341: Bar Exams, Change of Plans, Buy a Bankruptcy Code

The Bar Exam has been canceled (sort of). July is usually bar exam time in Tennessee (as well as all over the country). Like nearly everything else about our lives, the bar exam is going to be drastically different in Tennessee in 2020.

As a result of this Order, Tennessee bar applicants now–for the first time ever–have the option of taking a private, online exam. As you can see from the responses to the Tennessee Supreme Court Justice’s tweet (really, people?), no decision is going to please everybody.

It’s either too much of a departure from tradition (for the older crowd) or too little of a change to the status quo (for the progressives).

Twitter can be pretty awful.

Speaking of how it’s impossible to make everybody happy. As law firms are trying new models as they pivot into the new world, this tweet spoke to me on a DNA level:

This is absolutely true. A law firm is generally full of highly critical (in a good way), smart, risk-adverse know-it-alls (in a bad way). I’ve seen hotly contested arguments about what soda to stock in the law firm kitchen. Good luck with your nimble pivots, managing partners.

Diversity Matters. The past few months have provided eye-opening lessons about privilege and opportunity for so many of us. Especially those in leadership positions at law firms.

In early June, I started to receive all the Black Lives Matters marketing e-blasts, so I know that many law firms recognize the PR benefit of supporting this movement.

But, I also know these law firms and judge them on their actions (as well as their words).

Law firms, what are you doing about diversity? And not just the 2020 associate class. I’m talking about the future years’ classes too. What support are you providing to nurture and provide opportunities to current law students? What about college students from non-privileged backgrounds who want to be lawyers? What about your staff (both present and future)? What educational or institutional policies are you introducing to your practices in response? What are you doing to support the movement in your community?

Separately, am I–personally–doing everything that I can? Are you?

Bankruptcy, Bankruptcy, Bankruptcy. I posted last week about the starring role that bankruptcy lawyers will play in the coming months. Others agree:

Bankruptcies are heating up in the Middle District of Tennessee. Every day, I’m getting calls for representation on a new creditor bankruptcy case filed in Nashville.

Buy a Bankruptcy Code book, young lawyers.

The Palm sues the Nashville Hilton over losses related to COVID

Late Thursday, the Palm Restaurant sued the Nashville Hilton, arguing it should not have to pay full rent during the pandemic and especially not for time periods when the Hilton hotel itself wasn’t open.

It’s an interesting argument, about issues that will be litigated throughout the country over the next few years.

Generally, in Nashville (and everywhere else), closures related to COVID-19 haven’t given tenants much factual or legal basis for avoid rent payments. That’s because most commercial leases–more than anything–make payment of rent such a supreme duty under the lease that anything short of total physical destruction of the premises doesn’t excuse payment.

The Palm’s Lease at the Hilton is no different.

The Complaint alleges that “[t]he Lease provides for a rent abatement in the event that the Premises is damaged as a result of casualty,” citing Section 23.1 of the Lease. Specifically, that provision requires that the Property “be damaged by fire or other casualty” and has the typical murky text that you’d expect in a landlord-drafted lease that assumes the premises were physically damaged.

(Side note: The Lease also has a “Force Majeure” provision that is so iron-clad that The Palm doesn’t even cite it in the Complaint.)

As in so many of these cases, the million dollar question is: Does the COVID-19 virus cause “physical damage”?

The Palm takes a novel approach, in part, arguing that the Hilton’s voluntary shut-down caused the losses at the restaurant, since The Palms’ decision to initially lease the space was so heavily dependent on the existence of a thriving Hilton hotel.

“Pursuant to the Lease, the Hilton was and is required to operate a first-class business hotel…[and] provide the Palm with access to Common Areas…” As part of the Lease, the Palm’s dependence on the Hilton is evidenced by the facts that: Palm allowed Hilton guests to charge meals to their rooms; the Hilton heavily advertised the Palm in the hotel and in the rooms; and the Palm agreed to identify the Hilton in its own marketing.

Then, COVID hit. On March 12, the SEC tournament was shut down. On March 20, Metro shut down in-person dining. On March 22, the State of Tennessee took similar action. In response, on March 22, the Palm closed to in-house dining.

