A crisis usually is not a good time to make rational decisions about one’s future. The same theory, applied to companies, is implicit in the Bankruptcy Code.
Sometimes, though, lenders or other third parties team with an entity that buys a financially distressed business in a “hurry-up sale,” which may be necessary—or not.
“A rush to sale without process increases the risk of erroneous undervaluation. Crisis-driven leverage may be used as a tool to distort the Bankruptcy Code’s distributional scheme,” according to an article co-authored by UNC School of Law professor Melissa Jacoby.
The article, “Ice Cube Bonds: Allocating the Price of Process in Chapter 11 Bankruptcy,” recently received the Grant Gilmore Award for outstanding writing from the American College of Commercial Finance Lawyers.
Distressed businesses sometimes are called melting ice cubes that necessitate quick sales. It’s important to differentiate between cases with accurate information about the company’s value and costs of delay and cases where the ice cube argument is exploited to secure a favored deal.
“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,” according to the article, co-written by Edward Janger of Brooklyn Law School.
“Implicit in our argument is an important theme: to protect secured creditors’ rights but be mindful of boundaries on those rights. Otherwise, they end up diverting value that perhaps should have gone to workers, suppliers or others,” Jacoby says.
Her article is having an impact.
“Courts are questioning claims that firms are melting ice cubes and need to move the cases at lightning speed. I also hope the article will change the direction of scholarship about secured creditors’ rights, which must be respected but have limits that were not getting serious consideration,” Jacoby says.
“It’s rewarding to see the article taken seriously by commercial law experts,” she says. “Research can have real-world effects in addition to making a contribution to scholarship; these two goals are complementary.”
-May 18, 2015