11 U.S.C. Section 1108 - Authorization to Operate the Business

What Is Section 1108?

Section 1108 is one of the shortest and most consequential provisions in the Bankruptcy Code. It provides, in full: "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." Combined with Section 1107(a)'s substitution of the debtor in possession for the trustee, Section 1108 means that a Chapter 11 debtor is automatically authorized to continue operating its business from the moment of the petition. No order is required.

This is the structural feature that distinguishes Chapter 11 from Chapter 7 (where the business is generally wound down) and from Chapters 9, 12, 13, and 15 (each with its own operational rules). The going-concern presumption is the foundation of every successful Chapter 11 reorganization.

The "Unless the Court Orders Otherwise" Mechanism

The default operates in reverse: any party in interest (typically a secured creditor, the U.S. Trustee, or a creditors' committee) may move to terminate operations or to impose conditions on continued operation. Such motions are uncommon but not unheard of; they tend to be filed when there is credible evidence that continued operation is dissipating value rather than preserving it. The Supreme Court in NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984), recognized the going-concern preservation purpose of Section 1108 as central to Chapter 11.

How Section 1108 Interacts With Section 363

Section 1108 authorizes operation; Section 363 defines the transactional authority to use, sell, or lease property in the course of that operation. The two work together as follows:

• Section 1108: Legal authority to keep doing business.
• Section 363(c)(1): Transactions in the ordinary course of business may be entered without court order.
• Section 363(b)(1): Transactions outside the ordinary course require notice, a hearing, and court approval.
• Section 363(c)(2): Use of cash collateral requires creditor consent or court order, even in the ordinary course.

The ordinary-course test is fact-specific. Courts apply a two-part inquiry: a "horizontal" test (whether the transaction is the kind that other businesses in the industry routinely engage in) and a "vertical" test (whether the transaction would be a surprise to creditors based on the debtor's pre-petition course of dealing). The leading articulation comes from the Second Circuit's Roth American line of cases.

First-Day Operating Orders

Although Section 1108 does not require an order, large Chapter 11 cases routinely seek "first-day" orders that effectively implement Section 1108 in operational detail. Typical first-day operating motions include:

• Authority to pay pre-petition wages and benefits to retain workforce continuity;
• Authority to honor pre-petition customer programs (warranties, loyalty programs, refunds);
• Authority to pay critical vendors;
• Authority to continue using existing cash-management systems;
• Authority to continue insurance premium financing and surety bonds;
• Authority to maintain utilities under Section 366;
• Authority to use cash collateral or obtain DIP financing.

These motions are technically not required by Section 1108 (which authorizes operations by default), but they reduce uncertainty for vendors, employees, and counterparties who might otherwise be unwilling to continue dealing with the debtor.

Subchapter V Operations

In a case proceeding under Subchapter V of Chapter 11, the debtor remains in possession unless removed under Section 1185. The Subchapter V trustee, appointed under Section 1183, does not displace the debtor's operational role; the trustee serves more in a facilitator and oversight capacity. Section 1108's authorization to operate applies through Section 1184 (the Subchapter V analogue to Section 1107) and the cross-references in Section 1181.

Single-Asset Real Estate and Special Cases

Section 1108's operational authority applies even in single-asset real-estate cases (defined in Section 101(51B)), but those cases face accelerated relief-from-stay scrutiny under Section 362(d)(3) and shorter timelines for plan-filing and confirmation. Stockbrokers (Subchapter III of Chapter 7), commodity brokers (Subchapter IV of Chapter 7), and clearing-bank cases (Subchapter V of Chapter 7) have special operating rules that displace the ordinary Section 1108 default.

Practical Consequences of Operating Authority

The Section 1108 default has several important downstream consequences:

• Trade creditors continue to extend credit: Post-petition trade payables qualify as administrative expenses under Section 503(b)(1), which gives vendors confidence that they will be paid ahead of unsecured pre-petition claims.
• Employees continue to be paid: Wages and benefits earned post-petition are also administrative expenses.
• Going-concern value is preserved: A business that keeps operating typically sells for substantially more, whether through a Section 363 sale or as a confirmed plan, than a business that has been shut down.
• Tax liabilities continue to accrue: Post-petition employment, sales, and excise taxes incurred in the operation of the business are administrative expenses and must be paid currently in most jurisdictions.

Termination of Operating Authority

Continued operation can be terminated by:

• An order on a Section 1108 motion (rare);
• Conversion of the case to Chapter 7 under Section 1112;
• Dismissal of the case;
• Confirmation of a liquidating plan;
• Closure of the business as part of an authorized Section 363 sale where the buyer is not assuming operations.

Related Bankruptcy Code Sections

• Section 1107 - Rights, powers, and duties of the DIP
• Section 363 - Use, sale, or lease of property
• Section 1112 - Conversion or dismissal
• Section 365 - Executory contracts (often critical to operations)
• Section 503 - Administrative-expense priority for post-petition operations
• Section 1184 - Subchapter V analogue