Vol 4 (2007) - Issue 2

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The Microeconomics of Chapter 11 – Part 2

In the first part of this paper (Volume 4, No. 1) I introduced a new sample of almost 4,000 time entries in chapter 11 cases filed between 2001 and 2003. Using this data, I showed how up to 60% of the attorneys fees in these chapter 11 cases were arguably exogenous to chapter 11 itself, and were better seen as costs of financial distress or general legal expenses.
In this part of the paper I examine the issue of staffing in chapter 11. I then develop the broader argument that ex ante costs of chapter 11 are virtually irrelevant to current discussions of chapter 11. Specifically, while the costs of chapter 11 might be relevant if the status quo is extremely inefficient or a proposed new bankruptcy system results in substantial cost reductions, neither situation presently holds. Thus I reject the recurrent fixation with the ex ante costs of chapter 11 in the academic literature.

C. Staffing in chapter 11

While the question of the unique costs of chapter 11 is key to academics, the question of more relevance to judges, trustees, and outside critics of chapter 11 is whether there is evidence that chapter 11 cases are run in a way that benefits the professionals, at the expense of the debtor and its creditors.99 Arguably this issue should also be relevant to academics, inasmuch as any transfer of value from creditors to professionals is unlikely to be socially efficient. This article’s new, internal perspective on the question of professional fees can again provide new insights.
Table 6 begins the analysis with some basic information about the distribution of the time records in the sample. As would be expected, the numbers increase as the decades become more recent. What is immediately surprising about these data, however, is that the cumulative percentages make clear that a large portion of the time entries in the sample relate to attorneys who are either senior or mid-level attorneys.
Very senior attorneys (i.e., attorneys admitted before 1980) are more prevalent in cases that do not involve serious allegations of fraud.100 Figure 2 illustrates this further by dividing the sample along a three-point scale, ranking attorneys based on their graduation from law school, with 1 corresponding to the most senior attorneys. To increase the comparability of these figures, seniority was standardised
by comparing the attorney’s graduation date with the mean date of the relevant fee application. I examined the issue of seniority with a variety of standardised
and unstandardised variables, but use the most conservative variable for all calculations in this paper. In particular, an attorney is considered senior (coded as ‘1’) only if they had more than ten or more years of experience at the time of the fee application, while an attorney is considered junior (coded as ‘3’) if they had five or less years of experience.101
Arguably one would expect an optimal staffing strategy would result in this graph showing increasingly larger steps moving to the right. Nevertheless, Figure 2 alone does not show staffing inefficiencies inasmuch as the total number of senior and mid-level attorneys would not be meaningful without some evidence these attorneys were involved in the chapter 11 cases to the same extent as the junior attorneys.
Upon calculating the average fees and hours associated with the three classes of attorneys, however, a problem becomes apparent. Senior, Mid-Level, and Junior
attorneys all seem to work about the same number of hours per month on cases and, more perplexingly, they all seem to generate between USD 14,000 and USD 15,000 in fees per month.