The Examiners: Experienced Professionals Come at a Price

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

It’s hard to argue against the notion that professional fees associated with a Chapter 11 restructuring appear high. The U.S. trustee’s office, the bankruptcy arm of the Department of Justice, recently issued professional fee guidelines for large Chapter 11 bankruptcy cases with the noble intent of better monitoring and perhaps controlling fees. Fees concern and influence the timing of a bankruptcy filing and may influence whether certain companies seek the protections afforded by the bankruptcy courts—particularly in the small- and middle-market space. However, the tools provided by the bankruptcy code to debtors, lenders, asset purchasers and creditors remain important in maximizing sale values and capital and operational restructurings.

Out-of-court workouts and alternative state law remedies (such as assignments for the benefit of creditors, foreclosures, and receiverships) can help avoid certain bankruptcy costs, but at a critical price. These approaches often limit going-concern sales, capital structure or operational restructurings particularly by existing management, loans to facilitate a transaction, discharge debt or even liquidation sales by limiting good faith findings and free and clear title protections provided for under the bankruptcy code.

While large Chapter 11 bankruptcy case filings have declined, we continue to see distress in certain sectors (retail, energy, and gaming to name a few). And large Chapter 11 cases remain replete with sophisticated issues and intricate pre-bankruptcy and proposed post-bankruptcy structures, often requiring sophisticated bankruptcy and other professional advice for all of the constituents including debtors, official and unofficial committees, secured and unsecured debt holders, vendors, insurance providers, pensions, employees and retirees.

Hiring professionals with the necessary experience and expertise comes at a price. Professionals continue to be mindful of the transaction costs involved, but in complex cases—such as the recent, unprecedented American Airlines and US Airways merger—the higher price of not having experienced and sophisticated professionals likely would have been even greater in the form of lost opportunity.  Although the “high” hourly rates have generated some interesting discussion around the  ”mega” cases,  other Chapter 11 cases control costs by negotiating or developing  a plan for resolving financial issues before a filing and implementing the restructuring or sale process through a shorter or less litigated Chapter 11 case.

In short, while the professional fees associated with many Chapter 11 filings have increased over the years, factors other than professional fees typically dictate whether a company seeks relief under Chapter 11.

Sharon Levine is vice chair of Lowenstein Sandler LLP’s national bankruptcy, financial reorganization and creditors’ rights practice. Follow her on Twitter at @LevineSharon