Prediction: Tennessee Bankruptcy Filings will hit all time in June 2020

About two weeks ago–about 6-7 days into the COVID-19 shut down–I had a work call with a debtor’s bankruptcy attorney.

After we briefly talked business, we talked about how everything else was going. I asked him if he was swamped with anxious debtor phone calls. He said he wasn’t, which surprised me. During that first week, the news was full of businesses closing and mass layoffs.

In fact, he wasn’t even at his office. As we talked, I could hear that he was at the store, buying groceries and navigating an entirely separate conversation with the check-out clerk.

As he was loading the groceries in his car, he clarified: “It’ll be busy, like 20 hour a day work-days. But not yet. Right now, nobody knows what tomorrow looks like. Right now, people are worried about survival, not about their bills. Starting in April, maybe early May, that’s when it’ll start. It’ll be when they finally realize that Bankruptcy is their only option.”

I’ve thought about that call in all my conversations with bankers and small business owners navigating financial relief under the CARES Act (the Small Business Stimulus loans, the Paycheck Protection Program, or the expansion of the EIDLP programs), under their business interruption insurance, or calling their lenders for help.

This sense that a bankruptcy filing isn’t the first choice, but, for so many people, it’s inevitable.

Today’s Wall Street Journal has an article, Bankruptcy Lawyers Gear Up for Surge in Filings Due to Coronavirus Fallout, which previews this potential explosion in bankruptcy filings.  “The spike hasn’t caused an immediate jump in corporate bankruptcies, which require financing and—absent an emergency—usually take weeks or months to prepare.”

The reasoning, there, is that a really complex corporate bankruptcy isn’t something that you can rush into. It takes internal planning,  a massive review of financial records, and, in many cases, advance negotiation with essential creditors. In a different time, that process can take 6 months. The coronavirus hit us like a tidal wave, taking us from healthy to destroyed (financially) in a week.

But, what about the average consumer? Well, as a result of quick action by the Tennessee court administrators and Tennessee Supreme Court, most in-person court proceedings are suspended through the end of April.  As a result, even the most aggressive landlord can’t evict a tenant, because there’s no court to sign the order.  Plus, there’s a good legal reason to avoid conducting a foreclosure in Tennessee during this time.  There’s a good chance these suspensions are extended more as this situation develops.

Many debtors file Bankruptcy directly in response to a financial distress, often to stop a pending credit rights action (a foreclosure, a court date, a deadline in a lawsuit). Without these prompts, will there be an urgency for a debtor to call a bankruptcy attorney? Maybe not.

Also, as a matter of timing, what’s the benefit of filing early? Right now, many people are out of work and don’t have regular income. A filing now would draw a line in the sand of their debts at a time when their finances are most uncertain. Candidly, their debts will most likely extend far beyond that line.

As strange as it sounds, it’s likely that bankruptcy filings will not spike until the economy starts to recover, when businesses start to reopen and people begin to go back to work. That’ll be when people can stop worrying about survival and start worrying about digging themselves out a financial hole.

So, yes, Tennessee bankruptcy lawyers are going to be busy and, if 2008 is any indication, Nashville bankruptcy lawyers may end up being some of the busiest in the country.

I think that happens in June.

341: Rent is Due Tomorrow; Lawyer Webinars

Rent is Due Tomorrow, and It’s Going to be Bad. Tomorrow is going to be a terrifying day for lots of people across the country.  That’s because it’s the first of the month, and  rent and mortgage payments will be due for millions of families, and a good number of those people are out of work.

Clients in all types of industries are scared. They’re scared for their business. For their employees. For their personal finances.

cheesecake

Some businesses are taking aggressive action to preserve/conserve cash, but that’s a bold move and beyond what most small businesses or individuals can envision.  Who on earth imagined a future where “I’m not paying my mortgage next month” is a valid financial planning option?

It’s important that we, as lawyers, figure out how to help. This article in the Wall Street Journal, Bankruptcy Law Needs a Boost for Coronavirus, suggests that our financial and restructuring bar is thinner than it should be.

This is a real concern that I’ve heard from bankruptcy lawyers for about a year, even before people had any idea that a global pandemic was possible. There aren’t many bankruptcy lawyers under the age of 40. It’s because, basically, in the last 10 years, the economy has been strong enough that there hasn’t been growth in new practitioners.

