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

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