Corporate Bankruptcy: Stakeholders Have Mixed Views on Attorneys' Fee Guidelines and Venue Selection for Large Chapter 11 Cases
Released: 2015-09-23T00:00:00

Letter

Background

Role of the U.S. Trustee Program in the U.S. Bankruptcy Process

The USTP is one of several federal agencies involved in the U.S. bankruptcy system, but is the only executive branch agency responsible for providing oversight of bankruptcy cases. The agency consists of the EOUST, which provides general policy and legal guidance, oversees operations, and handles administrative functions; and 21 USTs who oversee 93 field office locations and supervise the administration of federal bankruptcy cases. Each of the field offices is managed by an AUST, who is responsible for day-to-day oversight of federal bankruptcy cases. In addition to fee review activity, the USTP also investigates and civilly prosecutes bankruptcy fraud and abuse; refers suspected criminal activity to the U.S. Attorney and other law enforcement partners; monitors and takes action to address the conduct of debtors, creditors, attorneys, credit counselors, and others; oversees private trustees; and ensures compliance with applicable laws and regulations in all bankruptcy cases, from individual consumer filings to large corporate reorganizations.

Six basic types of bankruptcy are provided for under chapters of the Bankruptcy Code, depending on factors such as whether the debtor is an individual, corporation, or municipality, and whether the debtor seeks to reorganize or liquidate existing assets and liabilities. Table 1 shows the differences between the types of bankruptcy and whether the USTP is responsible for reviewing professional fee applications for that bankruptcy type.

Per the Bankruptcy Code, the USTP is responsible for reviewing fee applications for five types of cases–cases under Chapters 7, 11, 12, 13, and 15 of the Bankruptcy Code. According to USTP officials, the USTP’s fee review responsibilities for Chapter 11 bankruptcy cases compose approximately 5 to 10 percent of the agency’s activities, though the amount of time varies by office and the type of case. Figure 1 provides an overview of the fee application and review process in Chapter 11 bankruptcy, including cases subject to the 2013 guidelines.

After a bankruptcy petition is filed, attorneys seeking to represent debtors or others must submit retention applications for approval by the court. Once their retention is approved, attorneys seeking to be compensated from the estate (the pool of assets and monies available to pay creditors) may submit interim fee applications every 120 days, or more often if permitted by the court. The interim fee application allows attorneys to receive compensation for their work before the conclusion of the bankruptcy proceeding. At the conclusion of the case, attorneys submit a final fee application to the court. Both the USTP and the bankruptcy judge are responsible for ensuring that fees are reasonable and necessary, and may review any submitted documentation associated with fees to assist in that determination. While the USTP has standing to object to requested fees, the bankruptcy judge is responsible for determining the final fee amount to be awarded. According to USTP officials, if the USTP identifies a concern associated with a fee application it has reviewed, such as staffing inefficiencies including duplication of work or requesting compensation for first-class travel, the USTP may seek to resolve it by informally contacting the firm submitting the application through an inquiry or by filing an objection to the fee application for the bankruptcy court to consider. Several factors influence how many inquiries and objections are made by the USTP offices in a given case with regard to professional fee applications. According to USTP officials, these can include the complexity of the case, the preferences of the court or USTP, or the experience of the firm filing the application. For instance, an experienced firm may be familiar with the USTP’s expectations for fee applications, reducing the need for the USTP to request additional information.

Development of the 2013 Guidelines

The goals of the 2013 guidelines are to, among other things, help ensure attorneys’ fees in bankruptcy cases are comparable to those charged for nonbankruptcy activities, increase the transparency and efficiency of the fee application and review process, and increase public confidence in the integrity of the process. As discussed previously, the USTP established fee review guidelines in 1996. The 1996 guidelines detailed the type of information and disclosures that the USTP expects professionals to include in their fee applications. Like the 1996 guidelines, the 2013 guidelines are policies and procedures for USTP staff to follow when reviewing fee applications. Unlike the 1996 guidelines, however, the 2013 guidelines apply only to attorneys’ fee applications in Chapter 11 cases where the debtor’s bankruptcy petition lists assets and liabilities each of $50 million or more. In addition to the provisions detailed in the 1996 guidelines, the 2013 guidelines outline the USTP’s expectations that attorneys provide the following information in their fee applications: information about the firm’s blended hourly rates for nonbankruptcy activities (comparable billing rates); budgets and staffing plans, to include explanations when fees requested exceed the budget by 10 percent; electronic billing data, generally in the form of LEDES (legal electronic data exchange standard) data; client and applicant statements on issues including customary billing rates, fees, or terms of service; and disclosures regarding rate increases.

According to senior USTP officials, the USTP began to develop the 2013 guidelines in 2010 in an effort to address concerns about the size of attorneys’ fees in large Chapter 11 cases. The 2013 guidelines were also intended to update the USTP’s fee review practices to better reflect advancements in law firm billing practices and technology. To develop the 2013 guidelines, officials created an internal working group and sought input from bankruptcy stakeholders, such as judges, legal industry groups, and attorneys. The USTP published drafts of the guidelines on its public website for public comment in November 2011 and November 2012, and received more than 30 comment letters in response. The USTP also held a public meeting on June 4, 2012, on the draft guidelines.

