, as well as to automatic relief from stay upon "termination events," cross-collateralization, limitations on compensation of debtor's counsel, and the right to designate the debtor's counsel and CEO. The court determined that such sweeping concessions evidenced a breach of the debtor's fiduciary duty to the estate, as well as overreaching by the secured creditor. While it is difficult to establish a formula for determining when a particular arrangement constitutes overreaching, the following discussion of considerations related to various substantive provisions should provide some guidance.

• Adequate Protection -- Cash Payments

Many interim cash collateral and financing orders contain some provision for adequately protecting the secured creditor by making "a cash payment or periodic cash payments" under 11 U.S.C. § 361(1). The United States Trustee should consider whether the proposed amount is appropriate in light of the debtor's ability to pay based on the projections of operations during the interim period. It may even be appropriate to move that the debtor and secured creditor be required to present evidence on these issues. If the evidence indicates that the size of the payments will inhibit the debtor's ability to operate, the United States Trustee should consider objecting.

• Cross-Collateralization

The most contentious issue in many financing orders is whether an existing creditor can, postpetition, secure its existing or new debt. The United States Trustee should be concerned when a prepetition creditor who is undersecured or unsecured attempts to "bootstrap" its status by acquiring liens on postpetition assets to secure its prepetition debt. Because this increased security would come at the expense of other unsecured creditors, it is unlikely to be in the best interests of the general creditor body.

Some courts have taken the position that cross-collateralization is impermissible. In re Saybrook Mfg. Co., 963 F.2d 1490 (11th Cir. 1992); In re Monach Circuit Indus., Inc., 41 B.R. 859 (Bankr. E.D. Pa. 1984) (cross-collateralization constitutes an illegal preference); cf. In re Ellingsen MacLean Oil Co., 834 F.2d 599, 601 (6th Cir. 1987), cert. denied, 448 U.S. 817 (1988) (section 364 priority appears limited to newly incurred debt).

However, the majority view seems to find cross-collateralization provisions acceptable under certain circumstances. In In re Vanguard Diversified, Inc., 31 B.R. 364, 366 (Bankr. E.D.N.Y. 1983), the court established a four part test that has met with general acceptance: (1) the business will not survive without the financing; (2) the debtor cannot obtain alternate financing on acceptable terms; (3) the lender will not accept less favorable terms; and (4) the proposed financing is in the best interest of the general creditors. See also In re Adams Apple, Inc., 829 F.2d 1484, 1490 (9th Cir. 1987) Cross-collateralization may provide only means of saving debtor); In re Ames Dept. Stores, Inc., 115 B.R. 34, 39-40 (Bankr. S.D.N.Y. 1990) (where debtor demonstrated that unsecured financing was unavailable, cross-collateralization permitted); In re Roblin Indus., 52 B.R. 241, 244 (Bankr. W.D.N.Y. 1985).

Even among courts that accept cross-collateralization, it is a disfavored means of financing. See Vanguard Diversified, 31 B.R. at 366 (cross-collateralization is a disfavored means of financing and is to be authorized only after hearing with notice to ; creditors). Thus, it is important to ensure that the other creditors have adequate notice and opportunity to object. At a minimum, the United States Trustee should emphasize the disfavored status of such financing provisions and seek to have the court apply the four part test set forth in Vanguard.

• Superpriority Provisions

The granting of "superpriority" status pursuant to 11 U.S.C. § 364(c)(1), which gives the unsecured creditor priority over most other administrative expenses, raises many of the same concerns as cross-collateralization. Accordingly, it is appropriate to consider the Vanguard factors in determining whether superpriorities should be approved.

In addition, it may be consistent with the interests of the general creditor body to consider carving out certain classes of claims from a grant of superpriority status. For example, provisions should be made for the payment of fees for debtor's counsel and for counsel to the creditors' committee. If a financing order is entered before any official committees are appointed, the United States Trustee should object to any carve-out for professional fees that does not include fees for committee professionals. If these professionals cannot be paid, the debtor may be unable to propose a plan and the interests of general unsecured creditors and other parties in interest may go unrepresented.

Further, under 11 U.S.C. § 1129(a)(12), the United States Trustee's quarterly fees must be paid on or before the effective date of any plan as a condition of confirmation. Thus, the United States Trustee should insist that a carve-out be provided for quarterly fees from any superpriorities or liens, or the debtor may be unable to remain in chapter 11 and confirm a reorganization plan.

If the case converts to chapter 7, the United States Trustee's quarterly fees and chapter 7 administrative expenses take priority over chapter 11 administrative expenses. 11 U.S.C. § 726(b). In re Endy, 104 F.3d 1154, 1157 (9th Cir. 1997); In re Juhl Enterprises, 921 F.2d 800, 803 (8th Cir. 1990).

• Validation of Prepetition Liens and Waiver of Claims

Other provisions that frequently appear in proposed financing orders are the validation of prepetition liens and the waiver of claims against a prepetition creditor. The United States Trustee should argue that such provisions should become effective only after other parties in interest have been provided with notice and an opportunity to object. This is consistent with the policy of preserving issues for the creditors' review and would obviate due process concerns.

• Priming of Liens

The interim order may provide for priming the new lender's liens over existing liens. 11 U.S.C. § 364(d). It is particularly important to ensure that inferior lienholders receive adequate notice of such priming. The subordinate lienholders are in the best position to address the issue of whether they are adequately protected.

• Default Provisions with Automatic Remedies

The United States Trustee should carefully review any provision in a proposed financing order that purports to grant an automatic remedy in the event of default. For example, a requirement that the case be automatically dismissed or converted to chapter 7 without notice under Fed. R. Bankr. P. 2002(a)(4) solely because of a default on the terms of a financing order may be inappropriate. Likewise, relief from stay should not be permitted without notice as required by Fed. R. Bankr. P. 4001(a). See In re Tenney Village Co., 104 B.R. 562, 569 (Bankr. D.N.H. 1989) (finding that agreement to provisions containing automatic remedies may constitute a breach of the debtor's fiduciary duties). Similarly, a provision that all terms of a financing order will be binding on any subsequently appointed trustee may impair the ability of the United States Trustee to find candidates to fill such a position and therefore is objectionable.

• Conclusion

The primary role of the United States Trustee with respect to interim cash collateral and financing orders is to ensure that creditors have an opportunity to review the issues and present their views to the court. The United States Trustee should raise objections if adequate notice is not given and should attempt to preserve as many issues as possible until a creditors' committee is in a position to participate.

It will, at times, be appropriate for the United States Trustee to take steps to preserve issues so that others are not estopped from objecting to interim orders later and to place the secured creditor and debtor on notice that certain agreements are contrary to the interests of the unsecured creditor body. On occasion, the United States Trustee may be called upon to take a position on the substance of a cash collateral or financing order. In these circumstances, the guiding concern should be what is in the best interests of the estate. See generally Stripp, Balancing of Interests in Orders Authorizing the Use of Cash Collateral in Chapter 11, 21 Seton Hall L. Rev. 562 (1991).

The doctrine of necessity is an equitable principle that evolved from two related rules--the necessity of payment rule and the six months rule. See Eisenberg & Gecker, The Doctrine of Necessity and Its Parameters, 73 Marq. L. Rev. 1, 2-5 (1989). The necessity of payment rule allows a court to authorize the payment of pre-existing claims in railroad reorganization cases, if such payments are essential to the railroad's continued existence. See In re Boston and Maine Corp., 634 F.2d 1359 (1^st Cir. 1980), cert. denied, 450 U.S. 982 (1981); In re Ionosphere Clubs, Inc., 98 B.R. 174 (Bankr. S.D.N.Y. 1989). The six month rule authorizes administrative expense priority treatment to creditors supplying services and goods to railroads within the six month period prior to case filing.

