As one of the nation’s premier bankruptcy venues, the Eastern District of Virginia (“EDVA”) has attracted some of the largest and most complex corporate bankruptcies. While companies file chapter 11 bankruptcies in the EDVA for many reasons—experienced judges, well-established legal precedent, a robust bankruptcy bar and local rules, and an expeditious docket (dubbed the “Rocket Docket”)—national law firms are also cognizant that EDVA courts have generally approved their fees, even when they exceed prevailing geographic market rates.
National Rates in the EDVA
In a recent mega case (where total assets or liabilities exceed $100 million), In re Retail Group, Inc., et al. (20-33113-KRH), the U.S. District Court raised concerns about the appropriate standard for the approval of national rates in bankruptcies filed in the EDVA. In connection with an appeal unrelated to fees, the District Court issued an order instructing the U.S. Bankruptcy Court to submit proposed findings of fact and conclusions of law with respect to any further applications for approval of attorneys’ fees in the bankruptcy case.
Two national law firms and one Virginia law firm timely filed fee applications. The Office of the United States Trustee (“UST”) reviewed the underlying itemized invoices and filed a statement indicating that it had negotiated aggregate fee reductions with all three law firms. The UST did not object to the fee applications, nor raise any issue with national rates, which is consistent with the UST’s fee guidelines. No other party filed a response or objection to the fee applications.
After convening a hearing on the matter, the Bankruptcy Court issued a report and recommendation (“R&R”), endorsing approval of the fee applications. To read the complete R&R, see In re Retail Grp., Inc., 20-33113 (Bankr. E.D. Va. Aug. 30, 2022) [ECF No. 2798].
Policy Considerations: Compensation of Bankruptcy Professionals
In a comprehensive overview of American bankruptcy law since its inception, the R&R notes the unfavorable treatment of bankruptcy professionals under the Bankruptcy Act, which limited compensation to amounts less than market rate. As a result, there was a perception that only attorneys of lesser caliber would represent debtors in bankruptcy.
However, by the 1970s, the U.S. Court of Appeals for the Fourth Circuit recognized the deleterious effects of this policy, noting there is a “public interest in attracting competent counsel in bankruptcy proceedings.” Therefore, the Fourth Circuit explained, the “yardstick” for compensation of legal services in a bankruptcy case is not necessarily the same as that used for similar legal services outside the bankruptcy arena.
Congress reached a similar conclusion. When the Bankruptcy Code was enacted, it imposed a standard of reasonable compensation commensurate with the cost of comparable services to attract the highest caliber of professionals to bankruptcy practice. Under this paradigm, bankruptcy courts act as a surrogate for the bankrupt estate by reviewing fee applications like a sophisticated non-bankruptcy client would analyze the law firm’s invoices.
“Reasonableness” Factors: Section 330(a)(3) and Johnson
In 2005, the Bankruptcy Code was amended to aid courts in assessing the reasonableness of fees. Section 330(a)(3) of the Bankruptcy Code sets forth six nonexclusive factors for courts to consider in evaluating the reasonableness of fee applications:
- the time spent on such services;
- the rates charged for such services;
- whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of, a case under this title;
- whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue or task addressed;
- with respect to a professional person, whether the person is board certified or otherwise has demonstrated skill and experience in the bankruptcy field; and
- whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.
Since the factors listed in section 330(a)(3) of the Bankruptcy Code are non-exhaustive, courts in the Fourth Circuit also consider the Johnson factors:
- the time and labor expended;
- the novelty and difficulty of the questions raised;
- the skill required to properly perform the legal services rendered;
- the attorney’s opportunity costs in pressing the instant litigation;
- the customary fee for like work;
- the attorney’s expectations at the outset of the litigation;
- the time limitations imposed by the client or circumstances;
- the amount in controversy and the results obtained;
- the experience, reputation and ability of the attorney;
- the undesirability of the case within the legal community in which the suit arose;
- the nature and length of the professional relationship between attorney and client; and
- attorneys’ fees awards in similar cases.
Moreover, when assessing the reasonableness of national rates, bankruptcy courts must also consider certain factors that warrant the retention of a non-local professional. These include, inter alia: (i) the specialization of the applicant; (ii) the urgencies of the debtor’s financial condition; (iii) the regional nature of the debtor’s holdings and creditors; (iv) the fact that a primary creditor may be a national lender; (v) the out-of-state locale of some large unsecured creditors; (vi) the involvement of non-local counsel for several creditors; (vii) the applicant’s unique skillset; (viii) the nature of the work performed; and/or (viii) the availability of capable professionals in the local market.
After applying the section 330 and Johnson factors to the factual record, the Bankruptcy Court concluded that all the fee applications were reasonable. The size and complexity of the case warranted national rates and the expertise of the national firms handling it was to the “benefit of thousands of unsecured creditors.” The District Court adopted the R&R and approved all three of the fee applications. See Order (Adopting Report and Recommendation With Modification), In re Retail Grp., Inc., No. 20-33113 (Bankr. E.D. Va. Sept. 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 enumerated in the R&R.
In tandem, the R&R and the District Court’s order confirm the reasonableness of national rates in the EDVA for corporate bankruptcies on a case-by-case basis. Moving forward, the EDVA remains an attractive venue for corporations and sophisticated parties seeking prompt resolution of complex disputes.