But, the lawsuit alleges, “[a]t no point in time since March 1, 2020 has the Hilton been forced to cease operations due to a state or local governmental order. … Despite the fact that it was under no obligation to do so, the Hilton shut down on March 24, 2020. …Upon information and belief, despite its management company having cash on hand necessary to support ongoing operations, the Hilton remained closed during April, May, and part of June.”

The Palm re-opened to 50% capacity on May 11 (as allowed by local and state law), but the Hilton didn’t re-open until June 8, 2020. The Palm argues that it was denied the benefit of foot traffic from the Hilton, marketing and promotional benefits, and access to Common Areas.

When the lawsuit was filed, the Palm had not paid rent for April, May, June, or July 2020 (including CAM charges for space at the Hilton). The Hilton has refused to discount any of that rent, despite the Palm’s requests for a discount.

This lawsuit asks the Davidson Chancery County Chancery Court to provide “declaratory relief” and declare that The Palm is not in default and is not required to pay April, May, June, and July 2020 rent (as well as get back some of the rent paid in March).

This case raises nearly all of the issues the commercial landlord-tenant bar will be fighting in the near future. Plus, this one has the added awkwardness of two inter-dependent, adjacent businesses being involved in direct litigation.

This may be the first notable COVID-related landlord tenant lawsuit filed in Nashville, and it’ll be one to watch over the next few weeks, months, and, gulp, year.

TL;DR: The lawsuit asks whether the Hilton’s decision to shut its own operations down creates a factual or legal defense to some or all of the amounts due from The Palm under the Lease.

Second Lady A sues Original Lady A in Nashville: Interesting Legal Issues for Interesting Times.

I’ll start by saying this: Lady Antebellum’s heart seemed to be in the right place.

As you will recall, last month, the band announced that it was changing its name to “Lady A,” which was in recognition of the racially insensitive history of the term “Antebellum.”

The news was applauded, in light of the global outpouring of support for the Black Lives Matter movement and the growing awareness of how little so many of us understand about what it means to be a non-white member of American culture. It’s not cool for a white country music band to be walking around with Antebellum in their name.

But, then, you know what happened next. Anita White, an African American gospel and blues singer in Seattle–and who has long performed as “Lady A”–objected to the name-change.

Side-note: Did nobody do a google search on any of this?

Per Second Lady A’s twitter, the parties had a number of conversations–all friendly (see above)–which became more complicated, as Original Lady A began to recognize that her interests may not be entirely at heart in the band’s move.

Then, well, I’ll let Second Lady A say it: “Today we are sad to share that our sincere hope to join together with Anita White in unity and common purpose has ended.”

To be clear, that date of the end was July 8, 2020, when Second Lady A filed a lawsuit in Nashville federal court, asking the District Court to grant them the right to use the trademark. The lawsuit says that it isn’t asking for money, but, still, it’s a fairly aggressive move. Apparently, Original Lady A asked for $10 million as part of the conversations.

This isn’t Trademark Rights 101 , but I follow really smart lawyers on twitter. Such as this twitter chain by Alexandra Roberts, an Intellectual Property law professor, who analyzes this situation top to bottom.

It’s a really fascinating view into the thought process that a court will consider, both on the facts and relevant law. Read the whole thing…you’ll be smarter by the end of it.

Another issue that I thought was interesting is this: Did Original Lady A submit herself to jurisdiction in Nashville by participating in phone and Zoom video calls, when Second Lady A were physically in Tennessee? Yikes, if that’s the law. Professor Roberts suggests that may be the alleged basis.

So, two quick-takeaways.

(1) This is a terrible look for Second Lady A. Maybe they’re correct as a matter of law, and I’ve just got more to learn about IP law. But, again, what a terrible look for Second Lady A. I tell my clients this all the time: You may be right here, but are there other factors to consider. Should we keep looking for a middle-ground resolution?

(2) I can’t wait for more information on the basis for jurisdiction in Nashville, Tennessee for this lawsuit.

Nashville Post: The Bankruptcies are Coming, but Where are the Bankruptcy Attorneys?

If a creditor rights attorney appears in a movie or TV show, he is generally the bad guy who galvanizes the stars of the movie to assemble a dance competition to save the community center from foreclosure.

In fact, for a long time, my LinkedIn bio described my creditor’s rights bankruptcy practice as:

This is an area of law they don’t make movies about. In fact, the only movie about creditor bankruptcy attorneys that I know of is Heart and Souls, a 1993 movie starring Robert Downey, Jr. In that movie, his childhood guardian angels come back to Earth to re-visit him as an adult and are horrified by what he does for a living. Well, that’s my job.