The doctrine of necessity is now widely used in non-railroad bankruptcy cases, though its use is restricted to instances where the payments are essential and necessary to the debtor's continued existence. Compare In re Eagle-Picher Industries, Inc., 124 B.R. 1021 (Bankr. S.D. Ohio 1991) (in case where debtor was automobile parts manufacturer, failure to pay prepetition debts would jeopardize debtor's relationship with customers) and In re Gulf Air, Inc., 112 B.R. 152 (Bankr. W.D. La. 1989) (in case concerning a regional commuter airline, payment of prepetition wage and employee benefit claims held to be "essential") with In re Ionosphere Clubs, Inc., 98 B.R. 174 (Bankr. S.D.N.Y. 1989) and In re Chateaugay Corp., 80 B.R. 279 (S.D.N.Y. 1987) (payment of certain prepetition employee claims held not to be essential).

Some courts have refused to apply the doctrine on the grounds that payments in certain cases would constitute preferential treatment over similarly classified creditors. See In re B & W Enters., Inc., 713 F.2d 534 (9th Cir. 1983) (rule not extended to allow cross-collateralization for purposes of postpetition financing in a trucking company case); but see Official Comm. of Equity Sec. Holders v. Mabey, 832 F.2d 299, 302 (4th Cir. 1987), cert. denied, 485 U.S. 962 (1988) (doctrine not extended to permit payments for reconstructive surgery or in vitro fertilization for women injured by the Dalkon shield outside of properly presented plan of reorganization); In re Adams Apple, Inc., 829 F.2d 1448 1490 (9th Cir. 1987); In re FCX, Inc., 60 B.R. 405 (E.D.N.C. 1986) (doctrine not extended to permit payment of employees and grain producers because to do so would violate priorities established by Bankruptcy Code); In re Timberhouse Post and Beam, Ltd., 196 B.R. 547, 550 (Bankr. D. Mont. 1996) (following B & W Enters., Inc.). See also Tabb, Emergency Preferential Orders in Bankruptcy Reorganizations, 65 Am. Bankr. L.J. 75, 100 (1991).

1. 11 U.S.C. § 105(a)

The statute most frequently cited to support application of the doctrine of necessity is 11 U.S.C. § 105(a) which empowers a bankruptcy court to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." The courts invoking 11 U.S.C. § 105(a) for this purpose rationalize that since the fundamental purpose of a chapter 11 is to allow a debtor to reorganize, 11 U.S.C. § 105 may be used to avert the consequences of a failed reorganization that may result if the payment to prepetition creditors is not allowed. See, e.g., In re Ionosphere Clubs, Inc., 98 B.R. 174, 175-177 (Bankr. S.D.N.Y. 1989).

Courts refusing to apply 11 U.S.C. § 105(a) rely upon limitations imposed by concepts of the Bankruptcy Code. These courts usually rule that prepetition creditor payments upset the priority scheme of 11 U.S.C. § 507 and/or the principle, embodied in 11 U.S.C. §§ 1122-1129, that similarly situated creditors be similarly treated. See, e.g., Official Comm. of Equity Sec. Holders v. Mabey, 832 F.2d 299, 302 (4th Cir. 1987), cert. denied, 485 U.S. 962 (1988) (clear language of Bankruptcy Code and Rules does not authorize payment or advance of monies to or for the benefit of unsecured creditors prior to approval of plan); In re FCX, Inc., 60 B.R. 405, p; 410-11 (E.D.N.C. 1986) (settling certain claims prior to filing plan of reorganization held to be inequitable); In re Structurlite Plastics Corp., 86 B.R. 922, 929-33, explained 91 B.R. 813, 816 (Bankr. S.D. Ohio 1988) (allowing payment of prepetition claims to the extent that they are priority claims). Courts using 11 U.S.C. § 105(a) counter that 11 U.S.C. §§ 507 and 1122-1129 are not inflexible and that the latter statutes apply only in the plan confirmation context. See, e.g., In re Chateaugay Corp., 80 B.R. 279, 287 (S.D.N.Y. 1987) (rigid application of section 507 would be inconsistent with fundamental purpose of reorganization which is to permit debtor's survival and payment to creditors).

