Set Your Clocks for 12:01am: Happy New Bankruptcy Act!

How are you celebrating Small Business Reorganization Act of 2019 Eve?

In case you’re wondering what I’m talking about, at 12:01am, the Small Business Reorganization Act of 2019 takes effect tonight.

So, if you wake up tomorrow morning and there have been a hundred or more small business and individual Chapter 11 bankruptcy cases filed overnight, this is why.

It’s because the debtors’ counsel think the new Act provides some tactical advantage for their small chapter 11 case. (And, disclaimer: by “small,” it’s a case where total debts is less than $2,725,625.)

Once upon a time, Chapter 11 was meant to be used for big cases–think K-Mart, Sears, Enron, American Airlines. Then, about 10 years ago, we started seeing more individuals and smaller “mom and pop” businesses filing bankruptcy.

Part of the reason was that these cases were “too big” for a Chapter 13. So, they got shoe-horned into an overly complex Chapter 11 case. It’s been generally a bad fit for many debtors.

In a way, the new Act makes a small chapter 11 case resemble a “big” chapter 13 case. Here’s how:

The process is accelerated, and the debtor must submit a plan within 90 days of the case being filed. Plus, the changes shave down some of the administrative requirements in a typical chapter 11, like the appointment of a creditors’ committee and the need to file a disclosure statement.

Also, there is now a “Sub-Chapter V” Trustee appointed in a case, who will oversee and, in some situations, manage the progress and implementation of a repayment plan.

Also, in the most Chapter 13 model possible, the discharge will not be granted until the debtor completes all payments due within the first three years of the plan or a longer period not to exceed five years (depending on the plan terms).

Finally, the part that gets all the attention is the elimination of the “absolute priority rule,” which requires a business owner to pay “new value” in order to retain any interest in a business unless creditors are paid in full. It used to be that creditors could object and require the debtor pay new money in order to keep a business, and, if none is paid, the creditors had to be paid in full. This is now gone.

So, if you wake up tomorrow morning and you see a lot of new Bankruptcy Cases, you may wonder why the debtor’s law firm stayed up so late to file it.

This is why.

But, creditors, please know this–there’s nothing really to do to stop or prevent this new Act’s application. Just wake up tomorrow and re-read the Act. And, be sure to re-read Chapter 13 while you’re at it.

Riverwood Cabins Files for Bankruptcy, with more than 4 Million in Customer Deposits at Issue

Ten or 12 years ago, it wasn’t a shock when a builder filed for Bankruptcy and left behind dozens of half-completed projects and unaccounted for customer deposits in its wake of discharge and dispair.

But, in our modern/better/faster/stronger economy, I was really surprised to see Riverwood Cabins, LLC file a Chapter 7 Bankruptcy in Nashville a few days ago.

Riverwood Cabins builds prefabricated cabins and modular log homes for customers (generally in Tennessee), and then delivers the cabins nationwide to the customer’s land for assembly.

Per the Bankruptcy Schedules, Riverwood claims assets of $265,205.18, and total debt of about $5,900,000.

Of that debt, here’s what’s mind-blowing: that debt includes $4,468,842 (*) in unaccounted for customer deposits that are claimed as debts.

To be clear, the customers who paid 50% down as a deposit for the cabin, and, now, that money is gone and entirely unaccounted for.

This isn’t a few dollars short here and there. This is 4 MILLION dollars.

In the Great Recession, a little shortage here and there wasn’t a shock.

Builders would dip into a little bit of funds from Project C so that they could finish up Project A. Then, a few weeks later… in order to finish Project C, they might dip into the funds on Projects E and F. In the end, the whole scheme would come crashing down when the shortages outpaced the new contracts from new customers.

But I haven’t seen this type of shortage before.

I’m literally shocked by the large number of customers (about 65) who don’t have cabins or any explanation of where their cabins–or their deposits–are.

For the first time in nearly a decade, the post-judgment interest rate has decreased

It has been nearly 8 years since Tennessee changed the post-judgment interest rate by amending Tenn. Code Ann. § 47-14-121.

For years, the rate was set in stone–at 10%–and the new statute created a variable interest rate tied to the formula rate published by the Tennessee Department of Financial Institutions.

After starting at a very judgment-debtor friendly 5.25%, the rate has steadily increased over the past few years. Last year, it hit a new high of 7.5%.

But, effective January 1, 2020, the rate is heading in the opposite direction: The rate dropped to 6.75%.

Honestly, I don’t even care about the 0.75% drop. What drives me crazy is the constant changes in the post-judgment interest rate. It’s made calculating post-interest nearly impossible, since you have to constantly adjust the per diem.

