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Following the Money in Large Chapter 11 Cases

posted by Melissa Jacoby

In the new working paper "Rise of the Financial Advisors: An Empirical Study of the Division of Professional Fees in Large Bankruptcies," Lynn LoPucki and Joseph Doherty of UCLA report findings distinguishing patterns of compensation of lawyers and financial advisors using data from the extremely valuable Bankruptcy Research Database. According to this paper, approved financial advisor fees rose at a much faster rate (25% per year!) than lawyers' fees in the big cases during the study period (plans confirmed between 1998 and 2003).  Although the paper's other findings are independently interesting as well, they are especially intruiging when considered in connection with LoPucki's other recent work.  In the book Courting Failure, LoPucki hypothesized that chapter 11 outcomes (including a repeat filing rate of nearly half among the largest cases) are in part a function of court practices -- including the handling of fee applications -- designed to attract repeat players (many from New York) who help decide where the cases should be filed. LoPucki characterized the Delaware and New York courts as the major case competitors racing to the bottom.  Those looking for a more detailed summary and critiques of these aspects of Courting Failure should check out the Buffalo Law Review symposium on Courting Failure that was organized by Bill Whitford of the University of Wisconsin and should be on Westlaw and elsewhere imminently.

In Rise of the Financial Advisors, LoPucki and Doherty fill in a few more pieces of the puzzle regarding the New York and Delaware courts.  According to the working paper, debtor-in-possession (DIP) attorneys fees awarded by New York and Delaware courts were not statistically different from those awarded by other courts (p. 13).  And fees awarded to New York DIP attorneys were not significantly higher than those awarded to non-New York DIP attorneys.  But approved financial advisors' fees were generally higher in the Delaware court than in other courts (p. 19), and the New York court was "more likely than other courts to award fees to investment banks at very high hourly rates" (p. 29).  The paper indicates that the raw data will be posted here so that other researchers can independently evaluate.  Among other things, these findings could lead to a refinement or adjustment of LoPucki's theory regarding the pathways through which court practices may affect reorganization outcomes.


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