Virginia Courts Approve Nationwide Rates in Complex Business Bankruptcy Cases | McGuireWoods LLP
As one of the nation’s top bankruptcy locations, the Eastern District of Virginia (“EDVA”) has attracted some of the largest and most complex corporate bankruptcies. While companies file Chapter 11 bankruptcies with the EDVA for many reasons – experienced judges, established legal precedent, a strong bankruptcy bar and local rules, and a fast track record (dubbed the ” Rocket Docket”) – national law firms are also aware that EDVA Courts have generally approved their fees, even when they exceed the prevailing rates in the geographic market.
National tariffs in the EDVA
In a recent mega deal (where total assets or liabilities exceed $100 million), In re Retail Group, Inc., et al. (20-33113-KRH), the United States District Court raised concerns about the appropriate standard for approval of national rates in bankruptcies filed with the EDVA. In an appeal unrelated to fees, the District Court issued an order directing the U.S. Bankruptcy Court to submit proposed findings of fact and law regarding any further application for attorney’s fee approval. in the bankruptcy case.
Two national law firms and a Virginia law firm filed timely fee claims. The Office of the United States Trustee (“UST”) has reviewed the underlying itemized invoices and filed a statement indicating that it had negotiated comprehensive fee reductions with the three law firms. The UST did not oppose the royalty requests or raise any issues with the national tariffs, which is in line with the UST royalty guidelines. No other party filed responses or objections to the royalty applications.
After convening a hearing into the case, the bankruptcy court issued a report and recommendation (“R&R”), approving the approval of the costs applications. To read the full R&R, see In re Retail Grp., Inc.20-33113 (Bankr. ED Va. Aug. 30, 2022) [ECF No. 2798].
Policy Considerations: Compensation for Bankruptcy Professionals
In a comprehensive overview of US bankruptcy law since its inception, the R&R notes the unfavorable treatment of bankruptcy professionals under the Bankruptcy Act, which limited compensation to amounts below the market rate. As a result, there was a perception that only lawyers of lesser caliber would represent bankrupt debtors.
However, in the 1970s, the United States Court of Appeals for the Fourth Circuit recognized the deleterious effects of this policy, noting that there is “a public interest in attracting competent attorneys to bankruptcy proceedings”. . Therefore, the Fourth Circuit explained, the “test” for compensation for legal services in a bankruptcy case is not necessarily the same as that used for similar legal services outside the field of bankruptcy.
Congress came to a similar conclusion. When the Bankruptcy Code was enacted, it imposed a reasonable standard of remuneration commensurate with the cost of comparable services to attract the best professionals to the practice of bankruptcy. According to this paradigm, bankruptcy courts act as a surrogate for the bankrupt’s estate by reviewing fee claims much as a knowledgeable non-bankrupt client would review bills from the law firm.
“Reasonableness” factors: Section 330(a)(3) and Johnson
In 2005, the Bankruptcy Code was amended to help courts assess the reasonableness of fees. Section 330(a)(3) of the Bankruptcy Code sets out six non-exclusive factors for courts to consider in assessing the reasonableness of fee claims:
- the time devoted to these services;
- the rates charged for these services;
- whether the services were necessary for administration or beneficial at the time the service was rendered for the purpose of completing a matter under this title;
- whether the services have been performed within a reasonable time depending on the complexity, importance and nature of the problem, question or task handled;
- with respect to a professional, whether the person is board certified or has otherwise demonstrated skills and experience in the field of bankruptcy; and
- whether the compensation is reasonable on the basis of the compensation customary to be charged by practitioners of comparable skill in matters other than matters under this title.
Because the factors listed in Section 330(a)(3) of the Bankruptcy Code are not exhaustive, Fourth Circuit courts also consider the Johnson The factors:
- time and labor expended;
- the novelty and difficulty of the questions asked;
- the skill required to properly perform the legal services rendered;
- the lawyer’s opportunity costs to lobby the current litigation;
- customary fees for similar work;
- the lawyer’s expectations at the start of the litigation;
- deadlines imposed by the customer or the circumstances;
- the amount in dispute and the results obtained;
- the lawyer’s experience, reputation and ability;
- the undesirability of the case within the legal community initiating the suit;
- the nature and duration of the professional relationship between the lawyer and the client; and
- attorney’s fees in similar cases.
In addition, when assessing the reasonableness of domestic rates, bankruptcy courts must also consider certain factors that justify retaining a non-local professional. These included, among others: (i) the candidate’s specialization; (ii) emergencies of the debtor’s financial situation; (iii) the regional nature of the debtor’s assets and creditors; (iv) the fact that a principal creditor may be a national lender; (v) the out-of-state geographic location of certain large unsecured creditors; (vi) the intervention of non-local counsel for several creditors; (vii) the candidate’s unique skills; (viii) the nature of the work performed; and/or (viii) the availability of competent professionals in the local market.
After application of article 330 and Johnson factors in the factual record, the bankruptcy court found that all of the fee claims were reasonable. The size and complexity of the case warranted national tariffs, and the expertise of the national firms handling it benefited “thousands of unsecured creditors”. The district court passed the R&R and approved all three fee claims. See Order (adopting the report and recommendation with modification), In re Retail Grp., Inc.No. 20-33113 (Bankr. ED Va. September 19, 2022) [ECF No. 2818]. In the next wave of EDVA mega-cases, national law firms should consider including evidence in their employment applications to support national rates consistent with the factors listed in the R&R.
At the same time, the R&R and the district court order confirm on a case-by-case basis the reasonableness of EDVA’s national rates for business failures. Going forward, EDVA remains an attractive venue for businesses and sophisticated parties seeking rapid resolution of complex disputes.