Editor's Note: The full GAO report can be found attached to the bottom of this article.
Under 11 U.S.C. § 330(a)(3)(F), professionals seeking payment from a bankruptcy estate must be compensated using reasonable rates and fees charged by comparably skilled professionals in nonbankruptcy cases. Prompted by the size of the professional fees in large chapter 11 filings, the General Accounting Office (GAO) was asked by the U.S. Senate Judiciary Committee to evaluate whether bankruptcy professionals billed higher fees for large chapter 11 cases, and if the venue-selection process was used by professionals to file in bankruptcy courts where higher fees could be awarded.
The GAO undertook a review of the U.S. Trustee Program’s (USTP) 2013 guidelines for fees in large bankruptcy cases, and evaluated if bankruptcy professionals adhered to the 2013 guidelines. They also made inquiries of bankruptcy stakeholders, including federal bankruptcy judges, attorneys and Assistant U.S. Trustees in 15 bankruptcy court jurisdictions to obtain their opinions regarding the effects of the 2013 guidelines, and the key drivers in venue selection for such cases.
In reviewing the 94 cases filed since the 2013 guidelines went into effect, the GAO found that half of the large case fee applications were accepted without comment by the USTP. In the remaining cases where the USTP raised issues regarding compliance with the 2013 guidelines (including electronic billing records, comparable billing rate information on bankruptcy and nonbankruptcy services, and case budgets and staffing plans), chapter 11 case attorneys successfully resolved most issues by providing additional information, including explanations. Bankruptcy judges, Assistant U.S. Trustees and attorney responses gave the GAO mixed feedback regarding whether the 2013 guidelines improved transparency, communication and efficiency in evaluating awards of professional fees in large chapter 11 cases. The GAO made no recommendations to the USTP related to its 2013 guidelines.
On the issue of venue selection, debtors’ alternatives for filing bankruptcy petitions include their place of incorporation, principal place of business, principal place where assets are held, or the place where an affiliate of a debtor filed a chapter 11 proceeding. Through interviews of bankruptcy professionals and related academic research, the GAO found that there were four significant factors in venue selection for large bankruptcy cases: (1) prior court rulings, (2) lender preference, (3) judicial experience and (4) geographic convenience of the parties.
Prior court rulings are regarded as important by bankruptcy stakeholders when selecting venues to file large chapter 11 cases because they enable a professional to appropriately advise a large chapter 11 client on a likely outcome. Lender preference clauses in financing agreements that direct distressed companies to file for bankruptcy in particular jurisdictions reinforce the creditor preference for predictability in court rulings and geographically proximate venues as desired attributes. Judicial competence and experience in handling bankruptcy matters was also identified as important in venue selection, since a judge’s experience aids in successfully predicting the outcome of a case and facilitates giving meaningful counsel to a distressed client.
In GAO-15-839, the study reported that at least 765 large company chapter 11 cases have been filed since 2010. Since 2009, more than 61 percent of large chapter 11s were filed in the Southern District of New York and the District of Delaware. This case concentration has enabled the development of case precedent and judiciary experience in handling large company chapter 11 cases. Apart from these two districts, the stakeholders perceived less opportunity to develop case precedent and relevant judiciary expertise in large chapter 11 cases in other bankruptcy districts.
The study also suggests that experienced judges in the Southern District of New York and the District of Delaware have contributed to the concentration of large bankruptcies having been filed in these two venues. The GAO observed that less-experienced bankruptcy judges in other districts have resulted in lower filings of large bankruptcy cases since there is less case precedent to consider when counseling clients considering bankruptcy in those venues, which makes predicting case outcomes more difficult. Proximity of the debtors and creditors to a particular court was also identified by the bankruptcy stakeholders as a factor in venue selection. In contrast, the GAO received mixed feedback as to whether court attitudes on professional fees played a significant role in venue selection for large chapter 11 cases. No recommendations were made by the GAO based on their interviews and research regarding these venue factors.
The GAO’s study suggests that professional fees for large bankruptcy cases are being evaluated and awarded from the successful application of the 2013 guidelines. The USTP reported that in most large bankruptcy cases, it has been able to work collaboratively through its inquiries and issues related to professional fees. In addition, the GAO study also concludes that venue selections for large bankruptcy cases are principally driven by the debtor and its professionals’ preference to be able to analyze a sizeable body of case precedent of experienced judges in order to appropriately advise clients and anticipate the outcome of a case — not by desires for venues where premium professional fees can be awarded.