Two of the newly proposed provisions—the comparable billing rate provision and the budgeting and staffing plan provision—were frequently discussed in the comment letters and during the public meeting. According to an EOUST official, the comparable billing rate provision received the most commentary during the public comment period and meeting and was therefore revised more extensively than other provisions. For example, the comment letters from the National Bankruptcy Conference (NBC) and a letter signed by 119 bankruptcy law firms identified several concerns with the draft guidelines’ proposal requesting the “highest, lowest, and average hourly rates” charged by firms for all activities. Among these was the concern that such detailed information about the highest and lowest rates billed does not accurately compare with a firm’s “customary compensation charged,” which is the standard identified by the Bankruptcy Code. The NBC also submitted a separate comment letter proposing multiple alternatives for the USTP to consider. Similarly, comment letters from both the NBC and the 119 law firms expressed concerns regarding the draft budgeting provision, particularly with regard to the public disclosure of budgets. After incorporating changes and clarifying provisions based on the public comments, including allowing redaction of sensitive budgetary information and removing the requirement to disclose the highest and lowest rates billed, the USTP published the final guidelines in the Federal Register in June 2013 and they went into effect in November 2013.

Attorneys Generally Observed the 2013 Guidelines; Opinions Regarding Their Effects Vary by Stakeholder Group

Our analysis of USTP data and interviews with bankruptcy stakeholders (AUSTs, judges, and attorneys) indicate that attorneys’ fee applications for guidelines cases have generally contained the information requested by the 2013 guidelines. Bankruptcy stakeholders we interviewed had mixed perspectives on the overall value of the guidelines and on their potential effect on the efficiency and transparency of the Chapter 11 bankruptcy process, or the fees awarded. Similarly, opinions regarding the effect of specific provisions of the 2013 guidelines—including provisions on electronic billing, budgeting and staffing plans, and comparable billing rates—also varied by group.

Attorneys Generally Observed the 2013 Guidelines

Analysis of USTP data and interviews with bankruptcy stakeholders indicate that attorneys’ fee applications for guidelines cases (those cases with assets and liabilities each of $50 million or more) have generally contained the information requested by the 2013 guidelines. For the 94 guidelines cases filed from November 2013 through March 2015, our analysis of USTP data found that the USTP did not make any inquiries or objections related to the guidelines for fee applications in half (47) of the cases. For the other 47 cases, the USTP identified issues in submitted fee applications that were associated with the guidelines, almost all of which were related to three provisions: (1) budgeting and staffing plans, (2) comparable billing data, and (3) electronic billing records. Specifically, in 36 guidelines cases, the USTP made 98 inquiries and objections, 90 of which were related to one or more of these three provisions in the 2013 guidelines. For example, in one fee application, a firm requested an hourly rate that was higher than the comparable rate it charged in nonbankruptcy activities and exceeded its budget in certain project categories. Because the firm did not provide any explanation in its original fee application, the USTP informally raised the issues with the firm, which then provided an explanation in supplementary information filed with the USTP and the court. In total, attorneys were able to resolve 92 of the 98 inquiries and objections to the satisfaction of the USTP. Almost all were resolved by the attorney providing an oral or written explanation or by filing supplementary information. An internal spreadsheet maintained by the EOUST to provide additional oversight of the 2013 guidelines’ implementation noted compliance issues in 11 other guidelines cases. Attorneys in 10 of these 11 cases also addressed the USTP’s concerns by providing supplemental information or agreeing to do so in future cases.

Bankruptcy stakeholders we interviewed who had participated in at least 1 guidelines case also reported that fee applications filed by attorneys in those cases generally contained information requested by the 2013 guidelines. Of the 57 bankruptcy stakeholders we interviewed, 38 had participated in at least 1 guidelines case. Of these 38, 29 reported that fee applications filed by attorneys in the case or cases they were involved in had at least partially observed the 2013 guidelines. Two judges we interviewed stated that in the fee applications they reviewed for guidelines cases they presided over, attorneys did not observe the guidelines’ provisions. Seven stakeholders could not comment on whether fee applications in the guidelines cases they participated in had observed the guidelines. As discussed earlier in this report, the 2013 guidelines are not law, and accordingly, are not binding on courts, debtors, or attorneys. Of the 25 judges we interviewed, 6 noted they were likely to use some, but not all, of the 2013 guidelines’ provisions when reviewing fee applications. For example, 1 judge stated that she would not require attorneys to provide budgets or staffing plans in their fee applications, but does expect that other provisions of the guidelines, such as electronic billing data, will make her review of fee applications easier. Another 9 judges said they did not intend to use the guidelines when reviewing fee applications. Specifically, 6 of these judges noted that their fee reviews would instead be guided by their courts’ local rules. As 1 judge explained, his court’s local rules already require all the information he needs to review fee applications.

