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The American Bankruptcy Institute's Investment in Knowledge: The Chapter 11 Professional Fee Study

One of Benjamin Franklin’s most eloquent sayings was: “[A]n investment in knowledge always pays the best interest.” The American Bankruptcy Institute (ABI) took this saying to heart when it funded1 an independent, academic study of professional fees in Chapter 11 proceedings in February of 2005 (Fee Study).2

I. What’s the Fee Study?

The ABI has always had a strong commitment to the study of professional compensation in bankruptcy proceedings. Between 1989 and 1991, the ABI conducted the National Report of Professional Compensation (Compensation Survey), which was the first comprehensive survey of the allowance of professional fees in both consumer and business bankruptcy cases. The Compensation Survey has been cited in numerous cases and in scholarly analysis of bankruptcy law.3

In 2004, the ABI began the process of outlining a detailed empirical study of court awarded compensation to professionals in Chapter 11 cases. This process lead to the selection of Professor Stephen T. Lubben as the Fee Study’s Reporter and the initial funding of the Fee Study with a $350,000 grant from the ABI. This grant was the largest ever made by the ABI.

The Fee Study’s main sample (Random Sample) is based on a sample of Chapter 11 cases filed in 2004 randomly selected from 33 districts – three districts from each numbered circuit. In each circuit, one district from the state with the highest population in the circuit, one from the lowest population state, and one district from the median population state in the circuit4 made up the Random Sample. Up to 40 Chapter 11 cases were selected from each district for inclusion in the Random ample. A total of 945 Chapter 11 cases were covered by the Random Sample. Additionally, the Random Sample was supplemented by a big-case sample that was comprised of an additional 81 large Chapter 11 cases filed in 2004, that were not captured in the original Random Sample. Numerous documents from each selected case in both the Random Sample and the big-case sample were gathered by members of the Fee Study’s Steering Committee and Practitioner Advising Panel (PAP) to form the raw data for the Fee Study.

The Fee Study’s sample size is substantially larger than any prior study of bankruptcy professional fees.5 In particular, the Fee Study examined the costs incurred by these debtors while in Chapter 11. Information on professionals, fee examiners, fee committees, committees, and various measures of the complexity of a case were collected by the Steering Committee and PAP and analyzed by Professor Lubben to form the basic data of the Fee Study. The use of holdbacks, ordinary-course professional procedures and other similar devices is also examined in the Fee Study.

II. What Does the Fee Study Show?

The Fee Study6 is a large and detailed document that provides a wealth of information about the Study’s Chapter 11 cases in general, as well as significant data on professional fee issues in these cases. Among the important findings are:

  • The average firm in the Random Sample has assets of $21.2 million and liabilities of more than $37 million, and the median firm has assets of $818,000 and liabilities of about $1.2 million.
  • The average firm in the big case dataset has assets of $423.4 million and liabilities of more than $775.7 million, and the median firm has assets of $13.7 million and liabilities of $50.2 million.
  • In the Random Sample, cases took less than a year, on average, to reach resolution (mean = .91 years). If the cases that were still pending when data entry was completed are omitted, the length drops to 0.85 years. Approximately a quarter of the cases ended in a confirmed plan, and a similar number of cases converted to Chapter 7—dismissal was the most common outcome, with more than 45% of the cases leaving Chapter 11 via dismissals.
  • In the big case dataset, confirmed Chapter 11 plans are the norm. Conversions and dismissals are similarly rare. Cases in the big case dataset took an average of 1.08 years to complete—or just under a year to complete, if the still pending cases are ignored (0.98 years).
  • In the Random Sample, the debtor’s lead counsel billed an average of 1,725.5 hours per case. In the big case dataset lead counsel billed an average of 5,026.7 hours per case.
  • Among those cases with committees and other retained professionals, committees in the Random and big case datasets retained an almost equal number of additional professionals, 86 in the random sample and 87 in the big case dataset. Remember that the Random Sample is almost 10 times larger than the big case dataset, so we again see much greater use of professionals in the big case dataset.
  • Courts rarely deny retention applications—just 2% of retention applications in both samples were rejected.
  • In the Random Sample, the debtor’s lead counsel’s fee applications drew objections in about 10% of the cases. The U.S. Trustee objected to the lead counsel’s fee application in just over 3% of the cases.
  • In the big case dataset, fee objections are somewhat more common, with the U.S. Trustee objecting to lead counsel’s fee applications in more than 13% of the cases and all parties objecting in fewer than 20% of the cases.
  • Almost 35% of the cases in the Random Sample result in no payment whatsoever to the professionals. These are typically smaller cases that are often converted to Chapter 7 or dismissed outright.
  • Professional fees in either dataset total about 4% to 4.5% of the sum of assets and debts.
  • Unlike prior studies, the Fee Study found that the time spent in Chapter 11 seems to have very little independent effect on the costs of the case. Factors like the size of the debtor corporation, the number of professionals and whether a committee is appointed play much bigger roles. It appears that the previous significance of time spent in Chapter 11 was actually the result of case outcome and complexity factors that are now represented elsewhere in this model.

