Quick Answer
Section 1108 authorizes the trustee — and by operation of § 1107(a) the debtor in possession — to continue operating the debtor’s business after the petition is filed, without prior court approval, unless the court orders otherwise after notice and a hearing. Ordinary-course transactions proceed under the business-judgment standard; non-ordinary-course transactions require notice and approval under § 363(b). The statute is the structural reason Chapter 11 can preserve going-concern value.
Official citation: 11 U.S.C. § 1108
Text: “Unless the court, on request of a party in interest and after notice and a hearing, orders otherwise, the trustee may operate the debtor’s business.”
The Presumption of Continued Operation
Chapter 11’s policy preference for reorganization rather than liquidation depends on the going-concern value of an operating business. A retailer with locked doors, a manufacturer with idle lines, or a service provider that has stopped answering the phone destroys value rapidly — far more rapidly than the bankruptcy process can move. Section 1108 addresses this by inverting what the default would otherwise be: the trustee or DIP keeps operating unless the court affirmatively orders shutdown.
The structural choice is deliberate. If operation required affirmative court authorization on day one, every Chapter 11 filing would face a critical window of operational paralysis while the court calendared and decided a threshold motion. Section 1108 closes that window by default.
The corollary, however, is also important. A party in interest — usually the United States Trustee, a major secured creditor, an unsecured creditors’ committee, or a landlord — can move to terminate operations or impose conditions. The court then weighs whether continued operation is in the best interests of the estate or whether the cost of continuing exceeds the going-concern premium that operation is theoretically preserving.
What “Operate the Business” Includes
The statute does not enumerate what operation means, and courts have read it expansively to cover the full range of activities reasonably incident to running an ongoing enterprise. The category includes, among many others:
- Buying inventory and raw materials from suppliers on customary terms.
- Selling finished goods or services to customers in the ordinary course of trade.
- Continuing to employ workers and pay post-petition wages.
- Performing under unexpired executory contracts and leases during the post-petition period (pending decisions to assume or reject under § 365).
- Collecting accounts receivable and managing cash within the constraints of § 363(c).
- Entering into customary supply, distribution, employment, and service arrangements.
What § 1108 does not authorize is conduct outside the ordinary course of business. That category is governed separately by § 363(b) and requires notice, a hearing, and court approval.
The Ordinary-Course / Non-Ordinary-Course Line
Federal courts use two complementary tests to draw the ordinary-course line:
The horizontal (industry) test: Would a comparable enterprise in the same industry, outside bankruptcy, consider this transaction part of its day-to-day business? The test screens out transactions that are unusual for the industry — a software company selling its core source code, a retailer auctioning its store leases, a manufacturer selling a plant.
The vertical (creditor expectations) test: Would a creditor extending credit to the debtor pre-petition have reasonably anticipated that the debtor might enter into this transaction? The test screens out transactions that depart from the risk profile creditors priced into the relationship.
A transaction that fails either test is non-ordinary course and requires § 363(b) approval. Common non-ordinary-course transactions include:
- Sales of substantially all or a major segment of the debtor’s assets.
- Settlement of significant pre-petition or post-petition litigation under Rule 9019.
- Transactions with insiders, affiliates, or other related parties.
- Material changes to compensation arrangements for senior management or key employees.
- Granting liens or security interests on previously unencumbered property.
- Material new borrowings (post-petition financing under § 364).
For ordinary-course transactions that fall comfortably within both tests, no advance court approval is required. For close cases, prudent practice is to seek comfort orders or include them in a comprehensive “first-day” or “second-day” motion.
The Business-Judgment Standard for Operating Decisions
When a DIP makes operating decisions inside the ordinary course, courts review those decisions deferentially under the business-judgment standard imported from corporate law. The DIP is presumed to act in the best interests of the estate when its decisions reflect a reasoned exercise of judgment, are made in good faith, and are supported by some rational business justification.
