The Examiners: Bankruptcy Has Actually Become Less Expensive

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

Chapter 11 restructurings aren’t becoming more expensive, and professionals aren’t pricing themselves out of business.

In general, in fact, I would argue that the opposite is true. Over the last 30 years, Chapter 11 has become less expensive. In large part, this is because we’ve moved from large, traditional Chapter 11 restructurings, to quicker-paced, prepackaged Chapter 11 cases. For a “prepack,” a company effects its restructuring by negotiating and soliciting acceptances for its plan of reorganization prior to filing a Chapter 11 petition. The company then files for Chapter 11 to make the plan binding on all parties. With a prepackaged plan, a company can enter and exit bankruptcy in 30 days or less. By contrast, a traditional Chapter 11 case may take years.

Professionals’ restructuring costs depend primarily on the amount of litigation and the length of the case. By working out many of the litigation issues prior to filing, and by negotiating plans with constituencies before filing, companies and professionals can drastically cut down on the ultimate costs of a Chapter 11 restructuring. Even if a company doesn’t choose to pursue a prepack, by narrowing the litigation issues and by socializing key constituencies to a proposed reorganization plan to the extent possible prior to entering Chapter 11, costs can be reduced.

Of course, there will always be the occasional complex, “mega” case—Lehman Brothers is the perfect example. Lehman Brothers was a large financial institution with offices all over the world that was essentially forced to file for Chapter 11 protection overnight. Lehman Brothers didn’t have the benefit of time to enter into serious negotiations with its constituencies prior to filing or to work out any of the myriad litigation issues that have contributed to its nearly 5 1/2-year stay in bankruptcy court.  That being said, the Lehman Brothers reorganization has been a huge success.

From time to time, we do hear suggestions that professionals’ costs are too high, but more often than not, we hear this from groups who would prefer to simply take over the distressed company and avoid the Chapter 11 process altogether. We aren’t, however, hearing this from the companies themselves.

Jay Goffman is the global leader of Skadden, Arps, Slate, Meagher & Flom’s corporate restructuring practice. He is based in New York.