Ice Cube Bonds: New Paper on 363 Sales and Chapter 11

FAC UT ARDEAT, begins The Flamethrowers by Rachel Kushner. It means "made to burn," the narrator learns (from that "gasbag . . . Chesil Jones"). Whether your preferred hurry-up 363 sale metaphor involves flames, ice, or a wagon full of rotting salmon, Ted Janger and I have just posted a draft of an article reframing the problems with pre-plan going-concern sales, and reallocating the risk associated with such sales. The 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.

Perhaps Ice Cube Bonds is the long weekend reading material you were hoping would come your way? We'd value your feedback.

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Comments

[Robert White]

What about statutory mootness contravening adjustment to the Ice Cube Bond?

That is, maybe there are constitutional objections to the sale that would eviscerate the Bond.

Stern v Marshall brings a few scenarios to mind - ie. forcing common law settlements between non-debtors.

One of the big gorillas in the Bond hearing will be unsecured creditors and the adequate protection they are entitled to if their claims are to be promoted to the status of a interest to be removed from the assets pursuant to 363(f) and then enjoined from pursuing the buyer for successor liability after the sale.

Or rather is it settled that unsecured creditors deserve no adequate protection?

And if adequate protection for unsecured creditors is unsettled statutorily how can the value of unsecured claims ever be determined?

Will unsecured creditors ever be told what they are getting?

And if return on their claims is not determined then unsecured creditors need to appeal immediately after the Sale Order becomes final based on their lack of consent (raised often and early) and that they can only be forced to take a somewhat certain and duly noticed amount of money for their interest.

Thanks for the article, it really helped me better understand the thinking of secured claimants.

[Matthew Bruckner]

Thanks for posting this. I'm excited to read this paper.

Does your paper address situations where there is a dispute as to ownership of the relevant assets? For example, in the Kodak case, Apple asserted an ownership interest in several of the patents that Kodak as trying to sell by way of section 363. In your view, could Kodak have posted a bond and then sold its patent portfolio, including the patents that were of disputed ownership?

[Ted Janger]

Ted Janger here. These are great questions about the article. I'll take a stab at them in the order that they are presented, and Melissa may weigh in later with her own take:

1) Equitable mootness should not come into play because that doctrine only applies to challenges to a confirmed plan of reorganization. An Ice Cube Bond would only be required for 363 sales closed prior to the confirmation of a plan so the doctrine would not come into play. The bond would be released and any "reserve" distributed upon plan confirmation, so there would be nothing to challenge post-confirmation. There is a related question with regard to the applicability of 363(m), which insulates a good faith 363 sale from reversal on appeal. However, 363(m) should not be implicated either, as the posting of the bond does not implicate the finality of the sale or the state of the title received by the purchaser. It only affects the distribution of the sale proceeds.

2) We don't see any constitutional (due process type) objection to the bond, in that the bond requirement merely preserves issues for later adjudication. In other words, it preserves process rather than denying it.

3) We don't see any Article III type objection either. One thing that the Supreme Court has been quite clear about in the TSAC v. Hood and Katz line of cases is the power of the Bankruptcy Court to administer property of the estate. All the bond does is insure that there will be property of the estate available to resolve disputes that arise after the sale closes. If the dispute needed to be resolved in an Article III court, there is no reason that the posting of an Ice Cube Bond would stand in the way. It simply ensures that claims arising out of that dispute will share equitably in the proceeds of the sale.

4) The question regarding adequate protection of unsecured creditors under 363(f) is a fascinating one. However, (at least tentatively) we don't think it's implicated here, either. As we frame the discussion, the funds are set aside preserve the status quo with regard to disputes about entitlement, and to indemnify the estate against harm caused by a procedural shortcut. The funds are not set aside to protect unsecured creditors against a decline in the value of the estate.

5) The unsecured creditors will learn about their distribution when the plan is confirmed.

6) We think that the posting of the bond will reduce, rather than increase the need of objecting creditors to appeal the sale order and/or seek a stay. That, indeed is one of the benefits of our proposed approach.

7) With regard to the Kodak scenario, We are not taking a position on the scope of the court's power to sell free and clear under 363(f). That would be an entire article unto itself. However, assuming that the court did have the power to sell the Kodak's patents free and clear of Apple's claims, the bond would be posted to compensate Apple if they were later found to be the owners of the patents (and entitled to compensation).