• Selected
• Entire List

Abstract:
This article presents the findings of an empirical study of professional fee and expense awards by United States Bankruptcy Courts in 48 large public company bankruptcy cases concluded from 1998 through the first half of 2002. Data was gathered from fee applications and orders in the courts files. Using that data together with case and company data from the Bankruptcy Research Database, the authors constructed regression models of the determinants of (1) the amounts of professional fees and expenses awarded by case and (2) the amounts of debtor-in-possession bankruptcy attorneys fees awarded by case. Two determinants dominate both models: the value of the reorganizing firm's assets and the length of time the case remains pending. Two additional factors contribute to determining the amount of professional fees and expenses, but not debtor in possession bankruptcy attorneys fees: the number of professional firms working in the bankruptcy case and whether the case was in the Delaware bankruptcy court.

The ratio of fees and expenses to firm size was subject to a scale effect. As the size of the case increased, the ratio of fees to expenses declined. For the 48 cases studied, total fees and expenses were 1.4% of assets reported on the bankruptcy petition. The average ratio of fees and expenses to assets was 2.2%, but removal of a single outlier reduced it to 1.9%. Controlling for firm size, case duration, and the number of professional firms working, fees were 32% higher in Delaware cases. But controlling only for firm size, the significance of this finding disappeared. Fee cuts were generally small - exceeding 4% of the amounts applied for in only 11% of the cases. The mean fee cut varied significantly by court. Delaware cuts averaged 0.7%, New York 4.5%, and Other Courts 2.3%. The differences in fee cuts among courts was significant, but fees were not significantly lower in cases with larger fee cuts.

Based on a comparison of the data gathered in this study with the data gathered by Weiss, inflation-adjusted professional fees and expenses awarded in large, public company reorganizations have fallen by about 57% since the 1980s. Controlling only for firm size, the difference is statistically significant. The decline in fees appears to be associated with the decline in case duration that occurred during the period.

Abstract:
For more than two decades, scholars working from an economic perspective have criticized the bankruptcy reorganization process and sought to replace it with market mechanisms. In 2002, Professors Douglas G. Baird and Robert K. Rasmussen asserted in The End of Bankruptcy, an article published in the Stanford Law Review, that improvements in the market for large, public companies had rendered reorganization obsolete. Going concern value could be captured through sale.

This article reports the results of an empirical study comparing the recoveries in bankruptcy sales of large public companies in the period 2000-2004 with the recoveries in bankruptcy reorganizations during the same period. We find that, controlling for company values reported at case commencement, pre-filing operating profits, and post-filing operating profits, the recoveries in reorganization cases are more than double the recoveries from going concern sales. We attribute the low recoveries in sale cases to continuing market illiquidity and the corruption of the bankruptcy process by competition among bankruptcy courts for large, public company cases.

We also find that bankruptcy recoveries are higher in years when merger and acquisition activity is higher for reasons other than high stock prices. Lastly, we find that bankruptcy recoveries are higher when debt capacity in the debtor's industry is lower - the opposite effect predicted by Professors Andrei Shleifer & Robert W. Vishny in their landmark article in 1992.

bankruptcy, sales, reorganizations, recoveries, market, merger and acquisition, corruption

Abstract:
In a study of the division of professional fees in 74 large, public company bankruptcy cases concluded from 1998 through 2003, we find that 79% of court-awarded fees are awarded for services rendered directly to the debtor in possession. Only 20% are awarded for services rendered to creditors committees, only one half of one percent are awarded for services rendered to equity committees, and less than one percent are awarded for services rendered by court appointed professionals.

Fifty-three percent of the fees were awarded to attorneys, 42% to financial advisors, 5% to accountants, and a fraction of 1% to all other professions combined. Of the 53% that went to attorneys, more than two thirds went to bankruptcy attorneys and less than one third went to "special" or "ordinary course" counsel performing nonbankruptcy work.

