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The Examiners: Five Suggestions for Improving the Fee System

Feb 9, 2015, 08:37 AM by Ben Kaplan
Jack Butler of Hilco addresses professional fees in bankruptcy cases in WSJ Examiners column.

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

The perceived high cost of Chapter 11 reorganization often makes headlines in the context of the biggest bankruptcies of our generation—American Airlines, Energy Future Holdings, Enron, General Motors, and Lehman. But the irony is that the increasing cost of Chapter 11 has had a much more significant impact on the ability of small- and middle-market companies to access Chapter 11 reorganization as a viable restructuring option.

There should be improvements made to the way professionals are compensated in bankruptcy reorganization cases of all shapes and sizes. However, the reality is that mega-cases, featuring complex problems and large pools of assets, generally fund comprehensive solutions at a cost of less than 5% of the sum of the debtor’s assets and debts. The compensation in these mega-cases is scrutinized by regulators, fee examiners, stakeholders and judges prior to payment.

On the other hand, middle-market and small businesses increasingly avoid traditional reorganization cases in favor of less costly judicial sales, liquidations or state court remedies such as receiverships and general assignments for the benefit of creditors. These alternatives may avoid the perceived costs of Chapter 11 reorganization, but sacrifice the equality and transparency of participation by all stakeholders and even risk the loss of the company itself and the jobs and tax revenues associated with it.

One of the central themes of the recent Report and Recommendations of the American Bankruptcy Institute Commission to Study the Reform of Chapter 11 of the U.S. Bankruptcy Code is to make the Chapter 11 process more efficient and cost-effective. So what should be done?

  • The process should be streamlined and simplified for small- and medium-sized enterprises without publicly traded securities and with less than $10 million in consolidated assets and liabilities.This threshold would effectively cover about 90% of the Chapter 11 cases filed annually. Streamlined procedures for these enterprises would reduce barriers to entry and facilitate successful reorganizations in every jurisdiction in the U.S.
  • Important splits across judicial circuits in the case law governing Chapter 11 should be resolved through amendments to the bankruptcy code to reduce the need for litigation and provide greater certainty for outcomes in accord with the U.S. Constitution’s provision for uniform bankruptcy laws.
  • Alternative dispute resolution should be promoted in bankruptcy cases through the creation of an “estate neutral” as a tool to more cost-effectively investigate and resolve disputes and other potential barriers to a debtor’s reorganization efforts.
  • Professionals should be authorized and encouraged to propose alternative fee arrangements suitable to the circumstances of the particular case and consistent with general market practices. All too often, the billable hours model doesn’t align stakeholders’ interests and treats all professional contributions with the same measuring tool irrespective of whether the interests represented are in or out of the money or the contribution is of extraordinary value to the reorganization or a commodity service.
  • There should be greater transparency and comfort that all professional compensation paid by the debtor to anyone on behalf of any stakeholder is disclosed and reasonable. And bankruptcy courts should distinguish between true reorganization costs and ordinary course professional fees that often overstate what bankruptcy cases actually cost.

Most commentators agree that bankruptcy reform should occur but that it will likely take several years to accomplish. In the interim, Congress could make an enormous difference if it moved with reasonable dispatch to streamline and simplify the Chapter 11 process for small- and medium-sized enterprises and explicitly authorized and encouraged the use of innovative alternative fee arrangements that are welcomed elsewhere in the marketplace in lieu of the more comfortable billable hour model.

Jack Butler is executive vice president with Hilco Global, where he works with healthy and distressed companies, their creditors and investors.

Source: Wall Street Journal

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