Virginia is for Lovers … And Chapter 11?

It’s no secret that Delaware, New York (Southern District), and Texas (at least since the oil and gas crisis) have become known as the “hotspots” for filing large chapter 11 bankruptcy cases.  Whether due to desirable precedent, well qualified judges, the responsiveness of the Courts to the need for prompt scheduling of hearings, or a sense of uniformity, most large companies have historically chosen to file in these venues. However, these popular venues appear to have a rival.  Recently, some large chapter 11 debtors— Gymboree and Toys “R” Us— have filed in the commonwealth that generally prides itself as being a place “for lovers.”  So, let’s explore why recent chapter 11 debtors have chosen to file in Virginia.

Venue in a bankruptcy case is governed by 28 U.S.C. § 1408, which provides that a debtor may file its bankruptcy case in any district where the debtor’s domicile, residence, principal place of business, or principal assets are located.  For the purposes of the statute, “domicile” indicates a corporation’s state of incorporation.  However, the debtor is not restricted to these locations.  Bankruptcy venue is also proper in a district where the debtor’s affiliate, general partner, or partnership already has a bankruptcy case pending, often times opening the door to a variety of venues.  In many cases, more than one venue will satisfy the statutory requirements, allowing the debtor to make a choice.

What is so appealing about the United States Bankruptcy Court, Eastern District of Virginia (Richmond Division)?  First, the two judges sitting in this district are well respected. Michael A. Condyles, a lawyer in the firm representing Gymboree as local counsel, was quoted in a recent article published in The Virginia Lawyers Weekly as saying, “I do think there is a definite trend.  I think it is a testament to the quality of the judges.”  “The attraction is the ‘quality and sophistication’ of the judges,” Condyles continued.  Judges Kevin R. Huennekens and Keith L. Phillips, who serve in Rich­mond, have a combined 15 years of experience on the bankruptcy bench.

However, this alone cannot answer the question of “why Virginia” in a particular case. Attorneys who have appeared before the bankruptcy courts in Delaware, New York, and Texas, are well aware of the proficiency of excellence and sophistication of the judges who sit there.  The judges’ experience and competency are driving factors that regularly motivate sophisticated attorneys to fly in from all over the country to present their cases in the sought after venues. Clearly, the skill-level of the judges cannot be the only draw to the recent filings in Virginia.

According to a recent article published in the New York Times, the Richmond bankruptcy court is also known to move cases along quickly. While this may be true, that is understandable due to the fact that Virginia courts are required to juggle only a small fraction of the large chapter 11 cases that some of the other venues regularly encounter. The overburdened dockets which many courts frequently face, especially those of the Southern District of New York and Delaware, are managed with ease. These judges commonly schedule multiple hearings in one day, and many of the hearings involve sophisticated, complex issues. Nonetheless, the overburdened dockets are defied by these Courts’ ability to handle the caseload in an efficient manner. Therefore, there still must be more behind this new trend.

The recent large-case filings in Virginia may also be due to another feature attractive to debtors’ counsel— the court is known for approving high professional fees. Nationally, professional fees for bankruptcies have been increasing about 9.5 percent a year, about four times the rate of inflation, according to Lynn LoPucki, a bankruptcy professor at the University of California, Los Angeles who was quoted in the New York Times. In 2014, The National Law Journal posted the results of an hourly billing survey from law firms. It showed the average hourly rate for partners was $604, and associates charged $307. Now, partners in the largest 50 firms charge a median hourly billing rate of $625 per hour, versus those in a second largest group who charge almost $180 less for every hour, coming in at $447. As law firm size increases, so does the median billing rate. Public company debtors typically are represented by the large firms with high billing rates.

Kirkland and Ellis, counsel to Toys “R” Us, disclosed to the bankruptcy judge in the Eastern District of Virginia that its lawyers were charging as much as $1,745 an hour in the case. According to an analysis by The New York Times, that is 25 percent more than the average highest rate in 10 of the largest bankruptcies this year. So far, the Richmond judges seem to accept that with the complexities of large chapter 11 cases, come high attorney rates.

This begs the question, now that the allure of filing in Virginia is known, will we see this trend continue to grow? Only time will tell.