Our analysis of the local rules for the 15 jurisdictions in our scope shows that 1 jurisdiction, the District of Nevada, generally incorporates USTP fee guidelines, while 14 jurisdictions do not. EOUST officials reported that as of December 2014, another 14 bankruptcy courts outside the scope of our report have at least partially adopted the 2013 guidelines. However, whether or not a jurisdiction has adopted the guidelines or a judge has chosen to use them to inform his or her own fee review does not preclude the USTP from implementing the guidelines’ provisions and commenting or objecting to fee applications, as the USTP deems appropriate. As the EOUST Director explained, the 2013 guidelines communicate to professionals and the general public the criteria used by the USTP in the review of fee applications and the USTP’s expectations of professionals. According to the USTP’s implementing guidance provided to staff, in most cases, the agency should not object to an attorney’s fee application based on noncompliance with the 2013 guidelines, and should instead reference the relevant provision in the Bankruptcy Code. However, the USTP can reference the provisions of the guidelines when reaching out to attorneys through an informal inquiry. Further, despite the reluctance of some judges to use the 2013 guidelines in their own review of fee applications, all 14 attorneys said that they included the information requested by the guidelines in relevant fee applications they submitted. Specifically, 5 of the attorneys noted that they try to maintain a good relationship with the USTP, and there is no reason not to comply with the 2013 guidelines.

Opinions Regarding the 2013 Guidelines Vary by Stakeholder Group

Overall Opinion of the 2013 Guidelines

Bankruptcy stakeholders’ perspectives on the overall value of the 2013 guidelines varied according to stakeholder group. Fourteen of 18 AUSTs, who oversee day-to-day activities associated with implementing the 2013 guidelines, viewed the guidelines positively, noting, for example, that the additional information requested by the guidelines will allow them to more easily determine whether fees are reasonable. The remaining 4 AUSTs stated it was too early for them to have an opinion about the guidelines overall.

In contrast, of the 14 attorneys we interviewed, 6 held negative, 6 held neutral opinions of the guidelines, and 2 expressed a positive opinion of the guidelines. The six attorneys with negative opinions of the guidelines commented that the 2013 guidelines impose significant additional work for them to prepare fee applications without providing a commensurate benefit to the bankruptcy process. One attorney with a neutral opinion explained that while he was not sure whether the guidelines would be able to accomplish their objectives, complying with them had not required much additional work. One attorney with a positive opinion said the 2013 guidelines are generally straightforward and easy to follow.

Judges’ opinions regarding the overall value of the guidelines were also mixed. Of the 25 judges we interviewed, 12 stated that their overall opinion of the guidelines was positive, 7 stated that their overall opinion was negative, 3 stated it was neutral, and 3 stated that it was too early to have an opinion. Of the 12 judges who expressed a positive opinion of the guidelines, 4 noted that the guidelines will be useful in reviewing fee applications. In contrast, 5 of the 7 judges who had a negative opinion of the guidelines commented that they believed the guidelines were unnecessary. As one of these judge said, the new provisions do not address the issues that create problems with professional fees. Specifically, he explained that the guidelines do not prevent cases from “going off the rails,” or experiencing unexpected setbacks, which is when problems with professional fees can arise. Figure 2 shows the opinions of each stakeholder group.

Bankruptcy stakeholders also had mixed opinions, which varied by stakeholder group, regarding the effect of the guidelines on transparency, efficiency, or fees. Specifically, 15 of 18 AUSTs reported that they thought the guidelines were likely to have a positive effect on transparency, efficiency, or fees. In contrast, 9 of the 14 attorneys we interviewed said the guidelines were unlikely to have an effect on transparency, efficiency, or fees, in part because they believed the process that existed before the 2013 guidelines was already very transparent. Four of 14 attorneys stated that they believed the guidelines would increase transparency, but 3 of the 4 noted that the guidelines would not improve the efficiency of cases or reduce the fees awarded. For example, 1 attorney explained that the best way to reduce fees in bankruptcy is to improve efficiency to reduce the overall time a case takes to complete, and he was not sure whether the 2013 guidelines would be able to do so. The judges were split in their opinions—11 of 25 responded that the guidelines were likely to have a positive effect on transparency, efficiency, or fees, and 10 of 25 responded that they were not likely to have an effect. For example, 1 judge said the 2013 guidelines would improve efficiency and transparency, making it easier for her to review and analyze fee applications. In contrast, another judge said she did not believe the guidelines would have an effect on the status quo, because attorneys already bill at market rates.

