Doherty, Professional Fees in Corporate Bankruptcies: In some instances, they seek payment for that work after the filing of the petition. But given the increasing importance of financial advisors in chapter 11 and other reorganization schemes, the need for some evidence of how these advisors influence chapter 11 costs is increasing as well.
This short Article begins the discussion by considering a sample of financial advisors involved in chapter 11 cases filed in Part I of the Article describes the dataset and the types of financial advisors that routinely appear in chapter 11 cases. Part II provides some basic descriptive statistics regarding these financial advisors, and it also provides a brief discussion of the types of professionals that routinely appear in chapter 11 cases beyond bankruptcy counsel. Part III then models the costs of financial advisors.
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In this Part, I find that cost increases if both the debtor and the committee retain financial advisors. Costs also increase with the contentiousness of the case, which I suggest reflects a tendency to focus on the large, lump-sum fees earned by financial advisors in such cases.
Part IV of the Article then turns to look at the specific issue of debtor-retained financial advisors, as they make up the bulk of financial advisor cost in chapter Here, the most interesting finding is that the size of the debtor matters, whereas it does not seem to matter when financial advisors are considered in the aggregate. Part V of the Article wraps up by considering the legal and policy implications of these findings.
- The Chapter 11 Financial Advisors.
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In particular, I note how poorly the Bankruptcy Code, as drafted in , is suited to the types of compensation structures that financial advisors and turnaround consultants typically receive. Law Research Paper No. The study is extensively discussed in Stephen J. This dataset includes cases that were originally filed in , and the data within each case comes from publicly available court filings that were primarily collected from Public Access to Court Electronic Records PACER. Section was repealed in as part of the enactment of the new chapter Two broad types of professional fee data were collected: A similar rule applies to professionals retained by examiners or trustees, 12 11 U.
The Code does not expressly provide for an examiner to retain professionals, but courts have typically assumed they have such powers. See generally Travelers Cas. The present study modifies the original ABI dataset in several key respects.
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For example, in the original study, each case was followed for two years or until it ceased to be in chapter 11 because either a plan was confirmed, the case was converted to chapter 7, or the case was dismissed. I took this approach with the data due to the required timeline for producing the final report for the ABI Chapter 11 Fee Study. To examine whether this censoring had any effect on the data, I revisited the cases that were still pending in chapter 11 when the original study was completed and re-coded them to include their final resolution and all professional expenses incurred through that resolution.
First, when available, asset and liability information was obtained from Bloomberg Professional. This change was made for a variety of reasons, most notably to reduce the risk that debtor size—a key factor in the present study—would be misspecified for the corporate groups in the dataset, since schedules are often filed on a corporation-by-corporation basis, whereas chapter 11 costs are typically incurred by the group as a whole.
With these changes, the dataset is now comprised of ninety-seven chapter 11 cases filed in Bankruptcy financial advisors come in two broad types. First, there are investment banker-type advisors, who either help market i. Second, there are accounting firms that act as financial advisors.
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They typically provide similar business advice to the debtor or the committee that retains them, but they are less likely to engage in direct efforts to sell the debtor. Lubben, The Costs of Chapter 11 in Context: American and Dutch Business Bankruptcy , 85 Am. Price Waterhouse, 19 F. In addition, both types of financial advisors typically present valuation evidence at a hearing to consider a reorganization plan for the debtor. This frequently involves hiring experts to create a liquidation analysis and present it at the hearing.
See generally Peter V. Ridings, Reorganization Value , 51 Bus. Somewhat related to financial advisors are turnaround consultants. Doherty, Rise of the Financial Advisors: These are professionals retained by the debtor. Like financial advisors, they provide business advice to the debtor—indeed, some of the same firms act as financial advisors when retained by a committee. In other cases, a turnaround firm, despite its hopeful title, manages a remnant debtor following its asset sale, liquidating unsold assets and working toward a plan that will distribute the sale proceeds.
