Study Finds Numerous Variables Influence Total Cost of Professional Fees in Chapter 11 Cases
Contact: John Hartgen
STUDY FINDS NUMEROUS VARIABLES INFLUENCE TOTAL COST OF PROFESSIONAL FEES IN CHAPTER 11 CASES
December 7, 2007 Alexandria, Va. — The results of a ground-breaking study funded by the American Bankruptcy Institute Endowment Fund revealed that numerous factors, such as the presence of creditors’ committees, influenced the total professional costs of chapter 11 bankruptcy cases. While previous studies have primarily focused on a company’s asset size, number of firms involved in the case and the duration of the proceeding as the primary factors influencing the total cost of professional fees, study reporter Stephen J. Lubben, Daniel J. Moore Professor of Law at Seton Hall University School of Law, looked at numerous factors in examining more than 1,000 chapter 11 bankruptcy cases that were filed in 2004.
“The fee study
represents the most comprehensive set of data of a large sample of
chapter 11 cases ever compiled by an independent empirical study,”
“Chip” Bowles Jr. of Greenbaum
Doll & McDonald PLLC (
Previous studies of professional fees in chapter 11 cases over the past 20 years had examined significantly smaller sample sizes, ranging from nearly 25-75 cases. These studies primarily evaluated asset size, number of professionals and duration of the proceeding as the primary factors in determining the costs of professional fees in chapter 11 cases. Taking those previous studies into account, Prof. Lubben’s research incorporated regression models that found the addition of other variables, such as looking at a bankrupt firm’s assets and debts, presence of official committees and whether there were “first-day motions” filed in a case, to be better predictors of the costs involved in a chapter 11 case.
Prof. Lubben’s data also revealed that unlike in previous studies, a distressed company’s time spent in chapter 11 had little effect on the costs of the case. “Chapter 11 costs are largely a function of the size of the debtor and the complexity of its case,” Prof. Lubben explained, “the jurisdiction the case files in or the law firm that represents the debtor does not have any independent significance in predicting costs.”
The study examined a total sample of 1,026 cases filed in 2004 as 945 chapter 11 cases were pooled into a “random” sample and 99 cases were considered in a “big case” dataset. The average firm in the big-case dataset had scheduled assets of $423.4 million and scheduled liabilities of nearly $776 million, while the average firm in the random sample had scheduled assets of $21.2 million and scheduled liabilities of more than $37 million. Prof. Lubben found that for both samples, professional fees totaled 4 to 4.5 percent of the bankrupt firms’ assets and liabilities, but he cautioned against reporting cost in relation to size, since the data evidenced significant economics of scale. Specifically, for every 1 percent increase in debtor size, fees increase 0.38 percent.
A six-member advisory panel comprised of a prominent judge, leading academics and bankruptcy attorneys from around the country aided Prof. Lubben’s study. Panel members included Richard Levin of Cravath, Swaine & Moore LLP (New York), Prof. Robert Lawless from the University of Illinois School of Law, Prof. Edward Morrison of Columbia Law School, Nancy Rapoport of the University of Nevada, Las Vegas – Boyd School of Law, Dean Robert Rasmussen from the University of Southern California Gould School of Law and Bankruptcy Judge Barbara Houser from the Northern District of Texas.
Since joining the Seton
Hall Law faculty in 2002, Prof. Lubben is one of the leading scholars
writing in the area of corporate reorganization and finance. His
article, The Direct
Costs of Corporate Reorganization: An Empirical Examination of
Professional Fees in Large Chapter 11 Cases,
was the first study of its kind by a law professor and has become a
leading analysis of this very timely issue. Prof. Lubben previously
worked as an associate at Skadden, Arps, Slate, Meagher & Flom,
where he represented major corporations in chapter 11 cases throughout
the country. Before Skadden, Arps, he clerked for the Hon. John T.
Broderick, Jr., currently the chief justice on the New Hampshire Supreme
Court. Prof. Lubben received his bachelor’s degree in history from
committee on this project is led by Chip Bowles of Greenbaum Doll & McDonald PLLC (
The ABI practitioner
advisory panel for the study included chairman Chip Bowles of
Greenbaum Doll & McDonald PLLC (
To obtain a copy of
ABI’s Chapter 11
Professional Fee Study, please contact
ABI is the largest multi-disciplinary, nonpartisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues. The ABI membership includes nearly 11,500 attorneys, accountants, bankers, judges, professors, lenders, turnaround specialists and other bankruptcy professionals, providing a forum for the exchange of ideas and information. For additional information on ABI, visit www.abiworld.org. For additional conference information, visit http://www.abiworld.org/conferences.html.