Effect of Selected Provisions of the 2013 Guidelines

The effects or potential effects of three provisions of the 2013 guidelines—(1) electronic billing records, (2) comparable billing rate information, and (3) budgeting and staffing plans—were discussed most frequently by bankruptcy stakeholders during our interviews. Similar to the overall opinions of the guidelines, perspectives on the effects of these three provisions varied by stakeholder group. 1. Electronic billing records: This provision was developed to bring the USTP’s procedures into line with modern nonbankruptcy billing technology and practice. The electronic billing records provision was cited by 22 of 43 AUSTs and judges as a provision likely to have a positive effect on the fee review process, in part because it will make the fee review process easier or more efficient. Only 2 attorneys mentioned the electronic billing record provision, and they noted that it was unlikely to have an effect. 2. Comparable billing rate information: This provision was developed to provide specific information about rates, in an effort to increase transparency and improve comparability between rates charged for bankruptcy and nonbankruptcy activities. The comparable billing rate information was cited by 20 of 57 bankruptcy stakeholders we interviewed as a provision likely to have an effect on the fee review process, with 8 of these stakeholders noting that this provision was likely to have a positive effect by increasing transparency. In contrast, 19 of 39 attorneys and judges reported that the comparable billing rate provision was unlikely to have an effect on the fee review process. For example, 5 judges and attorneys explained that the comparable billing information is unnecessary because rates charged in bankruptcy are already comparable to rates charged for nonbankruptcy activities, while another 6 said that trying to compare rates charged in bankruptcy with nonbankruptcy rates is “comparing apples to oranges” and is not a meaningful way to determine reasonable fees. See figure 3 for a breakdown of responses by stakeholder group. 3. Budgeting and staffing plans: This provision was developed to encourage firms to apply standard management and planning tools to bankruptcy cases, as is done in other types of cases, in an effort to increase transparency. The budget and staffing plan provision of the 2013 guidelines was cited by 26 of the 57 bankruptcy stakeholders we interviewed as a provision likely to have a positive effect on the fee review process. For example, stakeholders noted that the primary benefit of the budgeting and staffing provision is that it encourages attorneys to communicate, early in the case, information about the potential costs. In contrast, 16 of the 20 attorneys and judges who noted that the budgeting provision is unlikely to have an effect explained that bankruptcy cases are unpredictable, a fact that limits the value of a budget. See figure 4 for a breakdown of responses by stakeholder group.

Bankruptcy Attorneys, Judges, and Academic Research Identify Contributing Factors and Effects of Venue Selection

Bankruptcy attorneys and judges we interviewed, and academic research we reviewed, identified several factors that contribute to venue selection. The most frequently cited factors—including prior court rulings, the preferences of lenders, and judge experience—all contribute to overall predictability in a case and can provide some insights into what to expect from a court as a case proceeds through the bankruptcy process. Bankruptcy attorneys and judges we interviewed and academic research we reviewed also identified both positive and negative effects of the concentration of cases in the SDNY and Delaware.

Bankruptcy Attorneys and Judges Identified Several Factors that Contribute to Venue Selection

Bankruptcy attorneys and judges identified several factors that contribute to venue selection, or why a case may be filed in one court versus another. As discussed previously, companies filing for bankruptcy have several options available to them when determining the court, or venue, in which to file their case, including their place of incorporation, principal place of business or assets, or where an affiliate has filed a Chapter 11 bankruptcy case. The factors cited most frequently by the 39 attorneys and judges we interviewed as significant to venue selection include prior court rulings, the preferences of lenders, and judge experience. While no two cases are exactly alike, these factors were frequently discussed as important because of how they contribute to predictability in a case. For example, knowing a judge’s level of experience with large cases and how a court has ruled on certain matters can help an attorney advise a client about how a court is likely to respond to issues in a specific case. Attorneys and judges also mentioned other factors that can contribute to venue selection, such as perceived court attitudes on professional fees, convenience or proximity of the parties involved in a case to the court, and court administrative capacity, though the majority said that professional fees and court administrative capacity were either minor factors or not a factor in venue selection. See figure 5 for the frequency with which the various factors were cited.

Thirty-three of the 39 attorneys and judges we interviewed cited prior local or circuit court rulings as a significant factor when selecting the venue in which to file a large Chapter 11 bankruptcy case, in part because understanding prior court rulings allows attorneys to better predict and advise clients on the possible outcomes of a case. For example, 1 attorney explained the importance of prior court rulings, noting that attorneys look at district and circuit court opinions to determine what is favorable for their particular client and what will matter for the particular case. Specifically, 6 of the 33 attorneys and judges stated that it is the attorney’s responsibility to act in the best interest of his or her client, and understanding prior court rulings and how they relate to venue selection is part of that. Two of these attorneys further commented that filing in a court without taking into account prior rulings could harm a company’s ability to successfully emerge from bankruptcy and could be considered malpractice.

Lender Preference

Twenty of the 39 attorneys and judges cited the preferences of lenders as a significant factor. As 3 attorneys we interviewed explained, lenders who provide financing to a company in distress may incorporate clauses in their financing agreements requiring the company to file in a certain jurisdiction. Nine of the 20 attorneys and judges noted that lenders incorporate such clauses because they prefer the predictability offered by certain courts. For example, 1 attorney stated that lenders may prefer the certainty of providing debtor financing in courts that have done hundreds of similar financing arrangements so that they know what motions are likely to be approved. According to 4 attorneys and judges we interviewed, other reasons that lenders may prefer certain jurisdictions can include the proximity of the court to their business operations.

