Quick sales of companies are replacing traditional, lengthy U.S. bankruptcy reorganizations, and a lack of affordable credit and a recent appeals court opinion is expected to intensify the trend.
The strategy, known as a 363 sale, is not new, but the speed and stringent conditions put in place by the lenders who demand them is.
Given the increasing frequency of the sales, there's a risk the current wave of bankruptcies could scrub balance sheets clean without fixing underlying operations.
Gone are the days when companies such as Macy's or Eastern Air Lines lingered in court protection for years as managers tinkered with strategy. Now lenders will only finance a company's bankruptcy if there is a way out, often in 90 days or less, which almost guarantees a snap sale but precludes an operational overhaul.
We'll see a lot more 363 sales and a lot more creative 363 sale proposals from companies, said David Skeel, a law professor at the University of Pennsylvania.
Jeweler Finlay Enterprises Inc (FNLYQ.OB), for example, filed for bankruptcy last week and its lenders required it to begin liquidating its Bailey Banks & Biddle stores in less than a month.
Stationery maker Lang Holdings Inc filed for bankruptcy in July and lenders required that a sale of the company close within three months, even though the company had no buyer.
The U.S. government even showed it can play rough when it holds the purse strings. As the provider of bankruptcy financing, it required the automaker Chrysler LLC to have closed its sale to Italy's Fiat SpA (FIA.MI) within 60 days of filing for bankruptcy.
This is all occurring in an environment with such an enormous collapse in the value of assets that it is effectively almost impossible to have a bankruptcy because the only party that stands to receive anything is the secured lenders, said Dan Alpert, the managing director of Westwood Capital, an investment bank in New York.
Bankruptcy was not always like this. Only three large public companies went through 363 sales in the 1980s, a time when most companies financed their own bankruptcies, according to Lynn LoPucki, a law professor at the University of California, Los Angeles.
Today's bankrupt companies have to take whatever financing they can, regardless of the strings attached, to reorganize. In addition, companies have loaded nearly every asset with secured debt, leaving them with little say in the bankruptcy process.
A Second Circuit Court of Appeals opinion last week that upheld the sale of Chrysler could expand the use of the argument that a business is like a melting ice cube or rotting fish to justify a speedy sale.
The Second Circuit has elevated the melting ice cube to all sorts of businesses that don't sell fish, said James Peck, a bankruptcy judge for the Southern District of New York, at an American Bankruptcy Institute meeting last week.
Peck and other judges told the meeting they had seen companies and creditors return to court as issues they had agreed upon blew up because one party never fully understood the details.
I think we will see more of that because of how fast these things move through, said Kevin Carey, a judge on Delaware's bankruptcy court.
The sales that have created the most unease are those on tight timelines set by the provider of the bankruptcy financing, and one buyer.
Peck said judges often have only a few hours to review binders of documents, giving the sense that advisers spent weeks or months hiding the ball somewhere.
He approved what has become the poster child for hastily arranged 363 transactions: the sale of the brokerage business of Lehman Brothers Holdings Inc (LEHMQ.PK) to Barclays Plc (BARC.L), just days after Lehman filed for bankruptcy protection at the height of last year's financial panic.
What remains of Lehman is now investigating that sale, saying discrepancies may have cost it billions of dollars.
One hopeful sign: criticism from New York and Delaware judges. The two courts have a near lock on large corporate bankruptcies, due in part to the rapid pace they set for complicated cases, and there are signs that they are willing to push back.
Robert Drain, a bankruptcy judge in New York, last month forced auto parts supplier Delphi Corp (DPHIQ.PK) to allow competing bids for its business, which it originally planned to sell to private equity firm Platinum Equity.
The setter of the speed limit is the judge, said Jack Williams, a law professor at Georgia State University. He has considerable discretion. The system is famously flexible. A judge had a wide latitude in sculpting the way the course is going to go forward.