In this robust Tennessee economy, I get weekly phone calls from closing companies, who discover one of my old judgments (and related judgment lien). And, yes, computing payoffs on old judgments is a wonderful task that I gleefully undertake, but it really used to be a lot simpler (and, also, this was one of my earliest reactions to the new statute).

I love collecting money for clients, but, holy smokes, I don’t always love math.

Trust in Bankruptcy Lawyers to Save Krystal's

Yes, Krystal’s filed for Chapter 11 Bankruptcy.

But, don’t worry. A bankruptcy filing doesn’t mean that the South’s favorite tiny hamburger is going away. In fact, there’s a good chance it’ll be a stronger chain after all this.

Krystal’s financial problems appear to be a relatively new problem, based on documents filed in the main Bankruptcy case.

As part of the case, the lead company filed a Declaration by its Chief Restructuring Officer, who has been trying to help Krystal correct course (and hired very recently, in November 2019).

Of the nearly 300 locations, the company closed 44 locations in 2019, including 13 closures on December 15, 2019 (in anticipation of the bankruptcy filing, I’d assume).

The quick summary? “Shifting consumer tastes and preferences, growth in labor and commodity costs, increased competition, and unfavorable lease terms.”  You can download and read a full copy of the Declaration here:

The Declaration tells the story of the events leading up to the bankruptcy filing, starting with the invention of the “iconic square hamburger patty slider” in 1932. It’s written by bankruptcy lawyers, so don’t expect a glowing press release.

The summary of the problems is this:

  • Increased competition due to “proliferation of fast casual restaurants as well as online delivery platforms…”
  • “Difficulty finding and retaining qualified employees…”
  • Entry into an expensive store rebuilding program, at a cost of about a million dollars per location.
  • Default under a Forbearance Agreement on a $50 million loan.
  • A “security incident” involving one of the company’s “payment processing systems.”

In a nutshell, the Bankruptcy docket tells a familiar story, about how a changing industry landscape is creating havoc in long-standing businesses.

This is obviously early–in fact, all the filings I looked at are what is called the “First Day Motions.” But, given the amount of debt involved and brand recognition–and, yes, I’m talking about the out-pouring of concern on twitter–I suspect Krystal’s can figure this reorganization out.

And, honestly, I’ve eaten a lot of Krystal’s during my time. If part of the reorganization is shutting down bad stores and remodeling others, I think it’s a good plan.

A Service of Process challenge may not overcome your Judgment

Service of process is a hot issue in Tennessee law. The reason is obvious: Without proper service of process, any subsequent action taken in a case is void.

Part of the reason service issues are coming up so frequently lately is the comparison between the 2009 economy and the 2019 economy. Judgment debtors have more money (and reason) to fight now, including more money to fight old judgments.

A new appellate decision considered a service of process last week, in Warren Brothers Sash & Door Company v. Santoro Custom Builders, Inc., et. al., M2019-00374-COA-R3-CV, 2020 WL 91635 (Tenn. App. Jan. 8, 2020), where an individual defendant opposed a judgment creditor’s efforts to renew a judgment rendered in 2008 by contesting service of process.

Looking at the returned Summonses, the individual had a pretty good argument, since both the corporate and individual defendants were served at the business address, when the Sheriff served both Summonses at the corporate address, by serving the person at the front desk.

Under Tenn. R. Civ. P. 4.04, an individual defendant shall be served “personally” or, if she evades, by leaving the copies at her “dwelling house or usual place of abode with some person of suitable age and discretion then residing there…”

Long story short, the Sheriff didn’t serve Santoro personally and the business address wasn’t his house, and, as a result, Santoro had a really good argument on paper.

But, Plaintiff had some really good lawyers. Instead of stopping their work on the face of the Summons, they really dug in on who accepted service. They deposed the person, and they also found at other lawsuits where this person was authorized to accept service for the individual. And, they took care to get all this information properly introduced into the record.

With all this background proof in the record, the trial court found that the agent had implied authority to accept service. In affirming, the Court of Appeals wrote:

An individual may appoint an agent for the purpose of receiving service of process, giving that agent either actual or implied authority. Implied authority “embraces all powers which are necessary to carry into effect the granted power, in order to make effectual the purposes of the agency.” Implied authority can be “circumstantially established through conduct or a course of dealing between the principal and agent.’ ”  However, the existence of implied authority is determined by the “ ‘act or acquiescence of the principal,’ ” rather than the actions of the agent.” With respect to service of process, “the record must contain ‘evidence that the defendant intended to confer upon [the] agent the specific authority to receive and accept service of process for the defendant.’ ” 

Id. at * 5 (internal citations omitted).

In the end, Plaintiff’s counsel’s thorough analysis of the facts and getting those facts into the record carried the day.

It’s telling that this opinion was written by a fairly new appellate judge, Judge Carma McGee, who spent years as a trial judge. This is a smart, well-reasoned opinion, and all credit goes to the trial counsel, who gave the Judge the proper facts.

Remember: Detainer Appeals without the possessory bond are still valid appeals

Posting the proper bond in an eviction appeal in Tennessee is confusing and, sometimes, very expensive. Remember, though, if a landlord is granted an eviction judgment, the tenant can still have a valid appeal, even if the tenant doesn’t post the possessory bond required by Tenn. Code Ann. § 29-18-130(b)(2).

I thought this issue was settled–I was blogging about it 5 years ago–but it keeps coming up in circuit courts across Tennessee.

The Tennessee Court of Appeals issued an opinion yesterday, affirming this line of decisions, in Thomas v. Millen, W2019-00086-COA-R3-CV (Tenn. Ct. App., Dec. 19, 2019). This case cited the Court’s own recent, similar opinion at Belgravia Square, LLC v. White, No. W2018-02196-COA-R3-CV, 2019 WL 5837589 (Tenn. Ct. App. Nov. 7, 2019).

Long story short, the possessory bond is not jurisdictional, meaning the circuit court has jurisdiction to consider the issues, and an appeal remains valid despite the failure to post the § 29-18-130(b)(2) bond.

As a practical matter, most eviction appeals will die once the tenant loses the right to possession. But, not all. In that situation, the tenant could be dispossessed of the property, but the tenant can still challenge the landlord’s rights and, if successful, seek monetary damages against the landlord if the tenant wins.

That type of fight does happen. I’ve had an opposing party / tenant lose in Sessions, appeal to Circuit, lose possession in Circuit, but continue fighting my matter…all the way to the Supreme Court. The United States Supreme Court.

Judgment Renewal is Easy; Calendaring the Deadline can be Hard

Nearly ten years ago, I preached about the virtues of patience and perseverance in collection of judgments. Specifically, I discussed Tenn. Code Ann. § 28-3-110, which says that judgments are good for ten years. For judgment creditors, a lot can change for your judgment debtors in ten years.

I constantly tell my clients that. For example, that Nashville property contractor who was dead broke in 2010 could be on top of the world in 2018 Nashville. Just be patient.

But, don’t be too patient. As you approach the ten year mark, remember that judgments can be renewed for another ten years, using a pretty easy, straight-forward process under Tenn. R. Civ. P. 69.04.

Under new(-ish) Rule 69.04, this can be done via Motion, but the Motion itself must be filed prior to the expiration of the judgment. So, Tennessee creditor rights attorneys, the burden is on you to make sure you’re making a list and checking it twice, looking for judgments that are nine years old, right?

Creditors: Make a Judgment List and check it. Twice, if necessary.

What happens if your law firm gets the judgment for a client but fails to renew the judgment?

Like many issues, it depends, but a brand new opinion from the Tennessee Court of Appeals discusses this issue. The case is Linda Rozen v. Wolff Ardis, P.C., W201900396COAR3CV, 2019 WL 6876769 (Tenn. App. Dec. 17, 2019).

In that case, the law firm obtained a judgment, generally discussed the 10 year requirement with the client, and, years later, no renewal request was made; the clients sued for malpractice.

There’s a lot to unpack in this case, but here’s my quick take-away:

When you get a judgment for a client, tell them that it will expire in ten years. As part of that message, remind them that people change firms, lawyers die, files get closed, files get dormant and sent to storage, things change, but, no matter what happens, if they want you to renew the judgment in ten years, they have to call you and specifically ask you to do it. Your representation does not necessarily include this renewal request, unless you and the client agree it does.

That was a decisive fact here, that the law firm had put the client on notice that specific action was needed to renew this judgment before ten years passed. As that ten year mark approached and passed, the client didn’t raise the issue, either by confirming that the firm did it or, alternatively, suing them for malpractice within one year of the failure to renew it.

So, in a perfect world, we calendar up all our judgments for renewal and we discuss the action with our clients in advance and mutually agree on an engagement for a renewal.

But, in reality, a lot of things can change in ten years. A good practice is to make sure that the client understands that it has a responsibility in ten years to notify you that it wants you to take this action.