Conclusion

The completion of the Fee Study is both an end and a small beginning. As a beginning, the data in the Fee Study will give rise to a mass of scholarly articles, analysis and, most likely of all, debates. Professor Lubben is currently working on several articles based on the Fee Study. It is certain that other scholars, commentators, judges, politicians and other interested parties will review and use the data generated by the Fee Study. The Fee Study represents the most comprehensive set of data of a large sample of Chapter 11 cases ever compiled by an independent empirical study. It therefore constitutes a vital source of information about both the implications of the compensation of professionals in Chapter 11 as well as the practice of Chapter 11 cases in general.

As to the end, the Fee Study also represents a conclusion of the most important independent scholarly project ever funded by the ABI. It has been asked by various parties: “What was ABI’s goal in funding the Fee Study?” The answer to this question is that the ABI’s only goal was obtaining the data generated by the Fee Study. The Fee Study was never intended to have any goal or purpose other than the collection and development of useful information about professional compensation in Chapter 11 cases. Other than input from the Steering Committee and PAP as to which issues should be considered in studying professional fees and which documents could be useful in obtaining data for the Fee Study, the ABI had no input into the Fee Study conducted by Professor Lubben—although it did provide funding and made sure that Professor Lubben was supplied with the necessary data. The high quality and vast quantity of information gathered by the Fee Study shows that ABI’s faith in the Fee Study project and in Professor Lubben was well-placed. Everyone involved in Chapter 11 cases will benefit from the Fee Study’s data.

Research References: Norton Bankr. L. & Prac. 3d §§ 31:1 to 31:10
West’s Key Number Digest, Bankruptcy  3180 to 3203(7)

* John Ames is the Incoming President of the American Bankruptcy Institute. Chip Bowles is a Director of the American Bankruptcy Institute and also the Chair of the Fee Study discussed herein.

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Notes

  1. The ABI and the Fee Study were also supported by the National Conference of Bankruptcy Judges (NCBJ) through a generous grant and the work of several NCBJ members.
  2. For a full history of the development of the Fee Study, please see Gerdana, ABI–Funded Fee Study Launched, 23-Feb. AM. BANKR. INST. L.J. (2005), C.R. Bowles, Jr. & Stephen J. Lubben, The ABI Chapter 11 Professional Fee Study–An Update,25-Apr. AM. BANKR. INST. L.J.; C.R. Bowles, Jr., This First Small Step on a Long Journey, One Giant Leap Completed: The Final Report on the Chapter 11 Professional Fee Study, 26-Dec. AM. BANKR. INST. L.J. (2007).
  3. See, e.g., Connolly v. Harris Trust Co. of Cal. (In re Miniscribe Corp.), 309 F.3d 1234 (10th Cir. 2002); In re Busy Beaver Bldg. Ctrs., Inc., 19 F.3d 833 (3d Cir. 1994); Teresa A. Sullivan, Elizabeth Warren & Jay Lawrence Westbrook, The Persistence of Local Legal Culture: Twenty Years of Evidence from the Federal Bankruptcy Courts, 17 Harv J.L. & Pub. Pol’y 807 (1994).
  4. Hurricane Katrina, which made landfall in New Orleans just before the start of data entry, necessitated the modification of the selection rules in the Fifth Circuit. In particular, the Northern District of Mississippi was substituted for the Southern District. Similarly, the Western District of Louisiana was substituted for the Eastern District. These changes were made both to avoid the need to work with courts whose operations were tremendously disrupted by the storm and to avoid any skewing effects on the sample that the devastation in these two districts might have had.
  5. See, e.g., Lynn M. LoPucki & Joseph W. Doherty, The Determinants of Professional Fees in Large Bankruptcy Reorganization Cases, 1 J. EMPIRICAL LEGAL STUD. 111, 140 (2004) (reporting that the average ratio of fees and expenses to assets in a sample of 48 Chapter 11 cases was 2.2%); Stephen J. Lubben, The Direct Costs of Corporate Reorganization: An Empirical Examination of Professional Fees in Large Chapter 11 Cases, 74 AM. BANKR. L.J. 509, 540 (2000) (finding that professional fees averaged 2.5 percent of assets if pre-packaged cases were excluded from the sample); Lawrence A. Weiss,Bankruptcy Resolution: Direct Costs and Violation of Priority of Claims, 27 J. FIN. ECON. 285, 286 (1990) (reporting professional fees of 3 percent of asset, based on a sample of 31 publicly traded firms that filed for bankruptcy in the early 1980s). Cf. Jerold B. Warner, Bankruptcy Costs: Some Evidence, 32 J. FIN. 337, 340 (1977) (discussing a sample of 11 railroad cases filed under § 77 between 1933-55). .
  6. As of this article’s publication date, copies of the Fee Study are available from the ABI. Please consult the ABI’s website (www.ABIworld.org) for further details.
  • Senior Partner

    John is a member of the Tax and Finance Department. He works exclusively in the business reorganization process, both in Chapter 11's and state law workouts. He represents debtors, as well as creditors, both secured and unsecured. He ...

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