The Examiners: Studies Show Costs Are in Check

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

There are a number of studies of the professional costs (that is, “direct costs”) of bankruptcy from which a determination can be made as to whether professional fees have become excessive.

Framing a response, however, are two important qualifications. First is Seton Hall University Prof. Stephen Lubben’s substantiation that concerns over professional fees have been expressed in public policy since the establishment of the bankruptcy court system in the 19th century. These concerns are reflected in the evolution of the court’s regulation of professional costs. Exceeding standards of accountability in many other areas of the law, these regulations include the court’s review and approval of the retention of professionals, public disclosure of terms and regular filing for reimbursement, which afford transparency and market regulation of charges.

Second, to judge expenses requires some determination of corresponding value. While there are numerous studies of direct costs, there has been very little done to relate these to the indirect costs and benefits particular to each bankruptcy. These considerations should include accounting for creditor recoveries, as well as the economic costs incurred by the business in bankruptcy and opportunities realized post-emergence.

Subject to these caveats, it appears from various studies that professional fees measured as a percent of pre-bankruptcy assets have remained relatively constant over the past two decades. Professor Lubben finds that in large cases, these are between 2% and 3%, with somewhat higher ratios in smaller cases.

The huge corporate reorganizations following 2008 may have resulted in renewed concern. However, professional costs remain very much in check and with some empirical basis suggesting a long-term gain in efficiency. Rather than pricing themselves out of business, the bankruptcy profession may be coming of age in implementing the court’s objective of successful corporate reorganization.

A Few Fee Studies:

• “The Costs of Corporate Bankruptcy: How Little We Know” By Stephen Lubben
• “The Determinants of Professional Fees in Large Bankruptcy Reorganization Cases” By Lynn M. LoPucki and Joseph W. Doherty
• “How Costly is Financial (Not Economic) Distress?” By Gregor Andrade and Steven N. Kaplan

Anders J. Maxwell is a managing director in the restructuring & recapitalization group at New York-based investment banking advisory firm Peter J. Solomon Co.