As a result, insolvency attorneys tend to be slightly self-conscious about our role in the legal ecosystem. When our law firms’ clients host open houses at their glitzy new facilities or shiny, over-budget restaurants, it’s the bankruptcy attorneys standing by the bar who eyeball it all and wonder how much all it cost and whether they can pay for it.

(Note: I’m actually kidding about this…the bankruptcy attorneys actually never get invited to grand openings or fun events. Kidding.)

So, in light of all that, you can imagine how proud I was that the Nashville Post ran a magazine article this week showcasing the starring role to be played by bankruptcy attorneys in the coming months and years.

Step aside, corporate mergers and acquisitions counsel, this is a job for a Bankruptcy Lawyer.

It’s a well-done article, with spot-on analysis of the issues facing our local economy. This quote from local debtor counsel Nancy King really nails the current mindset:

Most companies right now are either in the stunned phase, or they’re in the ‘I want to work it out with my bank’ phase, or possibly the ‘I’ve gotten a PPP loan, I think I might make it’ phase. … When all that comes to an end, I think Chapter 11 is going to end up being an option for a lot of those companies.

One of the most interesting aspects of the article is the narrative that there aren’t enough bankruptcy lawyers in Nashville.

It’s absolutely true.

Nashville is widely known as having a sophisticated bankruptcy bar, due to the wide range of complex cases that get filed in our district (both consumer and commercial), our really smart judges, and a deep roster of sophisticated bankruptcy lawyers.

Nevertheless, when the Middle Tennessee economy rebounded so quickly from the Great Recession, local law firms simply didn’t restaff their bankruptcy practice groups. Instead, from 2013 to 2019, the smart young lawyers went into real estate, development, and corporate work.

As a result, most Nashville law firms have bankruptcy practices that are, basically, composed of the same bankruptcy lawyers who steered the ship in the last recession. Sort of like the 2012-13 Boston Celtics–a good team, but lots of veterans and hardly any young prospects.

We’ve known this is coming for a long time. In fact, at the 2019 Bankruptcy Lawyer Holiday Party (yes, it’s a real thing), the three most popular party guests were the three new faces (all under the age of 30). They were subjected to an endless barrage of business cards, lunch invites, and recruiting pitches that night.

In fact, one of those young lawyers has already been poached away by an out-of-state law firm that has one of the largest bankruptcy practice groups in the country.

So, my advice to young law school graduates (or students)?

Learn Bankruptcy. Read the Bankruptcy Code. It’s literally an inch thick. There’s always another recession around the corner.

You’ll have a great (and long) career.

Also, while you’re quarantined at home, watch Heart and Souls. It really is a fun, under-appreciated movie.

New Chancery lawsuit spotlights struggles for Airbnb companies in Nashville

As you’d expect, COVID-19 and the related travel restrictions have had a catastrophic impact on the travel and hospitality industry. In Nashville, rental income for once wildly-lucrative Airbnb properties evaporated in an instant.

Consider Stay Alfred, a hospitality start-up based in Spokane, Washington that had 2,500 units in 33 cities, which closed its doors in April and is now subject to a receivership action.

In Nashville (and in Memphis), Stay Alfred had a number of buildings where it controlled nearly all the units, such as the shiny 505 Tower in downtown Nashville, as well as other prime locations in both cities. By April, Stay Alfred had left those buildings entirely.

Now, it appears that Sonder USA, Inc. may be headed toward a similar fate. Sonder manages over 12,000 rental units in 28 cities, generally for short and medium term rentals. In its most recent efforts to obtain private equity, Sonder provided a valuation of $1.3 billion.

Yesterday, in Davidson County Chancery Court, a Georgia developer filed a breach of contract lawsuit against Sonder over its failure to take possession of 101 units in a residential building in Nashville’s Hillsboro Village, located at 1620 21st Avenue South.

In this deal, the Plaintiff-developer agreed to purchase the 101 units in December 2019, many of which were already rented out to long term tenants. As those existing tenants either left or were forced out, the developer would then lease those units to Sonder, which Sonder would then manage as short term rentals. Under the Lease, Sonder would pay the developer annual rent of “$2,641,387.32.”

