American Bankruptcy Institute
58 IV. Proposed Recommendations: Commencing the Case
The stated goals of the new fee guidelines are to, among other things, “ensure that bankruptcy professionals are subject to the same client-driven market forces, scrutiny, and accountability as professionals in nonbankruptcy engagements;” “increase disclosure and transparency in the billing practices of professionals seeking compensation from the estate;” and “increase public confidence in the integrity and soundness of the bankruptcy compensation process.”215 Notably, only a small number of chapter 11 cases fall within these new fee guidelines.216
Additionally, the increasing cost of chapter 11 has had a significant impact on the perceived ability — and perhaps actual ability — of small and middle-market companies seeking restructuring options to invoke chapter 11.217 One commentator observed that, based on a small sampling of cases filed in 2010 in the Southern District of New York, “professional fees for the middle-market Chapter 11 cases typically approached or exceeded $1 million.”218 This commentator suggested that high professionals’ fees, among other factors,219 have encouraged lawyers representing middle-market companies to pursue alternatives to traditional chapter 11 reorganization, such as section 363 asset sales on an expedited basis, followed by a liquidating plan, or to invoke alternatives under state law, including general assignments for the benefit of creditors and composition agreements to restructure debt.220 Although this particular study was limited in size and geographic area, the commentator’s findings mirror the testimony and anecdotal evidence presented to the Commission during its study process.221
reflect market rates outside of bankruptcy; the use of budgets and staffing plans; the disclosure of rate increases that occur during the representation; the submission of billing records in an open, searchable electronic format; and the use of fee examiners and ‘efficiency’ counsel.” Statement of Clifford J. White III, Director, Executive Office for United States Trustees, U.S. Department of Justice, before the Subcomm. on Regulatory Reform, Commercial and Antitrust Law of H. Comm. on the Judiciary, at 10 (Sept. 19, 2014) [hereinafter White Statement]. For a one-page summary of the UST Fee Guidelines prepared by the U.S. Department of Justice, see Summary of Material Differences from 1996 Guidelines, http://www.justice.gov/ust/eo/rules_regulations/guidelines/ docs/One_Page_Summary_AppxB_Guidelines.pdf. See also Marina Fineman, For Lawyers Only: New Fee Application Guidelines for Attorneys in Large Chapter 11 Cases, ABI Ethics & Professional Compensation Committee News, Vol. 10, no. 4, available at http://www.abiworld.org/committees/newsletters/ethics-and-professional-compensation/vol10num4/lawyers.html. 215 UST Fee Guidelines, supra note 214, at 36,251–36,254. See also White Statement, supra note 214, at 10 (explaining objectives underlying study of fees leading to new fee guidelines as including “(1) ensur[ing] that fee review is subject to client-driven market forces, accountability, and scrutiny; (2) enhance[ing] meaningful disclosure and transparency in billing practices; (3) decreas[ing] the administrative burden of review; (4) maintain[ing] the burden of proof on the fee proponent; and (5) increase[ing] public confidence in the integrity and soundness of the bankruptcy compensation process”). 216 The UST Fee Guidelines apply only to the so-called mega-chapter 11 cases, which are referred to as “larger chapter 11 cases.” A “larger chapter 11 case” is defined as “a chapter 11 case with $50 million or more in assets and $50 million or more in liabilities, aggregated for jointly administered cases and excluding single asset real estate cases as defined in 11 U.S.C. § 101(51B).” UST Fee Guidelines, supra note 214, at 36,249. See also Fee Guidelines for Attorneys in Larger Chapter 11 Cases, http://www.justice. gov/ust/eo/rules_regulations/guidelines/; White Statement, supra note 214, at 10 (“To date, 61 cases have been filed to which the guidelines apply, and we are monitoring them closely.”). 217 With respect to small and middle-market companies, “if they have to go into Chapter 11, the odds of the owners keeping the business are much lower. So there’s no incentive for the owners to enter Chapter 11 and reorganize. Why save a company for somebody else?” Mount, supra note 201. 218 Jeffrey A. Wurst, Is Chapter 11 Still a Viable Option or Has High Cost Rendered the Process Unaffordable?, ABJ Journal, Mar. 2013, at 57. 219 “There are several reasons why traditional reorganizations have been sparse. Amongst them are: 1.) the high cost of professional fees; 2.) uncertainty as to the outcome; 3.) lack of availability of unencumbered assets that otherwise may be utilized to secure a DIP lending facility or to fund post-petition obligations under a plan of reorganization; and 4.) alternatives such as out-of-court restructurings and assignments for the benefit of creditors.” Id. at 56. 220 “Liquidating Chapter 11 cases, for better or worse, have been the rule and not the exception in this Court and others over the last decade, if not longer.” Id. (quoting In re Applied Theory Corp., Case No. 02-11868 (Bankr. S.D.N.Y. Apr. 24, 2008) (Gerber, J.)). A study of approximately 60 chapter 11 cases filed in 2010 in the U.S. Bankruptcy Court for the Southern District of New York concluded that alternatives to chapter 11 proved to be more affordable for middle-market debtors. For example, although professionals’ fees typically approached or exceeded $1 million for a chapter 11 reorganization, “sales of assets pursuant to § 363 of the Bankruptcy Code, coupled with a structured dismissal, resulted in significantly lower fees, especially in those cases where the sale was conducted very early in the proceedings.” Id. at 57. “Out-of-court restructurings have become a more favorable alternative by streamlining the restructuring process allowing cost savings to be passed down to the creditor body.” Id. Assignments for the benefit of creditors (“ABCs”) as well as composition agreements to restructure debt have become low-cost alternatives to chapter 11 reorganization, and in some cases, even alternatives to section 363 sales. Id.
221 See, e.g., John Haggerty, Written Statement to the Commission (Apr. 19, 2013) (“In the last ten years, there has been an increase in the use of out-of-court alternatives . . . because the process is too time consuming and complex, and as a result, too costly.”), available at Commission website, supra note 55; The Honorable Dennis Dow, Written Statement to the Commission (Apr. 19, 2013)