The Examiners: Restructuring Practices Still Could Be Improved

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

Insolvency is a horrible thing. It means that a company cannot and will not keep its promises—to employees, retirees, customers, suppliers and lenders. There is pain and great complexity in shattering this web of obligations while trying to pay all that can be paid and save the enterprise and the jobs it represents. It should therefore come as no surprise that court-supervised reorganizations, which break, amend or restructure obligations to hundreds or thousands of counterparty stakeholders, are complicated, time-consuming and costly. They involve scores of litigations, financings, mergers, recapitalizations and a sometimes seemingly endless set of negotiations, often with multiple parties.  Virtually every possible stakeholder—sometimes tens of thousands of them—files a claim and otherwise fights for its rights.

Over time, restructuring professionals have developed techniques and technology to increase efficiency and reduce expense. Omnibus motions and hearings, plan mediations, electronic-only notices (which, oddly, Delaware does not allow), Web-based information flow, dial-in hearings (which, unfortunately, not all judges embrace), prepacks and prenegs, and many other advances have helped reduce costs.

Is there room for further improvement? Of course. Addressing the overlap of investigations by multiple entities, further streamlining discovery (through omnibus discovery procedures as we spearheaded in Lehman Brothers) and the increased use of technology for documents and hearings all need further advancement. A reduced (or no) role for creditors’ committees in non- or minimal-impairment cases also bears consideration, as does turning work over to lower cost professionals and hiring temporary staff in lieu of armies of high-priced hourly consultants functioning as employees.

Bankruptcy courts are, and should be, very serious about reviewing fee applications to ensure that professionals don’t saddle the estate with unjustified fees and costs at the expense of stakeholders. Many jurisdictions have enacted their own rules and guidelines, and bankruptcy judges frequently scrutinize every line item of cost, even in complex mega-cases in which fee applications can run into the hundreds of pages. Moreover, because all professionals must file public fee applications with the court, restructuring has perhaps the most transparent pricing of all legal and financial advisory practices. As Justice Louis Brandeis said, “Sunlight is said to be the best of disinfectants.”

All that said, the cost of the proceeding itself is and should be a factor in choosing between in-court and out-of-court restructurings. Where the necessary reorganization can be achieved without a filing, where adjusting one class of securities or seeking targeted relief will do the trick, an out-of-court process can work well and avoid the material incremental costs and burdens of a filing. But that will be true in only a limited number of situations. The goal should remain on further streamlining the Chapter 11 system, which, despite its soft and hard costs, has a pretty spectacular track record of saving failing enterprises and maximizing their value.

Marshall Huebner is a partner with Davis Polk & Wardwell LLP in New York and is co-head of the firm’s insolvency and restructuring group.