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

87 Pages Posted: 23 May 2013 Last revised: 6 Sep 2014

Melissa B. Jacoby

University of North Carolina (UNC) at Chapel Hill - School of Law

Edward J. Janger

Brooklyn Law School

Date Written: December 9, 2013

Abstract

Financially-distressed companies can melt like ice cubes. In Chrysler’s Chapter 11 bankruptcy, the finding that the debtor was losing $100,000,000 per day justified the hurry-up sale of the company to Fiat. This assertion - that the firm is a rapidly wasting asset - is frequently offered, and accepted, in support of quick sales under section 363(b) of the Bankruptcy Code. This raises a policy question: is this speed and streamlined process a “bug” or “feature?” Do these hurry-up going-concern sales create a speed premium and maximize value for the bankruptcy estate, or do they facilitate collusive deals between incumbent managers, senior creditors and potential purchasers? The answer is, “a little bit of both.” It is, therefore, crucial to distinguish between sales where the court and parties have good information about the value of the company and the costs of delay, from those in which melting ice cube leverage is used to exploit information asymmetries and to lock-in a favored deal. To accomplish this sorting and reduce transactional leverage, we seek to allocate the increased risks of foregone process to the beneficiaries of the sale. We propose that a reserve - the Ice Cube Bond - be set aside at the time of sale to preserve any potential disputes about valuation and priority for resolution after the sale has closed. This approach retains expedited section 363 sales as a useful way to quiet title in complex assets and preserve value, while preserving the opportunities for negotiation and adjudication contemplated by the Bankruptcy Code.

Keywords: bankruptcy, secured credit, asset sales, 363 sales, Chrysler, Chapter 11, business reorganization, law and economics

JEL Classification: D23, D81, D82, D92, G33

Suggested Citation

Jacoby, Melissa B. and Janger, Edward J., Ice Cube Bonds: Allocating the Price of Process in Chapter 11 Bankruptcy (December 9, 2013). 123 Yale L.J. 862 (2014); Brooklyn Law School, Legal Studies Paper No. 340; UNC Legal Studies Research Paper No. 2268662. Available at SSRN: https://ssrn.com/abstract=2268662

Melissa B. Jacoby

University of North Carolina (UNC) at Chapel Hill - School of Law ( email )

Van Hecke-Wettach Hall, 160 Ridge Road
CB #3380
Chapel Hill, NC 27599-3380
United States

Edward J. Janger (Contact Author)

Brooklyn Law School ( email )

250 Joralemon Street
Brooklyn, NY 11201
United States
718-780-7995 (Phone)
718-780-0376 (Fax)

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