Judge Experience

Sixteen of the 39 attorneys and judges cited judge experience as a significant factor in venue selection. Of these, 6 attorneys and judges stated that judge experience plays a key role in providing predictability in a case. As 1 judge explained, speaking from experience as a bankruptcy attorney, judge experience is very much a factor in venue selection and attorneys consider the competence and experience of judges on Chapter 11 matters when advising their clients. However, 6 other attorneys and judges said that in their opinion, all bankruptcy court judges are capable of handling large cases.

Professional Fees

Eight of the 39 attorneys and judges we interviewed identified perceived court attitudes on professional fees as a significant factor in venue selection. For example, 1 judge said that certain courts have a reputation for not approving fees over a certain amount and attorneys know which judges are “hard on fees.” In addition to the 1 attorney and 7 judges who identified fees as a significant factor, another 3 attorneys and 11 judges identified fees as a minor factor. In contrast, the majority of attorneys (10 of 14) and 7 of 25 judges said that professional fees were not a factor in venue selection. One attorney noted that he has tried cases in venues around the country and has not seen a difference in fees awarded. Five attorneys and judges said that professional fees may have played a bigger role in venue selection in the past.

Other Factors

Twelve of 39 attorneys and judges cited convenience or proximity of the parties involved to the court as a factor in venue selection. Five attorneys and judges also discussed the administrative capacity of the court, or the court’s ability to process large cases, as a significant factor. However, the majority of respondents (29 of 39) said that administrative capacity was either a minor factor or not a factor.

Academic Findings Reflect the Venue Selection Factors Reported by Stakeholders

Academic studies we reviewed on venue selection used various methodological approaches to identify several of the factors raised by the stakeholders we interviewed, though the importance of these factors varied across the studies. For example, four studies, from 2002, 2004, and 2005, cited judge experience or the perceived expertise of the judge, or prevailing court rulings, as key factors in venue selection. According to one academic expert we interviewed, judge expertise was likely a consideration for General Motors and Chrysler in choosing to file for bankruptcy in New York because they were more likely to be assigned an experienced judge in New York than in Detroit, where their headquarters were located. The 2002 study also identified predictability and speed (how fast a case moves through the court) as the most prevalent factors, and lender preference as a less prevalent factor in venue selection. One study from 2004 suggested that firms with secured lenders exhibited a strong preference for filing in Delaware. Two studies from 2002 and 2004 cited attitudes towards fees as a factor in venue selection; however, one noted that fees were not the most prevalent factor. In contrast to this finding and the results of our interviews, one study we reviewed identified the perceived scrutiny of professional fees as a key factor in venue selection. In this study and in subsequent work, the author contends that attorneys chose to file in venues where they believed their fee requests would be approved and theorized that some courts may have relaxed their scrutiny of fees in order to attract more large cases.

Bankruptcy Attorneys, Judges, and Academic Research Identify Positive and Negative Effects of Venue Selection Outcomes

Bankruptcy attorneys and judges we interviewed and academic research we reviewed identified both positive and negative effects of the concentration of cases in the SDNY and Delaware. Of the 94 guidelines cases filed from November 2013 through March 2015, 64 percent (60 of 94) were filed in the SDNY or Delaware, with the majority filed in Delaware. Our analysis of data related to these cases found that in 5 of the 14 guidelines cases filed in the SDNY, and in all of the 46 guidelines cases filed in Delaware, the venue selected differed from the company’s headquarters address. See appendix III for a more detailed analysis of the venue rules used as the basis for selecting the filing location in guidelines cases.

Thirty-two of the 39 attorneys and judges we spoke with cited at least one effect of the concentration of cases in the SDNY and Delaware, with 24 identifying positive effects and 29 identifying negative effects. The positive effect most commonly cited by attorneys (5 of 14) and judges (10 of 25) we interviewed was the significant large case experience developed by judges in the SDNY and Delaware. For example, 1 judge noted that the concentration of cases in the SDNY and Delaware has resulted in experienced judges with vetted, expedited procedures and processes. Six stakeholders noted that the body of court rulings the SDNY and Delaware courts have developed is another positive effect. Of the 18 stakeholders who mentioned one of these two benefits of case concentration, 8 explained that as a result, the SDNY and Delaware courts offer a degree of certainty in terms of case outcomes that does not exist in other courts. For example, 1 attorney said that he always advises clients on potential case outcomes, and the precedents in the SDNY and Delaware allow him to provide more predictability for his clients.

