ABI Commission to Study the Reform of Chapter 11
IV. Proposed Recommendations: Commencing the Case 59
Costs in Chapter 11 Cases: Recommendations and Findings
The costs associated with chapter 11 and the desires to make the chapter 11 process more efficient and cost-effective were among the central themes of the Commission’s study. The Commission was mindful that improving the utility of chapter 11 would do little for distressed companies if the process was perceived to be — or was in fact — cost-prohibitive. The Commission was keenly aware that tackling this issue would require most Commissioners to ask hard questions about their own practices and those of their colleagues, who are not only bankruptcy professionals in chapter 11 cases, but who are also, in many instances, subject to the U.S. Trustee’s new fee guidelines. Nevertheless, the Commission agreed that it could and would perform this task because it believed that addressing chapter 11 costs is necessary for effective chapter 11 reform.
The Commissioners discussed the various costs associated with filing a chapter 11 case and continuing to conduct business as a debtor in possession.222 The Commission focused its inquiry on several factors that may contribute to the increasingly high cost of chapter 11. These factors included the prolonged duration223 and complexity of a case leading to inefficiencies, the use of strategic or protective litigation in the case by the debtor or other stakeholders, the inherent uncertainty about the outcome of certain processes or legal standards that become the subject of litigation, and the professionals’ fees and expenses incurred in connection with the case.224 The Commission considered various ways to mitigate each of these factors.
To improve the efficiency of, and certainty in, the process, the Commission strived to develop reform principles to achieve these objectives in different aspects of chapter 11. For example:
• The Commission identified, analyzed, and, wherever possible, recommended principles to resolve splits in the case law governing chapter 11 cases to reduce the need for litigation and provide greater certainty about outcomes. To this end, the Commission sought to
resolve the following splits, among others:
(“The process of preparing a disclosure statement, obtaining approval of that document, soliciting creditor votes and satisfying the numerous requirements to obtain confirmation of the plan takes time and money. Adding to the costs is the requirement that the Chapter 11 debtor pay the costs of professional fees incurred by other entities in the case, such as creditor’s committees. Provisions offering accommodations for small business debtors have been in the Code for some time, but do not appear to have alleviated these problems.”), available at Commission website, supra note 55; Daniel Dooley, Statement to the Commission, at 37 (Apr. 19, 2013) (ASM Transcript) (“It’s really widely understood and agreed, I think, in the community right now, that Chapter 11 just isn’t cost-effective in the middle market. It doesn’t really provide an opportunity of companies to rehabilitate themselves. . . . So people believe and I think I’m in this category as well, that Chapter 11 and the middle market is simply too slow, and it’s simply too costly for almost all the cases.”), available at Commission website, supra note 55; Professor George Kuney, Written Statement to the Commission (Nov. 7, 2013) (“The number of middle-market and smaller businesses entering chapter 11 and emerging as viable enterprises is falling. Administrative costs for plans in middle-market and smaller cases are too high and as a result, debtors are increasingly relying on numerous alternatives to the traditional chapter 11 process.”), available at Commission website, supra note 55. 222 As suggested above, the filing fee is relatively modest and the quarterly fees owed to the U.S. Trustee are largely scaled to a debtor’s business size, measured by the debtor’s disbursements as reported in its debtor’s monthly operating reports. Although these fees may be difficult for some debtors to pay, as a general matter neither fee is unduly burdensome, and the proceeds from these fees support the oversight and administration of the chapter 11 case. 223 The general consensus of the Commissioners was that the duration of chapter 11 cases was perceived as a cost enhancer. Notably, this perception is refuted by Professor Lubben’s studies. See generally Lubben, Corporate Reorganization & Professional Fees, supra note 205; Lubben, What We “Know” About Chapter 11 Cost is Wrong, supra note 44. 224 These conclusions are consistent with a comprehensive fee study conducted by Professor Lubben. See Lubben, Corporate Reorganization & Professional Fees, supra note 205. Professor Lubben found that “factors such as the retention of several additional professionals and the appointment of an unsecured creditors’ committee are big factors that determine how much a chapter 11 reorganization ultimately costs. These factors are proxies for the size of the debtor and, more directly, the complexity of its reorganization.” Id. at 80. “The complexity of the bankruptcy and the compensation structure for the professionals retained (which may itself reflect further aspects of complexity) are the key determinants of cost.” Lubben, What We “Know” About Chapter 11 Cost is Wrong, supra note 205, at 147.