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Corporate Reorganization & Professional Fees

American Bankruptcy Law Journal, Vol. 82, p. 77, 2008

Seton Hall Public Law Research Paper No. 1094032

64 Pages Posted: 17 Feb 2008 Last revised: 27 Mar 2008

Stephen J. Lubben

Seton Hall University - School of Law

Abstract

In recent years critics have lambasted a corporate bankruptcy system that they see as nothing more than competing bankruptcy courts offer[ing] high fees to bribe the lawyers to bring them cases. Of course, big firm corporate attorneys earn lofty hourly rates in or out of bankruptcy court. And too often critics of chapter 11 make the mistake of assuming that the general agency problems inherent in all corporations can be solved by the bankruptcy system.

Exactly how much it should cost to reorganize a corporate entity is a matter of surprising elusiveness.

This paper provides the most extensive study to date of the professional fees and expenses awarded by U.S. bankruptcy courts in the reorganizations of American businesses. This study's database includes approximately 1,050 chapter 11 cases filed in 2004 - almost more than 1,000 more cases than the next largest American study.

Among the key findings of this study are:

- Most of the regulation of professional fees provided by the Bankruptcy Code is valuable primarily for its deterrence effects. Retention applications are rarely denied and requested fees are rarely reduced. This, of course, does not mean that the regulatory system is broken, but rather that much of the system is not easily viewed by outsiders.

- Unlike prior studies, I find that time spent in chapter 11 seems to have very little independent effect on the costs of the case. Factors like the size of the debtor corporation, the number of professionals retained, and whether a committee is appointed play much bigger roles.

- Professional fees in chapter 11 are subject to economies of scale. In particular, with every 1 percent increase in the size of a debtor, professional fees only grow by less than half a percent - holding other key factors constant.

- Lost in the sound and fury about large professional expenses in large cases is the fact that almost 35 percent of the chapter 11 cases result in no payment whatsoever to the professionals. These are typically smaller cases that are often converted to chapter 7 or dismissed outright.

Keywords: chapter 11, direct costs, professional fees, bankruptcy, reorganization

Suggested Citation

Lubben, Stephen J., Corporate Reorganization & Professional Fees. American Bankruptcy Law Journal, Vol. 82, p. 77, 2008; Seton Hall Public Law Research Paper No. 1094032. Available at SSRN: https://ssrn.com/abstract=1094032

Stephen J. Lubben (Contact Author)

Seton Hall University - School of Law ( email )

One Newark Center
Newark, NJ 07102-5210
United States
973-642-8857 (Phone)

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