The ABI Chapter 11 Professional Fee Study An Update

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first reported in the Director's Column of the February 2005 issue of the ABI
Journal,¹ the ABI is funding the largest and most comprehensive independent
study of professional compensation in chapter 11 cases ("fee study")
since the ABI's 1991 National Report on Professional Compensation ("ABI
report").² The fee study is one of the most important initiatives ever
undertaken by the ABI and will provide a significant amount of empirical evidence
concerning professional compensation in chapter 11 proceedings.

I. ABI's History of Scholarly Research on Professional Compensation

In order to fully appreciate the Fee Study, you must first be aware of the
ABI's long-standing commitment to the study of both the legal and factual aspects
of compensation of bankruptcy professionals. In 1989, the ABI's Committee on
Professional Compensation organized a high-level group to produce what would
ultimately become the ABI Report. Prof. G. Ray Warner was selected as
the reporter for the ABI report and Keith Shapiro was appointed as the
chair of the ABI Report's Steering Committee (Report Committee), whose members
included John "Jack" Butler, Paul Geilich, Scott
Peltz and Judge George Paine.

From 1989-91, numerous members³ of ABI worked with Prof. Warner
and the Report Committee through six subcommittees chaired by John Ames,
Ford Elsaesser, David Katzen, Richardo Kilpatrick, Thomas
J. Salerno and Deborah Williamson and developed a comprehensive set
of questions to be used in a survey of bankruptcy compensation issues. The survey,
which involved responses from 651 judges and bankruptcy attorneys, accountants
and trustees, was completed in February 1991, and the final report was prepared
by May 1991. The ABI Report has been cited in numerous cases and scholarly works,⁴
and several of the ABI Report's 13 recommendations have been adopted either
by legislation, case decision or practice including:

(a.) Amendment of the Bankruptcy Code to provide reimbursement of reasonable
and necessary expenses of appointed committee members (11 U.S.C. §503(b);


(b.) Now almost universal court approval of compensation based on prevailing
costs of comparable services (see, e.g., In re Airspect Air
Inc., 385 F.3d 915 (6th Cir. 2004); Farmland Industries Inc., 397
F.3d 647 (8th Cir. 2005); In re Airspect Air Inc., 385 F.3d 915 (6th
Cir. 2004); In re Federal Mogul-Global Inc., (3rd Cir. 2003);

(c.) Entry of orders permitting interim compensation on a regular monthly
basis by court orders;

(d.) Court approval of professionals' employment agreements under 11 U.S.C.
§328 (see, generally, In re Farmland Industries Inc.,
397 F.3d 647 (8th Cir. 2005); and

(e.) Increased efforts by the ABI to educate non-attorney professionals about
the employment and fee application requirements of the Code (see Getting
Paid: Retention and Compensation in Bankruptcy Cases—A Guide for Non-Attorney
Professionals (ABI 2005)).

II. The Fee Study's Background

The fee study came about due to discussions of issues related to chapter 11
compensation between then ABI president Bettina Whyte, Al Togut
and Deirdre Martini, Region 2 U.S. Trustee. These discussions led to
a proposal for a new study of compensation being presented to then incoming
ABI President Michael P. Richman, who arranged for initial meetings in
early 2004 with Bettina Whyte, Deirdre Martini, ABI Executive Director Sam Gerdano,
Chip Bowles and Judge Wesley Steen concerning the feasibility
of doing a new and more detailed study of professional compensation of debtor
and committee professionals in bankruptcy proceedings. These preliminary meetings
led to the formation of a Study Steering Committee comprised of Michael P. Richman
(Immediate Past President), John Penn (current ABI President), Chip Bowles,
Deirdre Martini, Judge Steven Rhodes, Judge Wesley Steen (incoming ABI
President), Bettina Whyte (chair of the ABI Board of Directors) and Judge Gregg
Zive. The Steering Committee's charge was to further evaluate the feasibility
of the fee study, develop guidelines for the fee study and find an eminent law
professor to act as the fee study's reporter.

During the summer of 2004, the Steering Committee met and considered the parameters
of the fee study. Michael Richman led Sam Gerdano and other members of the Steering
Committee in discussions about this project with the NCBJ leadership and several
prominent academics. The Steering Committee recommended and the ABI selected
Prof. Stephen J. Lubben as the fee study's reporter after refining the
study proposal and meeting with various candidates. ABI also agreed to fund
the fee study by a $350,000 grant (FSG) from ABI and the Endowment Fund. The
award of the FSG and the sponsorship of the fee study was first announced to
the general ABI membership by Michael Richman in his president's report at ABI's
2004 Winter Leadership Conference.

