Measuring the costs of chapter 11 cases: professional fees in american corporate bankruptcy cases

PhD ceremony: Mr. S.J. Lubben, 16.15 uur, Academiegebouw, Broerstraat 5, Groningen

Thesis: Measuring the costs of chapter 11 cases: professional fees in american corporate bankruptcy cases

Promotor(s): prof. O. Couwenberg

Faculty: Law

In his study Stephen Lubben examined both the very large chapter 11 cases that are the subject of much academic and popular attention, and the more typical chapter 11 cases that are numerically more common. In the United States, chapter 11 continues to attract a good deal of attention, as large debtors like Lehman Brothers, General Motors, and Washington Mutual pay millions of dollars - in Lehman, perhaps as much as $1 billion - to work their way through bankruptcy. The sheer numbers involved, stacked against the losses suffered, often lead to heated claims that professionals do little in chapter 11 but loot the estate. But these impressionist endeavors provide little actual understanding of how much chapter 11 costs. And how much chapter 11 costs is important both internationally and domestically as policymakers increasingly struggle to develop tools that will mitigate the e6ects of financial distress. In his Lubben presents three broad categories of models: models of the total cost of chapter 11, models of attorney costs, and models of financial advisor costs. With these new tools it becomes possible to examine past and future chapter 11 costs, and compare those costs with other possible solutions.

Lubben’s conclusion is that time spent in chapter 11 has no relationship with cost once a fully specified model is considered. References to a professional’s “burn rate” are thus misleading, inasmuch as it implies a fixed or constant cost to chapter 11. Costs ebb and flow through the course of the case. Prepackaged chapter 11 cases are not significantly cheaper than regular chapter 11 cases. Cases filed in New York or Delaware do not cost more - in fact, these jurisdictions seem to actually reduce chapter 11 costs, likely because of their greater experience with complex chapter 11 cases. Fee examiners do not reduce the costs of big chapter 11 cases.

Complexity and the compensation structure of the professionals retained, which may itself reflect further aspects of complexity, are the key determinants of cost. Debtor size is but a loose proxy for these factors, but is itself of reduced relevance once a fuller model is developed. Complexity is associated with economies of scale, resulting in lower chapter 11 costs for the very largest, most complex cases.

Lubben concludes with the hope that his study will be but the beginning of a more subtle, less combative examination of chapter 11. Given the current economic reality, the debate is of special import.