Twenty-nine attorneys and judges identified negative effects of case concentration in the SDNY and Delaware, but they differed in their opinions of the most significant negative effects. The negative effects most commonly cited by attorneys (9 of 14) were the difficulty local bankruptcy firms face in maintaining a bankruptcy practice outside of the SDNY and Delaware and the lack of opportunity for courts to develop precedent and expertise outside of these jurisdictions. For example, 1 attorney noted that firms in other parts of the country lose bankruptcy clients to SDNY and Delaware firms. The negative effect most commonly cited by judges (12 of 25) was the challenges small creditors face when a case is filed far from a company’s headquarters location. Four judges said that moving a case from the company’s home jurisdiction can disenfranchise small businesses and individuals who may want to participate in a case but are unable to do so because of the expense of travelling to a court in another jurisdiction. Additionally, 4 judges and 1 attorney said that the concentration of cases has a negative effect on the bankruptcy system as a whole. For example, 1 judge noted that when money is spent hiring local counsel and traveling to distant courts instead of filing where a company’s assets and employees are located, people view the system as corrupt.

Similarly, the academic studies we reviewed identified both positive and negative effects of case concentration in the SDNY and Delaware. As one academic expert we spoke with noted, there is a divergence in the academic findings and opinions related to venue. For example, two empirical studies from 1997 and 2004 suggested that cases filed in Delaware moved through the bankruptcy system faster than those filed in other courts. Other studies suggested that cases filed in the SDNY and Delaware had a higher refiling rate than cases filed in other courts and that cases filed in a venue outside the company’s headquarters, such as the SDNY or Delaware, cost more than cases filed in home jurisdictions. In contrast, one academic expert argued that some cases in Delaware did not have a higher refiling rate than other courts with a similar caseload, and more recent work by another academic suggests that cases in the SDNY and Delaware do not cost more. Additionally, a 2015 study found that having a case assigned to an experienced judge is a key factor in the success of a bankruptcy filing and that there is a high correlation between judge experience and jurisdiction, with highly experienced judges presiding over most SDNY and Delaware cases. However, as one expert we interviewed noted, because fewer cases are filed in venues other than the SDNY and Delaware, it is difficult for judges outside of those districts to gain experience with large Chapter 11 cases.

Agency Comments

We provided a draft of this report to the Executive Office for U.S. Trustees (EOUST) and the Administrative Office of the U.S. Courts (AOUSC) on August 21, 2015, for review and comment. In its written comments, reproduced in appendix IV, the EOUST generally agreed with our findings. We also received technical comments from EOUST and AOUSC, which we incorporated as appropriate.

We are sending copies of this report to the Senate Committee on the Judiciary, the Director of the Executive Office for U.S. Trustees, the Director of the Administrative Office of the U.S. Courts, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-9627 or maurerd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

This report addresses the following questions: 1. To what extent have bankruptcy attorneys observed the 2013 guidelines in fee applications, and what are the opinions of bankruptcy stakeholders, including attorneys, judges, and U.S. Trustee Program (USTP) officials, regarding the guidelines’ key provisions and their effects? 2. What do bankruptcy attorneys, judges, and available research identify as factors that contribute to venue selection and the effects, if any, of venue selection in large Chapter 11 cases?

To obtain background information and answer both questions, we reviewed the Bankruptcy Code and relevant bankruptcy filings related to professional fees in Chapter 11 bankruptcy cases. We also reviewed the 1996 USTP guidelines and the 2013 USTP guidelines on the compensation of attorneys in large Chapter 11 cases, or those with assets and liabilities each of $50 million or more. We analyzed USTP data related to Chapter 11 cases filed from October 2009 through March 2015 to identify the number of large cases filed during this time period in each USTP office. We selected this time period because it enabled us to identify case activity in the years both before and after the 2013 guidelines went into effect. According to USTP data, 765 cases with assets and liabilities each of $50 million or more were filed from October 2009 through March 2015. Of these cases, 94 were filed after the 2013 guidelines went into effect (guidelines cases). To assess the reliability of these data, we interviewed USTP officials responsible for collecting and reviewing the information and cross-checked the names of the guidelines cases against lists of the 20 largest cases filed in 2014 as identified by the bankruptcy research website New Generations (BankruptcyData.com). We determined that the data were sufficiently reliable for our purposes. As discussed in detail later in this appendix, we used the case information to inform our selection of a nongeneralizable sample of bankruptcy stakeholders for semistructured interviews. While the views expressed in these interviews do not represent those of all bankruptcy stakeholders, they provide valuable insights from stakeholders who have experience with large Chapter 11 bankruptcy cases and the 2013 USTP guidelines. We also conducted interviews with Executive Office for U.S. Trustees (EOUST) officials, U.S. Trustees (UST), academics, and industry stakeholders. Finally, we reviewed relevant academic literature on professional fees and venue selection in Chapter 11 bankruptcy cases. Because fee reduction is not a stated goal of the 2013 guidelines, we did not attempt to determine whether or not the guidelines have led to an actual reduction in professional fees awarded in large Chapter 11 cases.

