Do Quick Asset Sales in Bankruptcy Preserve Value?

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By Diane Davis

Oct. 13 — Tackling the issue of “melting ice cube” situations where a financially distressed company “melts” and must sell quickly to preserve value remains a problem under the Bankruptcy Code that even bankruptcy experts don't agree on.

“Thirty percent of bankruptcy cases filed today are going concern sales,” Prof. Michelle M. Harner of the University of Maryland, Francis King Carey School of Law, Baltimore, said Oct. 9 during a panel discussing asset sales at the American Bankruptcy Institute and Georgetown University Law's “Views From the Bench” program in Washington, D.C.

As a result, a Bankruptcy Code Section 363 sale has to be “treated as a viable exit strategy to maximize value,” she said. The problem, according to Harner, is that there is a lack of structure around Section 363 sales.

Bankruptcy Code Section 363 allows a debtor to sell substantially all of its assets free and clear of all encumbrances if specified requirements are met, if the debtor obtains court approval at a hearing upon notice to all parties in interest.

The ABI Commission to study the reform of Chapter 11 was concerned as to whether the value of the debtor was truly being maximized, Harner said, who was the reporter for the Commission's final report published Dec. 8, 2014. The trend toward quick sales in bankruptcy cases doesn't always preserve that value.

ABI Commission's Recommendations

Following a three-year study process and listening to differing perspectives on the issue, the ABI Commission's final report proposed a moratorium on Section 363 sales of substantially all of a debtor's assets for 60 days after the bankruptcy filing.

The 60-day period can't be shortened unless “the trustee or a party in interest demonstrates by clear and convincing evidence that there is a high likelihood that the value of the debtor's assets will decrease significantly during the 60-day period,” according to the report.

This qualification retains the “melting ice cube” exception, Harner noted.

According to the report, the sale of all or substantially all of a debtor's assets on an expedited basis, especially early on in a Chapter 11 case, can raise concerns about “(a) the proper valuation and marketing of assets, (b) whether other restructuring alternatives were fully explored, and (c) whether the court, the U.S. Trustee, and stakeholders have sufficient information and time to review and comment on the proposed transaction.”

LSTA's Response Disagrees

The Loan Syndication and Trading Association (LSTA), however, believes that the Commission's proposal is likely to harm the bankruptcy process by taking flexibility away from debtors and courts to address “melting ice cube” situations on a case-by-case basis.

The LSTA, which “promotes a fair, orderly, efficient, and growing corporate loan market,” Oct. 7 issued “The Trouble with Unneeded Bankruptcy Reform: The LSTA's Response to the ABI Chapter 11 Commission Report,” outlining the flaws and potential harmful effects of the ABI Commission's recommendations.

Although the LSTA believes in the ABI Commission's well-intentioned hard work to reform the Bankruptcy Code, the report's overall approach is “misguided,” and its recommendations will “do more harm than good to debtors, creditors, and credit markets alike,” the LSTA said in the Response.

According to the LSTA, the LSTA Response is intended to “contribute to the analysis and to inform the ongoing debate over whether ‘reform' of Chapter 11 is needed and, if so, what such reform should entail.”

The LSTA noted in the Response that it participated “fully” in the ABI Commission study process and formed a working group and engaged a team from the law firm WilmerHale to represent them through every aspect of the Commission's process.

No Reliable Data, LSTA Says

According to the LSTA, “there is no reliable data demonstrating that bankruptcy sales realize less value for stakeholders than traditional reorganizations.” “To the contrary, recent research suggests that the market for distressed assets is robust, and that bankruptcy sales can and do realize as much value for all stakeholders as a traditional reorganization,” the LSTA's Response said.

The ABI Commission's high burden of proof for demonstrating the existence of a “melting ice cube” problem — clear and convincing evidence that there is a high likelihood that the company's value would otherwise decrease significantly — “errs on the side of letting ice cubes melt,” the LSTA's Response said. According to the LSTA, lengthening the time spent in bankruptcy before completing a sale will increase administrative expenses, including business operating costs and the costs of the bankruptcy process itself, including the professional fees of the debtor and other parties in interest.

Based on the lack of any hard evidence that a moratorium will increase value for the estate, and that it will increase costs, the LSTA concludes that the ABI Commission's proposal “sweeps too broadly” and shouldn't be adopted.

Consider as ‘Best Practices.'

According to Judge Robert D. Drain of the U.S. Bankruptcy Court for the Southern District of New York, the ABI Commission's moratorium proposal would be better if it doesn't become law, but is considered more of “best practices.” Drain believes that it will lead to a litigation opportunity if the ABI Commission's 60-day moratorium becomes law.

“It's better as a reminder of what we should focus on,” Drain said.

Judge Kevin Gross of the U.S. Bankruptcy Court for the District of Delaware noted that “clearly, bankruptcy judges have the power to slow things down.” By the time that the debtor has filed for bankruptcy, it is “essentially dead,” Gross said, and “any delay will only cause a reduction in value to the estate,” he said.

The ABI Commission realized that judges are “already doing a lot in this area,” Harner said. One of the unstated goals of the Commission was to “take some litigation issues off the table,” she said.

To contact the reporter on this story: Diane Davis in Washington at

To contact the editor responsible for this story: Jay Horowitz at

Full text of the LSTA's Response to the ABI Commission Report and the LSTA's Executive Summary is available at: and The full report of the ABI Commission is available for download at: