In the Eastern District of Virginia, counsel in “mega” chapter 11 cases run the risk of only being paid the prevailing local rates, not “national rates,” as a consequence of two decisions by a district judge in the reorganization of Mahwah Bergen Retail Group, Inc., a retailer that operated 2,800 stores with names like Ann Taylor, LOFT and Lane Bryant.
After vacating the debtor’s plan confirmation order due to overly broad nondebtor releases, District Judge David J. Novak of Richmond, Va., remanded the case with instructions that the bankruptcy court not allow further fee applications at rates in excess of those in Richmond.
Following remand, Chief Bankruptcy Judge Frank J. Santoro of Norfolk, Va., recommended that Judge Novak grant allowances for work performed after the reversal of confirmation at rates almost as high as the “national” rates of firms representing the debtor and the official committee.
In his recommendation on fees to Judge Novak, Judge Santoro wrote a 30-page opinion amounting to a plea for the allowance of “national” rates for counsel in “mega” cases.
Judge Novak granted the fee allowances in the amounts recommended by Judge Santoro, but he said that the calculation “in future mega cases . . . must begin with the prevailing rates in the District, not a national rate suggested by Judge Santoro.”
Reading between the lines, this writer believes that Judge Santoro allowed the fees at national rates because cutting the rates in half would have been unfair to counsel who accepted and completed the difficult engagement on the belief that they would not be paid at “local” rates.
It remains to be seen whether “mega” debtors in the future will be able to attract qualified, “national” counsel to file chapter 11 petitions in the Eastern District of Virginia.
The Reversal of Confirmation
In a scorching opinion, District Judge Novak set aside confirmation of the debtor’s chapter 11 plan in January because it contained “extremely broad third-party (non-debtor) releases.” Patterson v. Mahwah Bergen Retail Group Inc., 21-167, 2022 BL 328437, 2022 U.S. Dist. Lexis 167953 (E.D. Va. Jan. 13, 2022).
Judge Novak vacated the confirmation order, voided third-party releases, severed the third-party releases from the plan, and voided an exculpation clause. To read ABI’s report, click here.
Judge Novak directed that further proceedings be held before another bankruptcy judge. Later, Judge Santoro reassigned the case to himself as the chief judge.
On January 13, the same day that he vacated confirmation, Judge Novak entered a second order disabling the bankruptcy court from exercising core powers by entering final orders of compensation in the case. Instead, he directed that the bankruptcy court issue proposed findings of fact and conclusions of law, “with respect to further petitions for approval of attorneys’ fees.”
In his second order, Judge Novak ordered “that attorneys’ fees approved in this case shall not be for rates exceeding the prevailing market rates in the Richmond Division of the Eastern District of Virginia.”
The Subsequent Fee Allowances in Bankruptcy Court
Fortunately, setting aside confirmation did not upset the apple cart entirely. As directed by Judge Novak, the debtor modified the plan, and it was confirmed by the bankruptcy court on March 3.
After re-confirmation, counsel filed fee applications covering the period from the reversal of confirmation on January 13 to the conclusion of the case.
Local counsel for the debtor filed an application for almost $7,700, at a blended rate of slightly under $500 an hour. The U.S. Trustee negotiated a $500 reduction.
“National” co-counsel for the debtor filed an application for just over $1 million, at a blended rate of almost $1,000. The highest-billing lawyer charged almost $1,500 per hour. The U.S. Trustee negotiated a reduction of $10,000.
Chief counsel for the official creditors’ committee, a “national” law firm, sought about $270,000 at a blended rate just under $1,000. The U.S. Trustee negotiated a $17,000 reduction.
Judge Santoro’s Fee Allowances
We won’t keep you in suspense. In an opinion on August 30, Judge Santoro recommended allowing fees in the amounts negotiated by the U.S. Trustee. In other words, the fees he recommended for the two “national” firms were about twice the local rate. No one objected.
Judge Santoro’s 30-page recommendation explained why he believed it would not be proper to cut national counsels’ fees to local rates. He began by laying out the history of Section 330(a) and how it differed from the “spirit of economy” that prevailed under the former Bankruptcy Act.
Judge Santoro explained that Section 330(a)(3)(f), as amended, now permits the court to consider “whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.” He said that the Fourth Circuit also requires consideration of the so-called Johnson factors.
