The Examiners: Bankruptcy Costs Take a Toll on Smaller Companies

Have Chapter 11 restructurings become so expensive that professionals are essentially pricing themselves out of business? 

With widespread coverage of the massive professional fees earned in recent, “mega” Chapter 11 cases, the Office of the U.S. Trustee last year announced its much-anticipated attorney’s fee guidelines. The guidelines remain in their infancy but have done little to date to tamper concern that Chapter 11 has become too expensive for all but the “wealthiest” insolvencies.

The aggregate fees of myriad professionals (attorneys, investment bankers, financial advisers, CROs, crisis communications firms and others) in highly complex Chapter 11 cases can be headline-grabbing. But in reality, these professionals run little risk of pricing themselves out of the market.

Often with billions of dollars at stake, competing interests among tranches of creditors and constraints of liquidity and time, these cases demand an army of restructuring professionals. Moreover, as many of these restructurings can only be accomplished using the tools embodied in the bankruptcy code, the additional costs that the bankruptcy process brings cannot be avoided.

This does not mean that bankruptcy professionals have carte blanche in their billings. Rather, the new U.S. trustee guidelines must be the beginning of a critical look at professional fees, requiring the active support of the bankruptcy courts, which retain their independent obligation to review and approve all professional fees.

The largest Chapter 11 cases garner headlines, but the costs of Chapter 11 are taking a considerable toll on the smaller and mid-market Chapter 11 cases. In these situations, liquidity is almost certainly constrained and access to time and financing is finite. In these cases, there is often a less costly, less desirable processes that companies are forced to consider. For example, while the benefits of an asset sale under Section 363 are well known, without the funds to pursue this path (and achieve value for creditors and the potential viability of an on-going business), companies may seek to sell outside of Chapter 11 (with its attendant risks and the lack of an open marketing process) or actually liquidate their operations under state law.

Fortunately, with the slowdown in the restructuring market, professionals are considering more efficient and creative fee approaches. Hopefully, these small steps—alongside the U.S trustee guidelines—will continue as the restructuring market recovers, making Chapter 11 available for all distressed situations.

Richard A. Chesley is the co-chair of DLA Piper’s restructuring practice, focusing on bankruptcy transactions both in the United States and internationally. He is based in Chicago.