This Bloomberg News article, Bankruptcy Phones Ring Off the Hook; Firms Prep for Deluge,  suggests that there will be big time growth in the practice area.

So, we get our coronavirus updates whereever we can, right?

Tony Roma Covid

COVID-19 Webinars are the real fast spreading virus. Ok, so what role can lawyers play?

First off, slow down with the webinars. There are so many lawyer webinars right now.

I loved this tweet from @catmoon:

cat moon tweet

This is great advice, and it’s a good reminder to judge your client marketing first from a place of “Is this Useful to the Client?

Now, don’t get me wrong. I have watched a fair share of coronavirus webinars, and I’ve learned a lot about the state of the economy and business interruption insurance. I even taught one (see below).

(Side Note: I’ve also learned that lawyers should do a test run before going live on a webinar. “I just heard someone grimace.”)

My advice? I agree with Cat 100%. Don’t make me listen to an hour-long webinar, when you could put that together in an article that I scan in 5 minutes. Everybody is busy, so let’s get to the point.

Also, maybe just call the clients and see what they need.  Again, handing the mic to Cat Moon:

2nd cat moon tweet

Call. E-mail. Text. Check in.

Separately, I taught a webinar.  Ok, ok, I know. Webinars.

Mine was a CLE for the Tennessee Bar Association. It was titled “Navigating Client Financial Issues During the Pandemic,” and I hope it gave good, practical advice for both creditors and debtors.

But, yeah, do what I say, not what I do.

tba cle

 

 

 

 

 

 

Does the Mayor’s Safer at Home Order Trigger Business Interruption Coverage? It’s a Billion Dollar Question.

On Sunday morning, Nashville Mayor John Cooper took bold action in response to the coronavirus spread: He entered the Safer at Home Order, which ordered Nashvillians to, generally, stay at home and ordered the closure of non-essential businesses.

Because the Order requires businesses that are “non-essential” to close, did the Mayor do those businesses a big favor, in the event that they decide to make a claim under a business interruption insurance policy?

Business interruption insurance is insurance coverage that replaces income lost in the event that business is halted for some reason, such as a fire or a natural disaster.

This coverage seems like it’d be very helpful to a business that was ordered by the government to shut down during a pandemic, right? Well, it depends on the specific language in the insurance policy.

Remember, insurance companies write these policies, so most will contain text that is as narrow as possible.

Duration of Shutdown? It will be narrow in duration (i.e. only as long as needed to re-establish operations).  As an example, after 9/11, one case held that, once the business owner could physically return to their building, the coverage ended (on 9/18).

But what about coronvirus, when we are prohibited from leaving the house by express order of the government and we definitely can’t go to our business? Seems like a coverable event. Again, though, look the the text of the policy.

Is it a shutdown or a “slow down”? Courts generally require a complete shutdown. Again, good for a Nashville business.

Some interesting questions:

  • If the entirety of your business activities cease; probably a suspension
  • If an entire portion of your business closes but another portion remains
    open?
  • If your normal business activities close, but you convert your business into a
    new but less profitable activity?

So, if you’re a bar that focuses on, let’s say, axe throwing but also serves nachos, and, after the coronavirus, you offer home delivery nachos, are you really shut-down?

Does your policy require the shutdown to be caused by a physical loss or property damage (like a tornado)? Is contamination from a deadly, contagious virus “damage to property”? Maybe…there are cases on dangerous levels of gases that are found to be damage to property.  But, do you have to show documented instances of COVID-19 at your business to get coverage? Also, maybe.

Is there text referencing an Order of Civil Authority? Some policies actually reference shutdowns when access to real or personal property is prohibited by order of civil or military authority.  Here, is the Safer at Home Order a recommendation or an order? Is your businesses clearly not an “essential” business that can stay open?

As a bankruptcy lawyer who rarely gets to fight the exciting fights, I really appreciate the interesting days and arguments that await the insurance lawyer bar over the next few weeks, months, and years.

My advice, today, is to: Pull a copy of your businesses’ insurance policy, and see if it includes business interruption coverage. If it’s a close call, make a claim and see what happens.

 

Is a foreclosure during a global pandemic an "irregular" and invalid sale? (Maybe)

During the coronavirus shut-down, there has been a lot of talk about there being no evictions in Davidson County, based on the Sheriff’s announcement that the Sheriff will not be serving non-essential service of process for the foreseeable future.

But, keep in mind, that announcement doesn’t stop landlord from using a private process server to serve the process.

In fact, the most critical obstacle to detainer proceedings is that the General Sessions Judges have cancelled court hearings through April 10. If there’s no court, then there’s no judgments for possession.

What about foreclosures?

Tennessee is a non-judicial foreclosure sale, so a foreclosing lender doesn’t need a court date, a judge’s approval, or an open courthouse. When they talk about a foreclosure “on the courthouse steps,” they are being literal.

So, as a practical matter, foreclosures can still take place in Tennessee over the next few weeks.

But, is a creditor wise to continue a foreclosure sale to a more stable time? Probably.

That’s because Tenn. Code Ann. §  35-5-118 allows courts to scrutinize the mechanics of a specific foreclosure, with an emphasis on whether a sale is “irregular.”

As I discussed in a blog post last year, pursuant to the Tennessee Supreme Court in Holt v. Citizens Central Bank, 688 S.W.2d 414 (Tenn. 1984), a conscience-shocking foreclosure sale price standing alone, absent some irregularity in the foreclosure sale, is not sufficient grounds for setting aside a lawful foreclosure sale.

What else did Holt say? “If a foreclosure sale is legally held, conducted and consummated, there must be some evidence of irregularity, misconduct, fraud, or unfairness on the part of the trustee or the mortgagee that caused or contributed to an inadequate price, for a court of equity to set aside the sale. ”

So, there remains a question: If a foreclosure sale occurs when the country is facing unprecedented restrictions in public interaction, when we are under orders from local government to “stay home,” is this an irregular sale? Did the unique conditions chill the attendance of competitive bidders?

These are unprecedented times, but we know that the economy is going to take a hard hit and issues like this are going to be litigated. A lender foreclosing on somebody’s business or home in this crazy time may be opening itself up to scrutiny and, yes, a legal challenge.

This would be a great time to continue a sale to a more stable sale date, which is expressly allowed under Tenn. Code Ann. § 35-5-101(f).

Insight from a Bank Attorney: How to ask a banker for help.

By 10am yesterday morning, one of my bank clients had already received five calls from worried borrowers.

These weren’t high risk consumer loans; these were commercial borrowers whose business has been impacted by the pandemic. A fitness studio who can’t have in person classes. Two AirBnB owners who have empty houses. Two restaurants. And that was just by 10am.

(Sidenote: Yes, I just referred to a fitness studio, AirBnBs, and restaurants as not “high risk” borrowers. This is 2020 Nashville, people. It was a different world until a week ago.)

In yesterday’s Tennessean, I told nervous borrowers to call their banker and talk about their concerns.

But what do you say? Here’s an idea of what banks are looking for:

Have a Plan. Don’t just call and ask to not pay for 90 days. Instead, explain to the banker how you are going to use that extra cash in the next 90 days to strengthen your recovery and maximize your chances of survival (and your chances to repay the bank).

Are there easy expenses that you can cut? Are you changing your operations in response? What are you going to do with “the bank’s money” during this time?

Do your Homework. Experts suggest that we’re going to be dealing with coronavirus for weeks and, maybe, months. Even though we have no idea how long this will last, can you give the banker a detailed forecast of your operations during this time?

Show them the bad news (i.e. the projected income), show them the easy and hard cuts you’ve decided to make, show them the fixed costs you can’t avoid (rent, costs of supplies), and show them that you’re trying.

Can you get more capital from other sources? Can you give the bank more collateral? If you can (or can’t), let them know you’ve explored that before asking the bank for help.

The banker probably wants to help you, because your success helps their bottom line too. Here, your goal is to make it easy for her to help you. Provide a roadmap that relies on numbers, solid projections, and is something that your banker can show his bosses when he advocates for you (or, months later, explains why he said “yes” to you).

Have a clear request. If you’ve done your homework and have a detailed plan, you should also be prepared to have a specific “ask” of the banker.