To further address question 1, we reviewed data from the USTP’s Significant Accomplishments Reporting System (SARS) on objection and inquiry activities related to professional fees in guidelines cases filed from November 2013 through March 2015. We analyzed the objections and inquiry data, including narrative descriptions, to identify USTP actions related to the 2013 guidelines provisions. To assess the reliability of these data, we interviewed officials responsible for entering and maintaining the data and reviewed internal documentation and guidance associated with data entry and internal review processes. We determined that the data were sufficiently reliable for our purposes. We also reviewed information collected by the EOUST on whether the provisions of the 2013 guidelines were observed in cases filed from November 2013 through March 2015 to determine the extent to which attorneys filing fee applications included information related to the 2013 guidelines’ provisions. To determine whether selected local court rules incorporated the key provisions of the 2013 guidelines, we reviewed local court rules and guidelines on fee applications and the compensation of professionals in bankruptcy cases for the 15 bankruptcy courts in our scope. These courts were selected because they had 5 or more large Chapter 11 cases filed from fiscal year 2010 through fiscal year 2014. Additional information regarding the jurisdictions in the scope of this report is provided later in this appendix.

To further address question 2, we reviewed relevant academic literature on the factors that contribute to venue selection and the effects of the concentration of cases in the Southern District of New York (SDNY) and the District of Delaware (Delaware). We also interviewed six academic experts in the Chapter 11 bankruptcy field to better understand their research findings. We conducted a literature search of various databases, such as ProQuest and Academic OneFile, and asked the academic experts we interviewed to recommend additional studies. From these sources, we identified 10 studies published between 1997 and 2015 that were relevant to our question on venue selection. We reviewed the methodologies of these studies to ensure they were sound and determined they were sufficiently reliable to identify factors related to venue selection and the effects of case concentration. To identify the basis for venue selection companies used when filing cases, we reviewed bankruptcy filing documents for each of the 94 guidelines cases filed from November 2013 through March 2015. We also reviewed the first day declarations for these cases to identify each company’s place of incorporation and headquarters location. In cases where we were not able to identify this information, we reviewed Securities and Exchange Commission filings or filings with state secretary of state offices, as necessary.

To obtain perspectives from bankruptcy stakeholders on the 2013 guidelines and issues related to venue selection, we conducted 57 semistructured interviews with a nongeneralizable sample of 18 Assistant U.S. Trustees (AUST), 25 U.S. Bankruptcy Court judges, and bankruptcy attorneys from 14 law firms. Our process for selecting each group of stakeholders in our sample is discussed below: AUSTs: We chose to interview AUSTs because they are responsible for the day-to-day oversight of federal bankruptcy cases and for reviewing fee applications. There are 21 UST regions with 93 field offices. Each field office is managed by an AUST. To determine the scope from which to select our sample of AUSTs for interviews, we reviewed USTP data on large Chapter 11 cases (cases with assets and liabilities each of $50 million or more) filed from fiscal year 2010 through fiscal year 2014. From this, we identified 18 USTP offices that had a total of five or more large cases during this time period. Of these offices, 12 offices had been assigned a guidelines case as of October 2014, while 6 offices had not. We interviewed 18 AUSTs assigned to each of the 18 offices (see table 2). At the time our interviews were conducted, 13 of the 18 AUSTs had participated in at least one guidelines case.

Judges: Bankruptcy judges have the final authority to award professional fees and to determine whether or not they are reasonable and necessary, under the Bankruptcy Code. To select our sample of bankruptcy judges to interview, we relied on the same selection criteria we used to select AUSTs. We matched each UST office/city with 5 or more large Chapter 11 cases from fiscal year 2010 through fiscal year 2014 to the corresponding judicial district for the U.S. Bankruptcy Courts. We identified 15 judicial districts covering the 18 cities in our AUST sample. To select individual judges for our interviews, we contacted the Chief Judge of each of the 15 bankruptcy courts and asked him or her to identify judges in those courts with experience in our topic areas who were available to be interviewed. To ensure that we spoke with judges with a range of experience in guidelines cases, we initially selected two judges in the each of the courts with 15 or more large Chapter 11 cases and one judge in each of the remaining courts (see table 2). We interviewed a total of 25 judges. Of these, 11 judges presided over one or more cases subject to the guidelines, while 14 judges had not yet been involved with a guidelines case. With the exception of one judge who had been appointed to the bench in 2013, all judges interviewed had presided over at least one case between October 2009 and October 2013 that met the guidelines thresholds of assets and liabilities each of $50 million or more.

Bankruptcy attorneys: To select attorneys to interview, we reviewed the guidelines case data provided by the USTP for all cases subject to the 2013 guidelines in fiscal year 2014. We identified selected guidelines cases filed in bankruptcy courts in 12 of the 18 cities listed in table 2 and reviewed the related bankruptcy filing petitions to identify law firms that represented the debtor in these cases. We selected cases to provide variation in geographic location and in case size. To ensure that we included attorneys from firms with substantial experience with large Chapter 11 cases, we cross-checked the list of firms with those identified as the top bankruptcy firms in the United States by two bankruptcy research websites, the University of California Los Angeles’ (UCLA- LoPucki) Bankruptcy Research Database and New Generations (BankrutpcyData.com). Firms were not excluded if they did not appear on these lists, but we added several major firms that did not appear on our original list. See table 3 for a list of the 14 firms from which we interviewed attorneys. Each of the firms represented companies in at least one 2013 guidelines case. In 4 of the 14 interviews we conducted, more than one attorney participated in the interview. However, because the opinions offered by attorneys in each of these individual interviews did not conflict or contradict one another, we counted each interview as one and refer to this group of stakeholders as 14 attorneys throughout this report.

