Emerging Chapter 11 Issues in Bankruptcy Administration Making Chapter 11 Bankruptcy Attorneys More Relevant

After declining for almost a decade, chapter 11 filings increased seven percent, from 9,835 to 10,519, during the 12-month period ending September 2001. Anecdotal evidence suggests that the magnitude of cases has increased as well. Last year, a wave of major filings such as those by FINOVA Group, PG&E, Bethlehem Steel, and PSINet was capped off by Enron Corp.'s filing of the largest corporate reorganization in American history.

The increasing chapter 11 caseload does not so much present new issues for United States Trustees, as raise some difficult issues with greater frequency and in jurisdictions that have not encountered them before. Issues seen only rarely if at all by a United States Trustee, or issues that seemed peculiar to cases filed in Delaware or the Southern District of New York, now have a nationwide scope. As a result, United States Trustees will be examining those issues more closely, and in coordination with each other may develop new policies, practices, and procedures over the coming months.

The following is a discussion of just some of those issues. It is by no means exhaustive. In addition, each of these issues has emerged in the midst of significant changes to chapter 11 practice over the past 10 years. In the past, the professionals employed in a chapter 11 bankruptcy case were primarily attorneys and accountants. Other professionals may have been retained for particular purposes--auctions, sale or valuation of assets of the company, or financing. However, the overall planning and structuring of the reorganization was left largely to accountants and attorneys.

Over the past decade or so, an increasing array of new advisory services have become involved in chapter 11 reorganizations as cases have become more complex and as more sophisticated strategies are employed. Investment bankers, crisis or turnaround specialists, and financial consultants have become involved in all aspects of the troubled company's operation, both before and after bankruptcy. Their terms of employment and compensation, the standards governing their impartiality and conflicts of interest, their relationship to affiliated or subsidiary companies, and their involvement in trading of claims or other bankruptcy-related services all challenge traditional practices under the Bankruptcy Code.

The provisions of the Bankruptcy Code (2) that govern professionals retained in a bankruptcy case were drafted against a backdrop of the practices and ethical rules that govern attorneys. (3) The requirements of hourly billing, conflict of interest rules, restrictions on the types of business that can affiliate with a professional, and other ethical restrictions are familiar to law firms and accounting firms. Workout specialists, financial advisors, and other bankruptcy consultants may operate under different rules.