The deference is not unlimited. The business-judgment standard does not insulate decisions that:
- Are tainted by self-dealing, conflicts of interest, or undisclosed insider relationships.
- Reflect gross negligence or willful disregard of available information.
- Constitute waste of estate assets or fraud on the estate.
- Materially favor pre-petition equity at the expense of creditors.
When a non-ordinary-course transaction is presented under § 363(b), courts apply a similar but more searching review under the “sound business purpose” test associated with In re Lionel Corp., examining the nature and necessity of the transaction, the consideration received, the proposed sale process, and whether less drastic alternatives were considered.
Section 1108 in the First-Day Motion Package
Although § 1108 supplies the default, virtually every business Chapter 11 filing seeks an early order confirming — for the benefit of vendors, lenders, and counterparties — that the DIP is operating under specified parameters. The typical first-day or second-day package includes:
- An order authorizing payment of pre-petition wages, benefits, and certain trust-fund taxes (overlap with the doctrine of necessity and § 363(b)).
- Authorization to use the existing cash-management system across multiple bank accounts and affiliates.
- Use of cash collateral under § 363(c)(2) with adequate protection under § 361.
- Post-petition financing under § 364 if the going-concern requires it.
- Authorization to honor customer programs (warranties, gift cards, loyalty programs) and continue critical-vendor arrangements where permitted.
- Continuation of insurance, workers’ compensation, and surety bond arrangements.
Practitioner note: Although § 1108 authorizes ordinary-course operation without specific orders, counterparties often demand explicit authorization before continuing to do business with the DIP. The first-day package functions both as legal authorization where required and as commercial reassurance where not.
When the Court Orders Otherwise
Section 1108’s authorization is “unless the court orders otherwise.” A court may terminate or condition operating authority when continued operation is destroying value rather than preserving it. Typical triggers include:
- Cash burn that exceeds available financing and any reasonable prospect of stabilization.
- Inability to satisfy adequate-protection obligations to secured creditors.
- Continuing fraud, illegality, or material safety/regulatory violations in operations.
- Loss of essential operating personnel or critical contracts such that the business can no longer function as a going concern.
- The emergence of a credible buyer whose offer is contingent on a near-term sale and operation pending closing is no longer economic.
The remedies range from full shutdown, to operational conditions (budget caps, reporting, milestones, appointment of a chief restructuring officer), to conversion to Chapter 7 under § 1112(b). Each remedy has very different consequences for going-concern value, and the choice is often the most consequential discretionary call in a Chapter 11 case.
Sub V Operations and § 1184
In Subchapter V cases, the small-business debtor’s operating authority is governed by § 1184, which gives the Sub V debtor essentially the same operating authority § 1108 provides — subject to the supervisory role of the Subchapter V trustee under § 1183. Section 1108 itself still applies if the Sub V debtor is removed under § 1185 and a Sub V trustee takes over operations.
Operating-Report and Reporting Obligations
Section 1108 authority is paired with reporting duties imposed by § 1106(a)(1) (incorporated through § 1107(a)), by the United States Trustee’s monthly operating-report requirements, and in Sub V cases by § 1187. These reports allow the court, the United States Trustee, and parties in interest to monitor whether the operating presumption continues to make economic sense, and they form the documentary basis for any later motion to terminate or condition operating authority.
Bottom line: Section 1108 is the procedural foundation that makes “debtor in possession” a meaningful concept. Without it, every operating decision would require advance court approval and the going-concern premium that Chapter 11 exists to preserve would evaporate during the procedural lag.
Related Bankruptcy Code Sections
- Section 1107 — DIP powers and duties (route by which § 1108 reaches the DIP)
- Section 363 — Use, sale, or lease of estate property (ordinary-course and non-ordinary-course)
- Section 364 — Post-petition financing
- Section 365 — Executory contracts and leases
- Section 1184 — Sub V debtor rights and powers
- Section 1112 — Conversion or dismissal when operations fail
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