Professional Overcharging in Large Bankruptcy Reorganization Cases

Lynn M. LoPucki and Joseph W. Doherty

Journal of Empirical Legal Studies, 2008, vol. 5, issue 4, 983-1017

Abstract: In an empirical study of professional fees and expenses in 74 large public company bankruptcies concluded 1998–2003, we found that (1) controlling for the trend over time and the geographical location of the cases, company size (measured by assets), case duration (measured in days), and the number of parties (measured by the number of professional firms working) explain nearly 87 percent of the case‐to‐case variation in professional fees, (2) fees and expenses increased about 10.4 percent per year over the six‐year period covered by our study, (3) five of six predictors of fees and expenses exhibited a strong scale effect, (4) the scale effect for company size is so severe that reporting fees as a simple percentage of assets is misleading, (5) using the same model we used with court file data, our variables explain 86 percent of the case‐to‐case variance in the amounts of professional fees and expenses reported in SEC filing data, and (6) fees and expenses reported in SEC filing data are highly correlated with those reported in court file data, but are 58 percent higher. The principal determinants of fees and expenses—assets, days in bankruptcy, and the number of professional firms working—appear to us to measure not only the need for professional services, but also the opportunity for professionals to bill. In an attempt to statistically isolate this “billing opportunity” component of fees and expenses, we compiled a second set of variables—employees, docket length, and reorganization plan classes—that we believe measures case complexity without measuring billing opportunity. When those variables are substituted for the principal determinants, the regression explains substantially the same percentage of variance in fees and expenses. This second, complexity‐only model predicts fees that, controlling for scale, are significantly lower for companies with assets greater than about $770 million. We theorize that this systematic difference in the two models' predictions measures the billing opportunity component of fees and expenses in large public company bankruptcies. That component is an overcharge because it is not warranted by the complexity of the cases, including complexity resulting from company size.

Date: 2008
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https://doi.org/10.1111/j.1740-1461.2008.00148.x

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