The Melting Ice Cube Fallacy

Can a company really melt? Putting aside a business with a perishable product or inventory, does management really wake up one morning and say, “Wow, if we do not sell this company in 30 days or less, we will lose significant value for our stakeholders.” I highly doubt it. Rather, I think a company “melts” because management leaves the freezer door open too long, or perhaps a particular stakeholder has its foot in the door. (For a thoughtful article on the melting ice cube issue, see here.) 

If the Code simply did not permit expedited sales, what would happen? Could it be that the possibility of an expedited sale with all of the bells and whistles of a confirmed plan enables management and senior creditors either to delay the chapter 11 filing or to manufacture urgency? From my perspective, this question is the central difficulty with section 363 going concern sales. A company should be able to reorganize through a value-maximizing sale in chapter 11. But those sales should not include quick fire sales that offer little opportunity for a robust auction or the need to use chapter 11 tools to enhance value in that auction. Chapter 7 is already well suited for such fire sales.

Under current practice, it is possible in some jurisdictions to file a chapter 11 case and close a sale of substantially all of the debtor’s assets in 30 to 60 days. That sale often cleanses the assets of all interests, liens, and claims; implements broad releases for not only the purchaser but also other parties in the case; and dictates the distribution of at least a significant part—if not all—of the sale proceeds. In essence, it is the entire chapter 11 case. Creditors are left with no opportunity to explore alternatives for maximizing the value of the debtor or to participate in value accretion that may have occurred during the case. Rather, their rights and returns in the case are determined summarily by the sale order.

I do not envy judges who are faced with the decision to allow an expedited sale or to call the parties’ bluff. Judges must decide cases on the evidence, and during the first days of a case, that evidence is necessarily one-sided. (For an overview of process and timing issues, see here.) For that reason, I commend the ABI Commission for suggesting a statutory moratorium on going concern sales and financing provisions that would require expedited sales (see here). Although the 60-day moratorium may not be long enough, it would at least allow the U.S. trustee to form a committee and parties some opportunity to test the terms and timing of the proposed sale. It also may encourage management and senior creditors to commence the case earlier, if timing really is essential to value preservation.

The Commission’s recommendations also incorporate some of the plan confirmation provisions into the sale process (see here). For example, to sell all or substantially all of its assets, the debtor would be required to make certain evidentiary showings, provide broader notice to creditors, and pay certain administrative expenses, all similar to a plan proponent’s obligations under section 1129(a). The Commission also suggests that the sale of assets free and clear of all “claims” (as opposed to just liens and interests) be limited to sales satisfying these requirements. Notably, the Commission’s recommendations on free and clear sales are subject to any Constitutional limitations, but otherwise would more readily allow such sales. For example, the recommendations would allow a sale free and clear of liens, provided that the liens attach to the sale proceeds (or other appropriate adequate protection is provided) and irrespective of whether the sale price exceeds the aggregate value of the liens.

On balance, going concern sales can facilitate meaningful reorganizations, saving a business and at least some of the jobs associated with that business. Like any “bet the company” decision, however, such sales should not be undertaken lightly or without appropriate diligence and planning. To those who say, “sometimes you simply do not have the luxury of time,” I simply say, “sometimes you have to make the time.”

*Note: The views expressed in this post are those of the author and are intended to spark a meaningful dialogue about chapter 11 reform. They are not attributable to the American Bankruptcy Institute or the ABI Commission to Study the Reform of Chapter 11.

Meliting ice cube image from Shutterstock.