We estimated regression models for the fees of each of five types of professionals: (1) attorneys, (2) DIP bankruptcy attorneys, (3) DIP special attorneys, (4) financial advisors, and (5) DIP financial advisors. Debtor size, case duration, and the number of attorney firms working were the principal determinants of attorneys fees. But those factors were only weak determinants of financial advisors' fees. The strongest determinants of financial advisors' fees were court (the Delaware and New York courts awarded more to financial advisors) and the trend over time. Over the period of our study, the fees of financial advisors increased at the rate of 25% per year. Courts did not award higher fees to financial advisors in cases where the debtor sold its business or a controlling interest in its business.

By comparing the results of our study with the results of LoPucki and Whitford's study of reorganizations in early 1980s, we find a sharp increase in the employment of financial advisors by creditors' committees and a sharp decline in the employment of professionals by equity committees.

We found that several factors thought to cause DIP bankruptcy attorneys fees to be higher in fact did not. They include whether the DIP lead attorneys were a New York firm, whether the DIP lead attorneys were from a city distant from the courts, and the hourly rates charged by the attorneys.

bankruptcy, reorganization, professional fees, attorneys fees, financial advisors, investment bankers, direct costs, special counsel

Abstract:
In recent years, about 70% of the large, public firms that file for reorganization choose the bankruptcy courts of Delaware (about 55%) or New York (about 15%). In an earlier study, LoPucki and Kalin found that firms emerging from those courts refiled bankruptcy at rates four to seven times the rate for firms emerging from other U.S. bankruptcy courts.

The study reported in this paper examines all 98 firms emerging as public firms from the bankruptcies of large, public firms in U.S. bankruptcy courts from 1991 to 1996, the period of Delaware's ascendency. Using four measures of failure, refiling, business discontinuation, post-bankruptcy earnings, and plan failure, this study finds rates of Delaware failure ranging from two to ten times the rates of Other Court failure in the five years after emergence. New York's failure rates were between those of Delaware and Other Courts. The study concludes that firms emerging from Delaware and New York reorganizations fail more often.

Prefiling characteristics of the firms, including measures of their sizes and levels of financial distress, were not related to failure. Nor were there important measurable differences in the firms choosing Delaware or New York and those choosing Other Courts. The study concludes that characteristics of the filing firms do not cause Delaware and New York's high failure rates.

The study discovered five characteristics of the reorganization process that may contribute to Delaware's higher failure rates. Delaware reorganization appears not to fix the business; firms emerge from Delaware reorganization with higher leverage; prepackaged cases fail heavily in Delaware but not in Other Courts; Delaware reorganization is faster; and Delaware plans are simpler. The paper concludes that the causes of Delaware's high failure rates are endogenous to Delaware's reorganization process. Large public firms in financial distress are flocking to the bankruptcy courts least likely to reorganize them successfully.

bankruptcy, reorganization, Delaware, New York, failure, refiling, Chapter 22

Abstract:
In an empirical study of professional fees and expenses in 74 large public company bankruptcies concluded 1998-2003, we found that (1) controlling for the trend over time and the geographical location of the cases, company size (measured by assets), case duration (measured in days), and the number parties (measured by the numbers of professional firms working) explain nearly 87% of the case-to-case variation in professional fees, (2) fees and expenses increased about 9% per year over the six year period covered by our study, (3) five of six predictors of fees and expenses exhibited a strong scale effect, (4) the scale effect for company size is so severe that reporting fees as a simple percentage of assets is misleading, (5) using the same model we used with court file data our variables explain 86% of the case-to-case variance in the amounts of professional fees and expenses reported in SEC filing data, and (6) fees and expenses reported in SEC filing data are highly correlated with those reported in court file data, but are 59% higher.

