The Examiners: Impose a Legal Cap on Creditors’ Professional Fees

If you could make one change to the bankruptcy code, what would it be?

The American approach to bankruptcy is one of the best in the world, giving new opportunity to companies that have stumbled but continue to hold great potential. Unfortunately, the process can be very expensive. A lot of attention is paid to large bankruptcies, but the real challenge is often for smaller and mid-sized businesses in which the high level of professional fees hinders the process, harms creditors and ultimately puts at risk a company’s ability to successfully exit bankruptcy.

The most frequent comment I hear from industry practitioners is that capping these fees would be one of the most meaningful improvements that can be made to the current bankruptcy code. Creditors and even advisers themselves recognize that mounting fees can break the system and erode opportunity for a turnaround. Hourly fees from advisers quickly escalate in bankruptcies because no one has the authority or incentive to achieve a resolution, leaving creditors worse off and the business’s future prospects diminished.

Adopting a more uniform fee structure whereby creditors’ fees for a set period of time are capped as a percentage of the docketed claims amount—with a minimum fee for very small cases—would remove this financial handicap. This would eliminate any incentive to prolong the action, benefitting both creditors and debtors.

The success of the bankruptcy process is determined by the commitment of the professionals involved to efficiently resolve creditor claims and give new life to businesses in distress. Most people who work with bankruptcies honor this ideal. But by implementing a reasonable cap on fees, we can ensure that the bankruptcy process itself remains “a direction, not a destination,” and that companies of all sizes can emerge from the process quickly.

Marc Leder, co-chief executive officer of Sun Capital Partners Inc. of Boca Raton, Fla., has been engaged in leveraged buyouts, investment banking and business operations for more than 25 years.