Ice Cube Bonds: Allocating the Price of Process in Chapter 11 Bankruptcy

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ARTICLE CONTENTS  INTRODUCTION  I.   EXPEDITED SALES OF ALL OR SUBSTANTIALLY ALL ASSETS: ARTICULATING      THE PROBLEM      A. The Doctrinal Framework for Chapter 11 Sales      B. Chrysler and the Problem of Melting Ice Cube Leverage  II.  RETHINKING THE THEORETICAL DEBATE      A. The Value Created by Bankruptcy (Sales)      B. Cataloguing the Problems with Expedited All-Asset Sales         1. Valuation Problems            a. Information Scarcity and the Informational Sweet Spot            b. Information Asymmetry            c. Leverage            d. Conflicts and Principal-Agent Problems            e. Institutional Capacity (Ex Ante)         2. Distributional Consequences      C. Quantifying and Allocating the Costs and Benefits of Expedited         All-Asset Sales         1. The Speed Premium and Increased Error Costs--Kaldor-Hicks            Efficiency         2. Distributional Consequences--Pareto Optimality and            Bargaining over the Speed Premium            a. Baseline Distributions--Best Interests and Pareto               Optimality            b. Allocating the Speed Premium               i.   Who Is Entitled to the Speed Premium?               ii.  Delayed Realization, Chapter-11-Created Value, and                    the Limits of Proceeds               iii. Gaps in Security and Priority               iv.  Impact of Bankruptcy Priority Rules on Allocation                    of the Bankruptcy-Code-Created Value III. ICE CUBE BONDS      A. Authorization Under Current Law      B. Operationalizing the Ice Cube Bond         1. How Much?         2. Who Pays?         3. When to Release?      C. Potential Concerns         1. Priority Rules         2. Institutional Competence         3. Incentives         4. Bargaining         5. Comparison with Other Lock-up Related Proposals CONCLUSION 

INTRODUCTION

Financially distressed companies can melt like ice cubes: every day that a company burns through more cash than it earns, it loses value. (1) In Chrysler's Chapter 11 bankruptcy, the bankruptcy court's finding that the car company was losing $100 million per day justified a hurry-up going-concern sale of all of its assets under [section] 363(b) of the Bankruptcy Code. (2) The Second Circuit agreed that these exigent circumstances justified the procedural shortcuts taken to accomplish the sale, citing the "melting ice cube" theory. (3)

Though the Supreme Court vacated the Second Circuit decision in Chrysler, (4) the Second Circuit's use of the melting ice cube argument was well within the judicial mainstream. (5) The government's role as a source of debtor-in-possession and exit financing was novel, but the expedited sale of all the company's assets outside a plan of reorganization was not. Hurry-up all-asset sales under [section] 363 of the Code ("363 sales") are now a common feature in the bankruptcies of large public companies. (6) A decade ago, Douglas Baird and Robert Rasmussen declared the classic business reorganization dead; the going-concern sale had replaced the traditional Chapter 11 reorganization. (7) While the claim may have been overstated as an empirical matter, many high-profile Chapter 11 cases, including the bankruptcies of Enron, Adelphia, and Lehman Brothers, have disposed of major assets through sales outside of a Chapter 11 plan. (8) Members of Congress were sufficiently concerned after the Gulf oil spill that BP would try to engineer a quick 363 sale to shed liabilities that they preemptively sought to change the Code. (9) Pleas for quick 363 sales frequently feature the melting ice cube argument--a "strong assertion of nonviability" because of an alleged rapid wasting of assets--as a justification for short-circuiting the Chapter 11 plan process. (10) The practical effect is to lock up the proposed sale package, and to raise the cost of investigating alternatives.

Although the largest cases attract public attention, small- and mid-market cases also feature proposals for quick all-asset sales. …