We asked all three groups about their general opinions of the 2013 guidelines and their opinions regarding the effects or potential effects, if any, of the 2013 guidelines on efficiency, transparency, or the professional fees awarded in Chapter 11 cases. We focused on these three aspects because two of the goals of the 2013 guidelines are to increase the transparency and efficiency of the fee review process, and, as discussed earlier in this report, EOUST officials reported that concerns about professional fees in large cases such as Lehman Brothers provided the impetus for developing the new guidelines. While we did ask stakeholders to identify any provisions they believed were likely to have an effect or to have no effect, we did not specifically ask stakeholders about their opinions on each provision of the 2013 guidelines. We also asked all three groups about the extent to which the provisions of the guidelines were observed by attorneys in fee applications submitted for guidelines cases.

In addition, we asked judges and attorneys their opinions on the factors that contribute to venue selection and the effects, if any, of the concentration of cases in the SDNY and Delaware. Because the AUSTs do not have a role in venue selection, we did not ask them questions related to venue selection. We asked attorneys and judges for their opinion on specific venue selection factors. For example, we asked attorneys and judges about the degree to which the following factors to contribute to venue selection: (1) judge experience, (2) court administrative capacity, (3) prior court rulings, and (4) perceptions of court attitudes on professional fees. Because of the semistructured nature of the interviews, stakeholders responded to these factors and also independently offered additional factors. Additionally, responses may total more than 100 percent because stakeholders offered both positive and negative opinions in response to certain questions. The semistructured interviews were conducted by telephone from February 2015 through May 2015. We then performed a qualitative content analysis of these interviews to identify common themes and the frequency with which certain issues were raised. To ensure intercoder reliability, three analysts jointly developed a coding structure that was then used to independently code the interviews. This process was reviewed by a GAO methodologist, and all coding was reviewed by another analyst. Any discrepancies were discussed and resolved jointly by the analysts responsible for coding the interviews.

We conducted this performance audit from November 2014 to September 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Executive Office for U.S. Trustees 2013 Fee Guidelines for Attorneys in Larger Chapter 11 Cases: Summary of Material Differences From 1996 Guidelines

Appendix III: Basis for Venue Selection in Cases Subject to the U.S. Trustee Program’s 2013 Guidelines

From November 2013 through March 2015, 94 Chapter 11 bankruptcy cases met the U.S. Trustee Program’s 2013 guidelines’ thresholds of assets and liabilities each of $50 million or more (guidelines cases). A company may choose the court, or venue, in which to file its case on the basis of where the company is domiciled, which has been interpreted as the company’s place of incorporation, or where it maintains its residence or principal place of business (headquarters) or assets. For example, one guidelines case involves a telecommunications holding company that is headquartered in Virginia and maintains its principal assets in three New York financial institutions. A company may also file in a court where an affiliate, such as a franchise or dealership related to the parent company, has already a Chapter 11 bankruptcy case pending (known as the affiliate filing rule). We reviewed 91 of the 94 guidelines cases and found that 63 percent (57 of 91) were filed in a venue that differed from their headquarters location (see table 4 below). To identify the provisions companies used as the basis for selecting the venue in which to file their case, we reviewed the initial bankruptcy filing petitions for each of the 91 cases included in our analysis. We also reviewed first day declarations, and, as necessary, filings with the Securities and Exchange Commission or state secretary of state offices to identify the place of incorporation and headquarters location for each guidelines case.

As shown in table 4, 57 of the 91 cases that were filed by companies through March 2015 filed in venues outside the company’s stated headquarters location. Of the options available to them under the Bankruptcy Code, companies in 31 of the 57 cases relied on place of incorporation as the primary basis to select their filing location (see fig. 6). All but 2 of these cases were filed in Delaware. Additionally, 8 relied on the affiliate filing rule, and 3 used principal place of assets as the basis for venue selection. In 12 cases filed outside of the headquarters location, data provided by the companies indicated that both place of incorporation and the affiliate filing rule were the bases for venue selection.

As shown in table 4, 34 of the 91 guidelines cases filed by companies through March 2014 filed in the same venue as their stated headquarters location. Our analysis, as shown in figure 7, found that companies in 23 of the 34 cases relied on principal place of business or residence, and another 9 relied on both principal place of business or residence and the affiliate filing rule as the reason for selecting their headquarters venue.

Appendix IV: Comments from the Department of Justice

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Adam Hoffman (Assistant Director), Bethany Benitez, Michele Fejfar, Elizabeth Kowalewski, Monica Savoy, and Sarah Turpin made significant contributions to this report. Also contributing to this report were Dominick Dale, Eric Hauswirth, Jean Orland, Michelle Su, and Wade Tanner.