The reporter is an associate professor of Law at Seton Hall Law School. Prior
to coming to Seton Hall, he was an associate with Skadden, Arps, Slate Meagher
& Flom in its New York and Los Angeles offices. The reporter has concentrated
his legal research in the areas of chapter 11 business reorganizations⁵
and court-appointed professionals' fee issues. Currently, the reporter has published
two major pieces on professional fee issues: Lubben, "The Direct Costs
of Corporate Reorganization: An Empirical Examination of Professional Fees in
Large Chapter 11 Cases," 74 Am. Bankr. L. J. 509 (2000), and Cook and Lubben,
"Retention, Payment Ethical and Other Obstacles for Non-Legal Professionals
in Chapter 11 Reorganizations," 769 PLI/Comm 549 (1999). The reporter is
also currently working on two new articles relating to professional retention
and compensation in addition to his work on the fee study; "The Microeconomics
of Chapter 11" and "The Irrelevance of Ex Ante Costs and Choosing
Corporate Bankruptcy Counsel."⁶

After the reporter was selected, then-ABI President Michael Richman, with input
from the Steering Committee and Sam Gerdano, formed the Practitioner Advisory
Panel (PAP) to provide practical insight and advice on professional compensation
issues to Prof. Lubben, as well as critical logistical support to the fee study.
The PAP is chaired by Chip Bowles and consists of Geoffrey Berman, Joseph
Bodoff, Rudy Cerone, Terri Gardner, Laura Davis Jones, Melissa Kibler Knoll,
Richard Meth, Neil Olack, Trish Redmond, Thomas Salerno, James Sprayregen, James
Sweet, Al Togut, Bruce White and Mark Williams. Recently John Penn
added James T. Markus to the PAP. A Study Advisory Panel was also established,
whose members include Judge Barbara Houser, Richard Levin, Prof. Robert
Lawless, Prof. Edward Morrison, Dean Nancy Rapoport and Prof.
Robert Rasmuessen.

The PAP's first meeting occurred at ABI's 2005 Annual Spring Meeting. This
was a joint meeting with the Steering Committee and the reporter. The initial
meeting addressed a wide range of issues relating to the fee study's form and
details. During the summer of 2005, various members of the PAP gathered the
numerous documents, which comprise the raw data of the fee study's empirical
analysis of professional compensation issues.

The next major fee study meeting occurred at ABI's 2005 Southwest Conference.
The purpose of this meeting was to discuss with the reporter the specifics of
the questions would be used in the fee study. At this meeting, the PAP and Steering
Committee members discussed the proposed questions and data points to be used
as the basis for the fee study and made numerous comments and suggestions concerning
possible modifications to the fee study. Based on discussions with the Study
Advisory Panel, the Steering Committee, Sam Gerdano and the PAP, the "Codebook"
for the fee study was finalized by the reporter.

It was also decided that the fee study would be supplemented by an analysis
of professional fee data from selected large chapter 11 cases ("big-case
sample") The big-case sample would use the same data collection model as
the fee study. However, unlike the fee study, which is based on a sample of
randomly selected chapter 11 cases from jurisdictions across the country, the
big-case sample will focus on professional compensation issues in large chapter
11 cases. Robert Burns of Kirkland and Ellis' New York office is coordinating
the gathering of information for the big-case sample. Data entry for the fee
study is progressing well, and the initial phase of gathering of documents for
the fee study is nearly complete.

III. The Fee Study

The sample that is being developed for the fee study is comprised of chapter
11 cases selected from 33 districts, three districts from each numbered circuit:
one district from the state with the highest population in the circuit, one
from the lowest population state, and one district from the median population
state in the circuit.⁷ Up to 40 cases were drawn from each district.
As noted, the main sample is supplemented by a big-case sample that is comprised
of 80 additional big cases that were not captured by the original sampling rules.
Table A shows the districts and the number of cases from those districts that
will be included in the sample.

This study will work with a sample size substantially larger than any prior
study.⁸ In particular, the fee study will look at the costs incurred
by these debtors while in chapter 11. Information on professionals, fee examiners,
fee committees, committees and various measures of the complexity of a case
are being collected. The use of holdbacks, ordinary-course professional procedures
and other similar devices will also be examined.

