Crowdsourcing (Bankruptcy) Fee Control

(Dec. 18, Crowdsourcing (Bankruptcy) Fee Control Matthew Adam Bruckner 0 A. How Chapter 's Fee Control System Works............ B. An Overcharged Estate Sub-Optimal Fee Review ii. Sub-Optimal Fee Review Is the Norm in Chapter A. How Crowdsourcing Can Help Fix Chapter B. What Might Crowdsourcing Look Like in Chapter 0 Assistant Professor of Law, Howard University School of Law. I would like to thank Kara Bruce, Nancy Rapoport, Ray Warner, and workshop participants at the University of this Article. Additional comments , ideas, suggestions, and assistance were provided by Laura Napoli Coordes, Pamela Foohey, Doron Kalir, Lynn LoPucki, Stephen Lubben, Susan Saab Fortney, Greg Shill, and Michael Simkovic , as well as workshop participants at the Mid-Atlantic People of Color Conference, anonymous reviewers on behalf of the American Business Law Journal, and my wonderful colleagues at Howard University School of Law. Research assistance was provided by Brittany Davis, Douglas Howell, and Johnathan Nixon. Research support was provided by both Howard University and Howard University School of Law. As always, this Article would not have been possible without the support and feedback of my wife , Morgan Hall - 362 [Vol. 46:361 INTRODUCTION Corporate bankruptcy cases1 are expensive.2 Perhaps even too expensive.3 Empirical evidence suggests that cases may be so expensive because some bankruptcy professionals overcharge their clients.4 Although chapter 11 has an elaborate fee control system designed to prevent professional overcharging, the system is inadequate. Chapter 11’s fee control system appears to be failing for at least two reasons. First, chapter 11’s fee control system suffers from information deficits. Information deficits arise because creditors and other parties to bankruptcy cases often fail to object to instances of potential overcharging. Without objections to highlight potential instances of professional overcharging, bankruptcy judges must often fail to reduce 1 The phrase “corporate bankruptcy cases” is used to refer to cases brought under chapter 11 of the United States Bankruptcy Code, notwithstanding that individuals may also file chapter 11 cases. See Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549 (codified as amended in scattered sections of 11 U.S.C.) [hereinafter Bankruptcy Code or Code]. Individual chapter 11 cases are not the subject of this Article. 2 After all, professional fees in the Lehman cases have already exceeded several billion dollars. See James O’Toole, Five Years Later, Lehman Bankruptcy Fees Hit $2.2 Billion, CNN MONEY (Sept. 13, 2013, 6:24 AM), http://money.cnn.com/2013/09/13/ news/companies/lehman-bankruptcy-fees/. 3 See Stephen Lubben, The Costs of Corporate Bankruptcy: How Little We Know (June 5, 2014) (unpublished manuscript), http://papers.ssrn.com/sol3/papers.cfm? abstract_id=2446663 [hereinafter Lubben, The Costs of Corporate Bankruptcy]; see also Troy A. McKenzie, Bankruptcy and the Future of Aggregate Litigation: The Past as Prologue?, 90 WASH. U. L. REV. 839, 845 (2013). Cf. Stephen Lubben, The Direct Costs of Corporate Reorganization: An Empirical Examination of Professional Fees in Large Chapter 11 Cases, 74 AM. BANKR. L.J. 509, 512 (2000) [hereinafter Lubben, Direct Costs] (“Chapter 11 is substantially less expensive than other significant corporate transactions.”). But cf. Stephen J. Lubben, The Microeconomics of Chapter 11—Part 2, 4 INT’L CORP. RESCUE 87, 91 (2007) [hereinafter Lubben, The Microeconomics of Chapter 11] (arguing that if “the direct costs of chapter 11 are in line with other large corporate transactions[,]” chapter 11 is not too expensive). The core idea of chapter 11 is that it may be possible to reorganize a company, pay related expenses, and leave creditors better off than they would have been if the company was not reorganized. See 11 U.S.C. § 1129(a)(7) (2011) (legislative statements) (setting forth the “best interests” test, and requiring that each creditor or interest holder receive as much under a chapter 11 plan as they would have received in a chapter 7 liquidation). 4 See infra Part I.B. fees and expenses even when they should be reduced. By contrast, if bankruptcy judges were alerted to possible problems, they could investigate and reduce fees and expenses, as appropriate.5 Therefore, improving chapter 11’s fee control system likely requires that bankruptcy courts receive better information about instances of potential overbilling, whether through objections or otherwise. Second, chapter 11’s fee control system is challenging, tedious, and, in many of the largest cases, potentially overwhelming. A single mega-bankruptcy case can necessitate the review of thousands of pages of time and expense entries over the life of that case.6 In order to prevent professional overcharging, these entries must be carefully reviewed to identify patterns, compared against relevant local rules or fee application guidelines, and (...truncated)