Judge Santoro pointed out how the Fourth Circuit had said in 1994 that rates in other communities can be considered “where it is reasonable to retain attorneys from other communities.” Rum Creek Coal Sales, Inc. v. Caperton, 31 F.3d 169, 175 (4th Cir. 1994) (citations omitted).
Around the country Judge Santoro found a “theme” in fee allowances “for out-of-market attorneys’ fees[:] . . . national bankruptcy cases are different.” Citing bankruptcy court decisions from California, northern New York, and Arizona, he went on to say that “limiting counsel to local-market rates in cases that are national or regional in scope would cap attorneys’ fees without consideration of whether the rate is reasonable in the particular case.”
Instead, Judge Santoro said that “the court must assess whether a requested rate is justified based upon the facts and circumstances of the case.” He said that the “interdisciplinary nature of large Chapter 11 bankruptcy cases, together with the exigencies and sheer magnitude of work involved, typically means that local counsel is not ‘truly available’ to take on such cases.”
With regard to the services by the two national firms, Judge Santoro referred to the “favorable outcome” they achieved and their “high level of experience, legal knowledge, and skill in the face of unique issues and significant time pressure.” With regard to one firm, he found that “out-of-market rates are reasonable under the particular facts and circumstances of this case.” Regarding the other, he said that “the rates reflect the firm’s experience, capabilities, and position in the national market.”
Given the “excellent results under challenging circumstances,” Judge Santoro recommended that the district court grant the fee allowances with the small cuts negotiated by the U.S. Trustee.
Approval in District Court
In his four-page opinion on September 16, District Judge Novak recited the instruction in his January 13 order that fees may not exceed the “prevailing rate” in the district. Acknowledging that no one objected, he went on to say that the “Bankruptcy Court approved the rates requested, although they exceeded the prevailing rates” in the district.
Judge Novak adopted the report “as the opinion of the Court, subject to the modifications below.” He approved payment of the negotiated fees, “[d]ue to the unique procedural posture of the case.” He added that he “agrees with the Bankruptcy Court’s analysis that this case warrants rates exceeding the prevailing market rates in the Eastern District of Virginia.”
“In future mega cases,” Judge Novak said, “the ‘yardstick’ for the rate calculation must begin with the prevailing rates in this District, not a national rate suggested by Judge Santoro. . . . [T]he appropriate rate calculation is a mega case must be determined on a case-by-case basis with detailed findings addressing Section 330(a)(3) and the Johnson factors in each case.”
Pure Speculation
It’s pure speculation on the part of this writer, but it is possible that Judge Novak did not impose local rates from concern that the two “national” firms would appeal and win reversal in the Fourth Circuit. It remains to be seen whether other bankruptcy and district courts in eastern Virginia will follow Judge Novak. We may never know, because “national” firms may henceforth shy away from Virginia.
The recommendation by Judge Santoro is Retail Group Inc., 20-33113 (Bankr. E.D. Va. Aug. 30, 2022); and the opinion by District Judge Novak is Patterson v. Mahwah Bergen Retail Group Inc., 21-167 (E.D. Va. Sept. 13, 2022).
In the Eastern District of Virginia, counsel in “mega” chapter 11 cases run the risk of only being paid the prevailing local rates, not “national rates,” as a consequence of two decisions by a district judge in the reorganization of Mahwah Bergen Retail Group, Inc., a retailer that operated 2,800 stores with names like Ann Taylor, LOFT and Lane Bryant.
After vacating the debtor’s plan confirmation order due to overly broad nondebtor releases, District Judge David J. Novak of Richmond, Va., remanded the case with instructions that the bankruptcy court not allow further fee applications at rates in excess of those in Richmond.
Following remand, Chief Bankruptcy Judge Frank J. Santoro of Norfolk, Va., recommended that Judge Novak grant allowances for work performed after the reversal of confirmation at rates almost as high as the “national” rates of firms representing the debtor and the official committee.
In his recommendation on fees to Judge Novak, Judge Santoro wrote a 30-page opinion amounting to a plea for the allowance of “national” rates for counsel in “mega” cases.
Judge Novak granted the fee allowances in the amounts recommended by Judge Santoro, but he said that the calculation “in future mega cases . . . must begin with the prevailing rates in the District, not a national rate suggested by Judge Santoro.”