The principal determinants of fees and expenses assets, days in bankruptcy, and the number of professional firms working appear to us to measure not only the need for professional services, but also the opportunity for professionals to bill. In an attempt to statistically isolate this billing opportunity component of fees and expenses, we compiled a second set of variables employees, docket length, and reorganization plan classes that we believe measures case complexity without measuring billing opportunity. When those variables are substituted for the principal determinants, the regression explains substantially the same percentage of variance in fees and expenses. This second, complexity-only model predicts fees that, controlling for scale, are significantly lower for companies with assets greater than about $1 billion. We theorize that this systematic difference in the two models' predictions measures the billing opportunity component of fees and expenses in large public company bankruptcies.

professional fees, attorneys fees, bankruptcy, fees

Abstract:
When lawsuits are resolved out of court, what determines the settlement amount?

As a first approximation, the legal merits of the lawsuit matter, of course. Settlements are negotiated in the shadow of the law. But there is much more to settlement negotiations than the facts of the dispute and the relevant legal rules. Within certain boundaries determined by the nature and strength of the plaintiff's claim, the plaintiff's lawyer attempts to obtain every dollar that the defendant will pay, and the defendant's lawyer attempts to avoid paying all but the most minimal amount. This article uses a bargaining experiment to attempt to identify the factors that can be assessed prior to the beginning of bargaining that determines who wins and who loses this battle.

The analysis reveals that, in the conditions of the simulated negotiation, the negotiators' estimate of the opposing negotiator's reservation price is the best predictor of outcomes, follow by the gender of the negotiator and the size of the first offer made. The negotiator's target or aspiration, the negotiator's relative enthusiasm for litigating the case if need be, and the negotiator's relative confidence in his negotiating ability were also predictive of a successful outcome, although less important. The negotiators' pre-negotiation perception of what would constitute a fair outcome had a very small indirect effect on outcomes. Together these seven variables explain more than half of the variation in settlement outcomes achieved by the subjects who participated in the simulation.

The specific context of this article is settlement bargaining, but the insights generates are applicable to any two-party negotiation. Thus, the results should be of interest not only to litigators and legal scholars, but to anyone who negotiates as part of his or her personal or professional life or studies negotiation in any context.

negotiation, settlement, bargaining, experimental

Abstract:
In 1990, the United States Bankruptcy Court for the District of Delaware - then a one-judge backwater - began competing for big bankruptcy cases. In six years, that court achieved a near monopoly. In 2000, LoPucki and Kalin discovered that 42% of the companies filing in Delaware during that six year period of ascendency refiled bankruptcy within five years of their emergence, as compared with only 6% of those filing in courts other than Delaware and New York. In a later study, we found the (1) the failure of the companies reorganized in Delaware during the period of ascendency was robust across several measures of failure and (2) the Delaware filers were not different from the other court filers in any way that might account for the higher refailure rates.

In a review of LoPucki's book Courting Failure (University of Michigan Press 2005), An Efficiency-Based Explanation for Current Corporate Reorganization Practice, 73 University of Chicago Law Review 425 (2006), Professors Kenneth Ayotte and David A. Skeel, Jr. came to Delaware's defense with an economic model and new empirical evidence. They argued, in essence, that companies with worse prospects for reorganization chose Delaware reorganization because it was cheaper. Because this group of companies was weaker, creditors put them "on a short[er] leash," by saddling them with high debt levels. The higher rate of refiling that resulted was nevertheless efficient because refiling costs were low.

In this essay we respond that the Ayotte-Skeel model is based on the assumption of a selection effect for which there is neither a shred of empirical evidence nor even a variable proposed for measurement. We demonstrate that it is mathematically impossible for the cost savings from Delaware's shorter bankruptcies to offset the cost of so many second bankruptcies. We also note that the Ayotte-Skeel model leads to several predictions in conflict with the empirical evidence.

We argue that refailure is costly and propose an empirical approach to quantify those costs. We praise Ayotte and Skeel's discovery that the EBITDA of firms emerging from Delaware bankruptcy was not significantly different from the EBITDA of firms emerging from bankruptcy in other courts during the period of ascendency. We agree that their findings suggest leverage played a greater role in the failure of the Delaware companies than we had previously thought.