Do you need an extension of your line of credit amount? How much? How did you get that figure?

Do you need a 90 day payment forbearance? Why 90 days?

Do you need a re-amortization of your debt or to make interest-only payments for a few months? How does the lowered payment fit into your budget?

Be a pessimistic optimist. When you call your bank, you’ll be inclined to ask for as little relief as possible, because you’ll want your “ask” to be granted. Maybe you’ll commit to a reduced payment that’s still a little too high.

Here, if you’ve done your homework and come up with a detailed plan, you’ll have a good idea of what you really need from your bank. Ask for that, but maybe a little lower (give yourself some wiggle-room).

You don’t want to get some relief from your bank, but, then, a few weeks later, realize that you can’t perform and need more adjustments.

Long story short, err on the side of being a pessimist, and give yourself some room to under-perform (or over-deliver).

Again, I encourage immediate contact. In my experience, bankers appreciate transparency and dislike surprises (in this context, because these are generally “bad” surprises). Call them, talk to them, and let them know you’re fighting to protect your business.

What's Good for Bankruptcy Lawyers Probably Isn't Good for America.

During my third year of law school, I signed up for “Intro to Bankruptcy” at the University of Tennessee College of Law.

It wasn’t a popular course, and that’s why I chose it. After a summer clerkship where my supervising attorneys couldn’t spell the word “bankruptcy,” I thought it would be a good niche area to know in a tough job market.

Of course, I never imagined that, 21 years later, I’d have spent nearly every working day of my life spelling the word.

My class was taught by Professor Tom Plank, who really loved bankruptcy law. Passionately. When he got really excited in class, he had a thing he’d say: “What’s good for bankruptcy lawyers is good for America.”

Over the years, though, I’ve wondered what he meant. In my 20 plus years of bankruptcy practice, honestly, when I’ve been the busiest in Bankruptcy Court, it’s been a pretty awful time for Americans.

Sort of like the time we are entering right now…

https://twitter.com/tamburintweets/status/1240332869962207232

This article in tomorrow’s Tennessean will discuss the the financial impact of the coronavirus. Spoiler alert: It’s not good.

The article, Bankruptcy lawyers’ warning as coronavirus crisis mounts: Act Now, has good practical advice for people wondering how they are going to pay their bills.

Nashville bankruptcy attorney Griffin Dunham and I were both consulted for the article.

Griffin’s first piece of advice? “Act now. Waiting to address financial concerns would only exacerbate problems.”

My advice? “People who are out of work or losing income because of the crisis shouldn’t wait until they’re out of money…If they feel like they’re in the pinch now, reach out to the landlord, reach out to the bank now.”

Dunham also advocates having a very deliberate plan when deciding to allocate limited cash resources. “The people and businesses that devise a plan, store cash, and think strategically are in the best position to weather the storm.”

It’s going to be bad. For many people, it’s already bad. Act now. Be proactive. Call your lender, call your landlord.

Or, if it’s really bad, call a bankruptcy lawyer.

Nashville Bankruptcy Lawyers Prepare for the Inevitable Spike in Filings

During this coronavirus pandemic, lots of us aren’t working. (Don’t worry, clients, I am 100% working.)

Many of us are staying at home with the kids. We’re definitely not shopping at the mall or meeting up for drinks (well, some of us aren’t). The hotels are empty. Reservations for dinner are being cancelled. AirBNBs are vacant.

This state of affairs is historically unprecedented, and the impact it will have on all businesses, big and small, and all people people, rich and poor, will be felt for years.

One Nashville bankruptcy lawyer, Griffin Dunham, sees it coming. He’s already hearing from businesses that are struggling, and the choices they are making today can have a big impact over the next months.

Here are his quick thoughts on the decisions that people are dealing with right now.

Now, don’t get me wrong. This blog is called Creditor Rights 101, and I don’t advocate for not paying landlords or banks. But, at the same time, I know that this situation calls for tough decisions, and you’ll need somebody in your corner helping you make these decisions.

From my experience, he’s dead right about the need to act deliberately and with good counsel. These are strange times, and it’s the bankruptcy lawyers who can help you navigate these really tough decisions.