The ultimate goal of the fee study is to produce a comprehensive final report
for the ABI by the fall of 2007. The report will provide a complete textual
and quantitative description of the information gleaned from the study about
chapter 11 professional fees, considered from multiple perspectives, and thus
provide the basis for all future debates concern the costs of chapter 11.

IV. The Fee Study's Future

In summary, although the fee study is well underway, the majority of work remains
to be done. The Steering Committee, PAP and all other parties⁹ involved in supporting
reporter on this project will continue to review the progress of the fee study
and offer advice and logistical support through the completion of the fee study's
final report. In order to keep ABI's membership properly informed of the fee
study and the use of the FSG funds, the authors and Sam Gerdano will continue
provide updates of the fee study's future projects. Watch this spot for further
updates.

Footnotes

1 24 ABI Journal, 78 (Feb. 2005)

2 ABI National Report on Professional Compensation in Bankruptcy Cases (May,
1991). A copy of this report will shortly be posted at www.abiworld.org.

3 It is impossible in this small space to properly thank all the parties who
participated in the ABI report. However without their hard work and dedication,
a survey conducted without email and before EM/ECF filing would have been impossible.

4 See e.g. In re MiniScribe Corp., 309 F.3d 1234 (10th Cir. 2002); In
re Busy Beaver Bldg. Centers Inc., 19 F.3d 833 (3rd Cir. 1994); Sullivan
Warren and Westbrook, "The Persistence of Local Legal Culture: Twenty
Years of Evidence from the Federal Bankruptcy Courts," 17 Harv J. of L
& Pub. Policy 807 (1994).

5 Lubben, The "'New and Improved' Chapter 11," 93 Ky. L.J. 839 (2005))
(special, peer-reviewed AALS Section on Creditors' and Debtors' Rights issue);
Lubben, "Out of the Past: Railroads & Sovereign Debt Restructuring,"
35 Geo. J. Int'l. L. 845 (2004); "Lubben, Railroad Receiverships and Modern
Bankruptcy Theory," 89 Cornell L. Rev. 1420 (2004). Lubben, "Beyond
True Sales - Securitization and Chapter 11," 1 N.Y. U. J.L. & Bus.
89 (2004); Lubben, "Some Realism About Reorganization: Explaining the Failure
of Chapter 11 Theory," 106 Dick. L. Rev. 267 (2001).

6 Working drafts of these papers can be found at www.ssrn.com.

7 Hurricane Katrina, which made landfall in New Orleans on Aug. 29, 2005, just
before the start of data entry, necessitated the modification of the selection
rules in the Fifth Circuit. In particular, the Northern District of Mississippi
was substituted for the Southern District. Similarly, the Western District of
Louisiana was substituted for the Eastern District. These changes were made
both to avoid the need to work with courts whose operations were tremendously
disrupted by the storm and to avoid any skewing effects on the sample that the
devastation in these two districts might have had.

8 See, e.g., LoPucki, Prof. Lynn M. and Doherty, Joseph W., "The
Determinants of Professional Fees in Large Bankruptcy Reorganization Cases,"
1 J. Empirical L. Stud. 111, 140 (2004) (reporting that the average ratio of
fees and expenses to assets in a sample of 48 chapter 11 cases was 2.2 percent);
Lubben, Prof. Stephen J., "The Direct Costs of Corporate Reorganization:
An Empirical Examination of Professional Fees in Large Chapter 11 Cases,"
74 Am. Bankr. L.J. 509, 540 (2000) (finding that professional fees averaged
2.5 percent of assets if prepackaged cases were excluded from the sample); Weiss,
Lawrence A., "Bankruptcy Resolution: Direct Costs and Violation of Priority
of Claims," 27 J. Fin. Econ. 285, 286 (1990) (reporting professional fees
of 3 percent of assets, based on a sample of 31 publicly traded firms that filed
for bankruptcy in the early 1980s). Cf. Warner, Jerold B., "Bankruptcy
Costs: Some Evidence," 32 J. Fin. 337, 340 (1977) (discussing a sample
of eleven railroad cases filed under §77 between 1933 and 1955).

9 Special thanks to Harry Long and Marshall Entelisano, who have been assisting
the Fee Study by providing copies of pleadings from Alabama non-ECF cases.