American Bankruptcy Institute
56 IV. Proposed Recommendations: Commencing the Case
Costs in Chapter 11 Cases: Background
A common critique of chapter 11 is that it is too expensive: distressed companies cannot afford to file for bankruptcy and engage in the process of reorganizing under the protections of the Bankruptcy Code.201 Although commentators debate the accuracy of this statement, the perception persists that chapter 11 is cost-prohibitive for many distressed companies.
The chapter 11 process is not free. It introduces costs into a company’s budget that do not exist outside the bankruptcy context.202 The debtor in possession also must retain and compensate bankruptcy professionals to assist with its chapter 11 case.203 Importantly, the debtor’s estate is also responsible for paying the fees and expenses of bankruptcy professionals that are retained by any statutory committees, examiners, and trustees that are appointed in the debtor’s chapter 11 case.204
The estate’s administrative outlay for professionals’ fees is often the focal point of debates concerning the costs of chapter 11.205 Headlines such as Extra! Extra! Tribune Fees Top $150 Million,206 and American Airlines Bankruptcy Advisors Seek $400 Million in Fees, Expenses207 catch the attention of
201 One prominent bankruptcy attorney at a major law firm observed that “bankruptcy has become so expensive that, ironically, poor companies or businesses with no cash cannot afford to go through the procedure.” Natalie Posgate & Mark Curriden, American Airlines Insiders Provide Exclusive Behind-the-Scenes Recap of Historic Bankruptcy and Merger, Texas Lawbook (2014), available at http://www.law.smu.edu/getmedia/7430e732-144d-4fbf-ba3a-3273d2be862b/American-Airlines-Insiders-Reprint. Another seasoned turnaround consultant opined that “the cost of bankruptcy has gotten so high — because of professional and other costs — that the ability to continue the company under current ownership has reached almost zero.” Ian Mount, Adviser to Businesses Laments Changes to Bankruptcy Law, N.Y. Times (Feb. 29, 2012). 202 For example, currently a company must submit a filing fee of $1,717.00 to the bankruptcy court along with its petition to commence a chapter 11 case. During the pendency of its chapter 11 case, a debtor in possession also must remit quarterly fees to the Office of the U.S. Trustee, which are calculated each quarter based on the amount the debtor disbursed during such quarter. These fees currently range from $325 (for disbursement of $0 to $14,999.99) up to $30,000 (for disbursements of $30,000,000 or more). Pursuant to 11 U.S.C. § 1930(b), the Judicial Conference prescribes filing fees in all cases under the Bankruptcy Code. The current schedule of fees effective as June 1, 2014 is available at http://www.uscourts.gov/FederalCourts/Bankruptcy/ BankruptcyResources/BankruptcyFilingFees.aspx. Bankruptcy courts enforce these filing fees. See, e.g., Fee Schedule, United States of Bankruptcy Court, District of Delaware (effective June 1, 2014), available at http://www.deb.uscourts.gov/fee-schedule; Fee Schedule, United States of Bankruptcy Court, Southern District of New York (effective June 1, 2014), available at http://www. nysb.uscourts.gov/sites/default/files/pdf/filingFees.pdf. 203 The Administrative Office of the U.S. Courts on behalf of the Federal Judiciary advises that “[c]orporations and partnerships must have an attorney to file a bankruptcy case. While individuals can file a bankruptcy case without an attorney or ‘pro se,’ it is extremely difficult to do it successfully.” Filing for Bankruptcy Without an Attorney, http://www.uscourts.gov/FederalCourts/ Bankruptcy/BankruptcyResources/FilingBankruptcyWithoutAttorney.aspx. 204 Bankruptcy Code section 330 provides for compensation of all professionals — not just professionals retained by the debtor — whose retention was approved by the court. Specifically, section 330(a) provides, in relevant part:
[T]he court may award to a trustee, a consumer privacy ombudsman appointed under section 332, an examiner, an ombudsman appointed under section 333, or a professional person employed under section 327 or 1103 —
(A) reasonable compensation for actual, necessary services rendered by the trustee, examiner, ombudsman,
professional person, or attorney and by any paraprofessional person employed by any such person; and (B) reimbursement for actual, necessary expenses. 11 U.S.C. § 330(a). A 2007 comprehensive study of professionals’ fees in bankruptcy revealed that “[c]ommittee professionals
cost the estate about two-fifths of what the debtor’s professionals cost.” Jesse Greenspan, Time Spent In Chapter 11 Doesn’t Affect Costs: Study, Law 360 (Dec. 7, 2007, 12:00 AM), http://www.law360.com/articles/41896/time-spent-in-chapter-11-doesn-t-affect-costs-study. 205 But see Lubben, What We “Know” About Chapter 11 Cost is Wrong, supra note 44, at 144 (“[T]oo much of the debate about chapter 11 costs rests on a false premise . . . that professional fees in bankruptcy represent nothing more than wealth transfers, taking value from creditors and giving it to bankruptcy professionals”). A recent study of professionals’ fees found that “[i]n almost 35% of [chapter 11] cases, professionals received no payment whatsoever,” and typically these cases were smaller and were often converted to chapter 7 or dismissed. Greenspan, supra note 204. Based on a 2008 study of professionals’ fees, Professor Lubben concluded that factors like the size of the debtor, the number of professionals retained, and whether a committee is appointed, which are all proxies for the complexity of the case, have much more significant effects on costs, as compared to the time spent in chapter 11, and that professionals’ fees in chapter 11 are subject to economies of scale, especially in larger cases. Stephen J. Lubben, Corporate Reorganization & Professional Fees, 82 Am. Bankr. L.J. 77, 79–80 (2008). 206 Eric Morath, Extra! Extra! Tribune Fees Top $150 Million, Wall St. J. Blog (May 25, 2011, 3:54 PM), http://blogs.wsj.com/ bankruptcy/2011/05/25/extra-extra-tribune-fees-top-150-million/. 207 Sara Randazzo, American Airlines Bankruptcy Advisers Seek $400 Million for Fees, Expenses, Wall St. J. (June 26, 2014, 4:20 PM), http://online.wsj.com/articles/american-airlines-bankruptcy-advisers-seek-400-million-for-fees-expenses-1403814038.