Chapter 18? Imagining Future Uses of 11 U.S.C. § 363 to Accomplish Chapter 7 Liquidation Goals in Chapter 11 Reorganizations

Abstract

Bankruptcy law is intended to operate in the instances where other applicable laws break down. In other words, it is a gap-filler that is not intended to disturb the natural order unless necessary to solve a problem. More specifically, commentators generally acknowledge that the specific purpose of reorganization is to preserve the going-concern value of financially distressed firms. Opponents of the use of § 363 of the Code to accomplish the Chapter 7 end of liquidation in Chapter 11 raise a host of complaints ranging from arguments that it represents an abuse of the reorganization process by secured creditors to systemic undervaluation of assets to concerns regarding the institutional competency of judges to effectively administer complicated auctions from the bench to contentions that this process fails the basic aim of Chapter 11 reorganization. Recently, commentators have also raised the prospect that the self-interest of accountants, bankers, and lawyers involved in the reorganization may cloud the sale process and deprive the estate of value. Proponents of these sales counter the above complaints by pointing to the quick resolution of a complicated dispute and the economic benefits of a competitive bidding process as evidence for the superiority of asset sales to reorganization. The settlement of this argument and the reformation of the Code is beyond the scope of this Note; however, given the expected continuation of the uptick in Chapter 11 bankruptcy petition filings experienced in 2008, it will be useful to further investigate the current trends of §363 uses while forecasting its future use in a time of constricting credit. Part II of this Note explores the history of the uses of §363 in bankruptcy proceedings while focusing on its increasing prevalence and popularity in recent years. The issues and concerns surrounding the current practices of §363 usage, including the pitfalls and objections noted above, are to be examined in Part III. A consideration of proposed alternatives to pure asset sales in Chapter 11 reorganizations is discussed and evaluated in Part IV, while attempting to keep these suggestions in the context of the current economic climate. Ultimately, this Note concludes that asset sales in Chapter 11 under §363 of the Code are too ingrained in the bankruptcy process to be turned back now. In fact, it is the position of this Note that the same credit market deficiencies that contributed to the rise in bankruptcy filings experienced in 2008 will also contribute to the cementing of §363 asset sales as the preferred exit from Chapter 11. The issue that is left open for debate is how to effectively and efficiently administer the sale process within bankruptcy in order to further the reorganization goal of maintaining going-concern value in financially distressed firms.