2. 11 U.S.C. § 363

Some courts cite 11 U.S.C. § 363(b) or 363(c)(1) which permit the debtor to use property of the state in the operation of the business as a basis for application of the doctrine of necessity. By viewing the debtor's application to pay certain prepetition claims as a request for authority to expend funds outside of the ordinary course of business pursuant to 11 U.S.C. § 363, some courts have required that the debtor articulate a sound business reason for the decision to do so. See, e.g., In re Ionosphere Clubs, Inc., 98 B.R. at 175-176.

3. 11 U.S.C. § 507

Courts may approve payments to prepetition creditors on the theory that 11 U.S.C. § 507(a) which defines administrative expenses provides priority status to the requested payments. See In re Structurlite Plastics Corp., 86 B.R. 922, 933 (Bankr. S.D. Ohio 1988). While 11 U.S.C. § 507 does not authorize immediate payment of priority claims, these courts apparently rationalize that the claims will ultimately be paid in full and no one is harmed by early payment.

1. Employees (Non-Management)

The most common use of the doctrine of necessity concerns prepetition employee payroll and benefits claims. Typical requests include seeking authorization to pay prepetition payroll and work benefits and to reimburse employee expenses. These types of requests are often granted, particularly if the payments requested fall within the 11 U.S.C. § 507(a) priority parameters. See Eisenberg & Gecker, supra, at 12-14; see also In re FCX, Inc., 60 B.R. 405, 412 (E.D.N.C. 1986) (only employee wage claims under section 507(a)(3) entitled to priority); In re Structurlite Plastics Corp., 86 B.R. 922 (Bankr. S.D. Ohio 1988) (payment of prepetition medical claims would be allowable pursuant to section 507(a)(4) as contributions to employee benefit plan).

An issue arises, however, as to whether payments must be made to all creditors within a specific priority classification. See In re Chateaugay Corp., 80 B.R. 279 (S.D.N.Y. 1987) (debtor which received authorization to pay employee and workers' compensation claims was not required to pay workers' compensation claims in all states); In re Ionosphere Clubs, Inc., 98 B.R. 174 (Bankr. S.D.N.Y. 1989) (debtor which received authorization to pay prepetition claims of active employees was not required to pay claims of non-active striking employees whose claims enjoyed same priority status).

Some debtors request authorization for payment of terminated employee wages and benefits on the grounds that non-payment of these claims would adversely affect current employee morale and/or the public image of the debtor. See, e.g., In re Structurlite Plastics Corp., 86 B.R. at 924.

2. Management

Requests for authorization to pay prepetition wages sometimes include requests to pay management salaries, expenses, or benefits. Occasionally, authorization for payments to prepetition creditors is sought on the ground that payment of these creditors will allow management to focus its attention on the debtor's reorganization. Payments to creditors to whom management may be personally liable, such as taxing entities or holders of guaranteed debt, may be requested under this theory. See, e.g., In re Revco D.S., Inc., 91 B.R. 777 (Bankr. N.D. Ohio 1988) (denying request to pay only prepetition trust fund taxes but no other taxes entitled to 507(a)(7) priority so that principals could avert threat of personal assessment).

3. Customers

Courts that allow use of the doctrine of necessity generally approve requests that preserve customer good will. The doctrine may be used to authorize payment of warranty claims, return of customer deposits, honoring customer gift certificates or payment of customer referral commissions. See In re Eagle-Picher Indus., Inc., 124 B.R. 1021 (Bankr. S.D. Ohio 1991) (customers would perceive unfair conduct if automotive toolmaker creditors not paid).

4. Suppliers

Some courts authorize payments to critical suppliers or service providers. See, eg., Eagle-Picher Indus., Inc., 124 B.R. at 1023 (payments to prepetition unsecured toolmakers authorized). Payments may be sought for several reasons. The debtor may allege that a creditor will not supply essential supplies, will go out of business to the debtor's economic detriment, or will ruin the debtor's reputation if the prepetition debt is not paid.

5. Foreign Creditors

The doctrine of necessity may be used to justify payments to foreign creditors. Eisenberg & Gecker, supra at 16-17. Utilization of the doctrine may avoid expensive legal proceedings and preserve the debtor's image abroad where perceptions of bankruptcy may differ. Application of the doctrine also avoids testing the validity of the automatic stay in other countries and the initiation of self help or other legal remedies available in the foreign creditor's country.

The United States Trustee should endeavor to ensure the broadest possible notice of doctrine of necessity requests in the context of the case. The scope and length of notice urged will be dependent on the time sensitivity of the request, the payment amount requested, the cost of notice, and the existence of effective creditor advocates, such as an active creditors' committee. Fed. R. Bankr. P. 4001 offers general guidance on the minimal length of notice appropriate for emergency and non-emergency situations.

Discretion should be exercised in determining substantive positions on case specific doctrine of necessity requests. Factors that may suggest decreased scrutiny by the United States Trustee include active creditor participation, full notice of the proposal with an ample objection period, requests involving minimal expenditures in comparison with case size, requests to pay creditors entitled to priority pursuant to 11 U.S.C. § 507 (which are likely to be paid in full anyway), and payments that are obviously essential to the debtor's continued existence. Factors that may suggest increased scrutiny include requests that are beneficial to the debtor's management, requests for payments that do not seem essential, and requests for payments to creditors whose class is not likely to be paid in full through the bankruptcy process.

Due consideration should be given to the difficulty of evaluating the economic consequences of nonpayment and the probability of uncontroverted testimony from the debtor's management. Unless presented with egregious or obviously overreaching requests (such as when insider or creditor intimidation is indicated), the United States Trustee should rely on the affected parties to challenge doctrine of necessity requests.

The Bankruptcy Reform Act of 1994 amended the Bankruptcy Code to expedite the process by which small businesses may reorganize under chapter 11. A small business is defined as "a person engaged in commercial or business activities (but does not include a person whose primary activity is the business of owning or operating real property and activities incidental thereto) whose aggregate noncontingent liquidated secured and unsecured debts as of the date of the petition do not exceed $2,000,000." 11 U.S.C. § 101(51C). A qualified small business debtor who elects coverage under this provision (i) may seek to dispense with the appointment of a creditors' committee (11 U.S.C. § 1102(a)(3)); (ii) is granted an exclusive period of 100 days within which to file a plan (11 U.S.C. § 1121(e)); and (iii) is subject to more flexible provisions for disclosure and solicitation of acceptances for a proposed reorganization plan (11 U.S.C. § 1125(f)). The Bankruptcy Code does not provide a time limit within which the small business election must be made. A debtor may elect to be considered a small business by filing a written statement of election no later than 60 days after the order for relief (or by such later date as the court, for cause, may fix). Fed. R. Bankr. P. 1020. The United States Trustee must review any such election to determine if the debtor is eligible for treatment as a small business and object if necessary.

Further, the Bankruptcy Reform Act of 1994 amended 11 U.S.C. § 1102 to provide that, on request of a party in interest in small business cases and for cause, the court may order that a creditors' committee not be appointed. 11 U.S.C. § 1102(a)(3). In re Haskell-Dawes, Inc., 188 B.R. 515 (Bankr. E.D. Pa. 1995). Although the Code does not provide any definition of what would constitute "cause" for purposes of 11 U.S.C. § 1102(a)(3), the United States Trustee should scrutinize any application to ensure that adequate notice and an opportunity for a hearing is provided.