Bankruptcy: A Profitable Growth Industry

I generally agree with John Kenneth Galbraith. In one of his many memorable passages, he wrote:

“At any given time there exists an inventory of undiscovered embezzement. This inventory — it should perhaps be called the bezzle — amounts at any moment to many millions of dollars …. In good times people are relaxed, trusting and money is plentiful. But even though money is plentiful, there are always people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all of this is reversed.”

Wysocki, Bernard Jr. 2007. “Rising Fees Charged in Bankruptcy Cases Elicit a Backlash.” Wall Street Journal (4 August): p. B 1.

“Overall, fees paid to pros involved in large corporate bankruptcies soared 12% a year between 1998 and the first half of 2007, according to a study by scholars at the law school of the University of California at Los Angeles. It concluded that in many recent bankruptcy cases, fees far surpassed the average of recent years. The numbers, crunched on behalf of The Wall Street Journal, followed a previously published UCLA study, covering 1998 to 2003, that showed a 9% annualized rise. “Nobody is controlling the fees,” says Lynn LoPucki, a UCLA law professor who performed the analysis with colleague Joseph Doherty”.”

“Enron Corp.’s collapse generated roughly $1 billion in such fees, a record. Other recent cases have each generated more than $100 million in professional fees, such as those of auto-parts makers Collins & Aikman Corp. and Delphi Corp.”

“Stephen Lubben, a professor at Seton Hall University law school, Newark, N.J., says bankruptcy fees are rising about as fast as compensation increases to junior lawyers in big law firms. In other words, fees are keeping pace with wage inflation. He argues that bankruptcy fees shouldn’t be singled out, because corporate-advisory work is expensive. For instance, he says fees in the recent sale of Tribune Co. were roughly $100 million, a transaction that didn’t involve bankruptcy.”

“United Auto Workers President Ron Gettelfinger recently lashed out at the fees paid to professionals in the Delphi bankruptcy case, which have exceeded $200 million. “These guys are making a ton of money,” Mr. Gettelfinger told a Detroit radio interviewer in July. “It’s obscene. They’re hogs slopping at the trough of corporate greed”.”

“The U.S. Trustee, an arm of the Justice Department and a watchdog over bankruptcy proceedings, has weighed in recently in opposition to fees. Three months ago, the U.S. Trustee’s office filed a 53-page brief seeking to block $91 million in fees in the Adelphia case. The agency pushed to deny $26 million in fees billed by White & Case LLP, a law firm representing a note-holders committee, because the firm didn’t explain what work it had performed.”

“Professional fees in the Adelphia case total more than $600 million since the cable operator sought bankruptcy protection in 2002. It emerged from Chapter 11 protection last February. In a sign of the increasing disquiet over fees, a major creditor has weighed in, a rare occurrence. Third Avenue Trust, a New York money manager, has attacked the $100 million paid in the case of Collins & Aikman, the auto-parts supplier. Prof. Lubben’s analysis would have predicted fees in the Collins & Aikman case of about $47 million, less than half the actual total. In one three-month period in 2006, the debtor’s lead law firm, Kirkland & Ellis LLP, filed for fees of $4.2 million.”

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