Lastly, we respond to Ayotte and Skeel's argument that DIP lenders, other creditors, and bankruptcy courts can prevent the case placers from using their leverage over the bankruptcy courts to externalize costs. The DIP lenders will not prevent the externalization because they are themselves case placers. Other creditors cannot prevent the externalization because no procedural means exist by which they could do so. The bankruptcy courts cannot prevent the externalization because the case placers avoid courts that attempt to place limits on them.

Delaware, bankruptcy, reorganization, leverage, refailure, refiling, Chapter 22, DIP lenders

Abstract:
In Bankruptcy Fire Sales, 106 Michigan Law Review 1 (2007), we compared the recoveries from the going-concern bankruptcy sales of 25 large, public companies with the recoveries from the bankruptcy reorganizations of 30 large, public companies in the same period. We found that, controlling for the asset size of the company and its pre-sale or pre-reorganization earnings (EBITDA), reorganization recoveries were more than double sale recoveries.

In Bankruptcy Noir, a reply forthcoming in the Michigan Law Review, Professor James J. White values the same set of companies differently to reach the finding that the sale recoveries are not statistically significantly different form the reorganization recoveries.

In this response to White's reply, we demonstrate that the difference in White's findings results entirely from four errors in White's method. First, White values grossly insolvent companies based on their debts rather than their assets, thus creating phantom assets at filing even the companies themselves did not claim. Second, in comparing the sale and reorganization recoveries, White deducts current liabilities from the reorganized company recoveries without making the corresponding deduction from the sold company recoveries. Third, after deducting those current liabilities B which are a proxy for cash and other current assets B White deducts the cash a second time. Here too, he makes the deduction from the reorganization recoveries, but not from the sale recoveries. White's fourth error was to drop from his study the seven sale cases with the lowest recoveries. He attempts to justify their removal on the ground that they were unreorganizable telecoms. But he acknowledges that two were not telecoms, he retains seven higher-recovery telecoms in the study, and he provides no evidence that the companies dropped could not have been reorganized.

bankruptcy, 363 sales, James J. White, liquidation, total enterprise value, enterprise value, reorganization, recoveries, telecommunications, CLECs, mergers and acquisitions

Abstract:
This Article reports the results of an empirical study showing that the United States bankruptcy courts routinely authorize and tolerate professional fee practices that violate the Bankruptcy Code and Rules. The study documents the existence of three such illegal practices. The Ordinary-Course-Professionals Practice excuses some or all professionals serving in the ordinary course of the debtor’s business from the requirement that they obtain court approval for the payment of their fees. The Prior-Payment-Disclosure Practice ignores the requirement that a final fee application disclose the prepetition payments the professional received in connection with the bankruptcy case. The Disburse-First Practice allows debtors to pay 80% or more of the fees sought by professionals before the court has even seen the fee requests. The Article speculates that these practices, which apparently occur only in large, public company cases, result at least in part from competition among the bankruptcy courts for those cases.

bankruptcy, professional fees, attorneys fees, court competition

Abstract:
This article analyzes whether managerial judging reforms that were introduced to expedite procedure at the International Criminal Tribunal for the former Yugoslavia (ICTY) achieved their goal. Using survival analysis - Weibull regression - the paper tests the hypothesis that the higher the number of reforms a case was subjected to, the shorter the pretrial and trial phase of that case should be. Our six models for pretrial and trial reveal that in all pretrial and trial models the number of reforms is significantly correlated with longer pretrial and trial. The article explains that reforms made process longer rather than shorter because ICTY judges did not use their managerial powers or used them deficiently, and prosecution and defense managed to neutralize the implementation of the reforms. To explain judges’ behavior, the paper articulates an unnoticed challenge for managerial judging - the court is likely to have limited information about the case that may lead judges to restrict use of their managerial powers to avoid making inefficient decisions. In addition, ICTY did not have an implementation plan to encourage judges to change their behavior. The paper also explains the incentives that prosecution and defense had to neutralize the reforms.

International Criminal Tribunal, ICTY, International Organization, International Criminal Procedure, Judicial Reform, Managerial Judging, U.S. Civil Procedure