Times , May 2, , http: In the present dataset, there were thirty-three turnaround firms retained across thirty chapter 11 cases. That is, three debtors each retained two turnaround firms, while twenty-seven debtors each retained a single turnaround firm. Thirty-three fee applications are often an insufficient number to analyze separately, but given the somewhat unique role these professionals play in chapter 11 cases, it warrants accounting for their presence when considering the topic of financial advisors, broadly defined.
Eleven debtors retained a turnaround consultant but no financial advisor. In the dataset, seventy-four of the ninety-seven cases have at least one committee.
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In fifty-seven of these cases, the committees retained at least one financial advisor. Table 2 shows the relationship between retention of financial advisors by the debtor and its committees.
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Note that zero committee retentions in this Table can either mean there was no committee, which happened in twenty-two cases, or the committee retained no financial advisors, which happened in eighteen cases; combining the two yields the forty total cases seen in the Table. Other than bankruptcies with no financial advisors or turnaround consultants involved in the case whatsoever, the next most likely outcome is for the debtor and committee to each retain one financial advisor or turnaround consultant, followed closely by one committee retention and two debtor retentions.
In eleven cases there was more than one committee appointed. In all of these cases the committees retained at least one financial advisor; in six cases they retained two, most often with each committee retaining its own financial advisor.
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Multiple retentions of financial advisors by debtors do not seem to turn on the number of committees. For example, there are twenty-six cases with no committees appointed, yet in which the debtor retained two or more financial advisors. Financial advisors, including turnaround consultants, are less likely to be retained by debtors in the smallest quartile of cases in the dataset. As shown in Table 2A, it also appears that multiple retentions are less likely to occur with respect to the smaller debtors. Tables 2 and 2A will not match up exactly, since Table 2A includes cases without committees, while Table 2 excludes cases without committees.
Table 3 shows the typical cost for financial advisors and turnaround consultants. That is, I know a financial advisor or turnaround consultant was retained in some cases, but I do not know how much they were paid. In other words, debtors spend an average of about three times more than committees do on these professionals. One cannot be entirely sure a sample size of twenty-seven is representative.
Turnaround consultants account for The bottom graph of Figure 4 shows all cases with financial advisors, regardless of whether there was a turnaround consultant. In this larger group, financial advisors account for Some, like appraisers and real estate professionals, may be directly involved in the bankruptcy. Meanwhile, others may be exogenous to the bankruptcy process, like lawyers handling a specific piece of nonbankruptcy litigation or auditors that would have been retained even if there had never been a bankruptcy case.
The authors also found that retention of KPMG LLP as a financial consultant reduced overall cost, although the implications of this finding are not discussed in their article. The authors reported that their model resulted in an adjusted R-squared of 0. Cost Control Chapter 7. The Need for Cost Control Chapter 8. The Cost of Cost Control Chapter 9. Fee Objections Chapter Fee Cuts Chapter Cost Control Failure Chapter The Sample Cases B. Each fall semester he is the Bruce W. Professor LoPucki has engaged in empirical research on large public company bankruptcies for more than twenty-five years.
His Bankruptcy Research Database provides data for much, if not most, empirical work on the subject. His book, Courting Failure: How Competition for Big Cases Is Corrupting the Bankruptcy Courts shocked the bankruptcy world with empirical evidence of the devastating effects of forum shopping and court competition. He has also published articles on voting behavior and campaign finance. He has a Ph. LoPucki and Doherty explode several myths about fees and establish important facts about them while foregoing the usual generalizing from one or a handful of cases.
Every law firm doing serious Chapter 11 work and every judge assessing fees in bankruptcy and other cases must read this book. Lawyers who make fee requests without accounting for the patterns revealed in this book should do so at their own peril. This massive and comprehensive investigation into the practices of bankruptcy professionals presents an important challenge to anyone comfortable with the status quo.
Baird, University of Chicago Law School. Oxford University Press is a department of the University of Oxford. It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide. Academic Skip to main content. Choose your country or region Close.
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