The Chapter 11 Attorneys
23 Pages Posted: 13 Oct 2011
Date Written: October 11, 2011
Understanding the costs of corporate bankruptcy has importance in a variety of contexts. Most obviously, if the costs of corporate bankruptcy are “excessive” – a term that is surprisingly difficult to define – it has clear policy implications for legislators with regard to the Bankruptcy Code.
Less directly, but perhaps of equal importance, the cost of chapter 11 has implications for corporate finance. The famous Modigliani-Miller start in a world without taxes or bankruptcy costs. To extend these theories to practice, measuring taxes and bankruptcy costs becomes rather important.
To date all studies of chapter 11 costs, with one exception, have been done in the aggregate. That is, the studies report the total cost of chapter 11, but provide little information on the aspects of chapter 11 that contribute to cost.
I use this paper to examine the specific question of bankruptcy attorney cost in chapter 11 cases. Drawing on a new dataset of large chapter 11 cases filed in 2004, I show how the attorneys in these large cases compete in a nationwide market, with attorneys frequently representing debtors outside the attorneys’ home jurisdiction. I also demonstrate how the number of parties in a case influences the overall cost of bankruptcy counsel, as the debtor’s counsel is compelled to interact with additional parties. And finally I show how the creditors’ committee counsel can increase the cost of chapter 11 not only through their own fees, but by also increasing the cost of the debtor’s attorneys.
Keywords: Chapter 11, Direct Costs, Professional Fees, Bankruptcy Costs
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