What could go wrong in Nashville real estate in 2020, right?

Per the Complaint, in April 2020, when Sonder was scheduled to take possession of the first batch of units, Sonder immediately went into default. Sonder claimed defenses of force majeure and impossibility of performance and frustration of purpose.

When Sonder failed to take possession or pay, Plaintiff filed this action, seeking $2 million in current and future rents. This is going to be an interesting case, since the parties seemed to go into this venture, jointly, in December. If so, then why does all of the risk shift to the lessor-defendant? Does the nature of the business relationship mean that Plaintiff and Defendant both should bear the risks?

I live in Hillsboro Village, so this one is a bit personal for me. This is my neighborhood, which is a bustling area of families, Vanderbilt workers (school and hospital), and college kids. It’s a residential community, not a vacation or party destination.

Housing is scarce. And getting more and more expensive.

As somebody who has lived in this neighborhood for over ten years, it’s irritating that these out-of-town companies created a business model to convert limited, scarce housing assets into STR properties by forcing residents out of their leases and out of the building.

Think about if you’re a grad student or doctor at Vandy, and you love your apartment. It’s right there next to your school/work, next to Luke Bryan’s steakhouse (which really is delightful), and next to Dragon Park. Sounds great, right? But, when you get to month 10-11 of your lease, you get a notice from the new owner that they want you out; the entire building is converting to vacation rentals.

I’m sure the developer would say that the “market dictates the highest and best use of property.” Let’s hope our new economy sends its own message to these opportunistic developers who want to convert our residential space into a hotel / vacation rentals. One that our local government is clearly afraid to send.

Maybe an empty building where all the long term tenants were forced out will send that message.

For what it’s worth, that message may have been received. As of the time of this posting, a great number of the units in Village 21 are now available for long term leases.

Tennessee law doesn’t require judgment creditors to collect in any particular order. Seriously.

Is a judgment creditor required to exhaust its collection efforts against personal property before executing on real property?

If you asked 100 lawyers over the age of 60 this question, 80 of them would get the answer wrong. And every single one of them would be absolutely positive that they were right.

I’d guess that I have a argument with opposing counsel on this legal issue at least once a month, and it usually ends with them being absolutely certain that I am wrong.

What’s crazy is the answer is simple:

Execution against personalty need not precede execution against realty.

Tenn. R. Civ. P. 69.02

So, there you have it.

If you’re wondering, however, whether you should ever start the collection process with efforts to sell real property…well, that’s another blog post entirely.

Davidson County Chancery Court’s Zoom Trial Worked!

Last month, I told you Davidson County Chancellor Ellen Lyle had scheduled a business litigation trial to be conducted entirely via Zoom.

This was big news for laywers. After COVID-19 prevented most in-person court proceedings, many innovative courts began to conduct contested, non-evidentiary hearings via the phone or Zoom.

What was so interesting about this matter, however, was this was a full-blown trial, with witnesses and 61 exhibits. This required lots of advance planning, exchanging exhibits, and technical preparation (Does Zoom work? Can you share screens and jointly review exhibits?)

And, it worked. A link to the live-streams remains available at Part III’s YouTube channel. (What a crazy thing to type…”Part III’s YouTube channel.”)

It’s been an unprecedented time for our world, but it’s awesome to see our Tennessee Courts evolving to make sure matters get heard and also not being afraid to open up these news-worthy proceedings to the public.

Earlier this week, the Tennessee Supreme Court conducted a full day of hearings via Zoom, with the proceedings live-cast on the Court’s YouTube channel.

My office is just down the street from the Davidson County Courthouse and only a block or two from the Tennessee Supreme Court, so it’s no big deal for me to stop by and observe an interesting or newsworthy court proceeding.

But, for the average citizen, the barriers to seeing the justice system at work are staggeringly prohibitive. The average person probably doesn’t know where the courthouse is, how to get there, where to park, or whether they are even allowed to “pop in” and watch a proceeding.

Long story short, the Tennessee Courts have really done a great job during the pandemic; not only staying open, but expanding and innovating. Here’s hoping that the progress continues.

Time is On Your Side: 4 Tips for Collections in a Sinking Economy

Things are looking bad for the economy, and there doesn’t appear to be any end in sight. As we enter Month Two of the COVID pandemic, banks and others creditors are bracing themselves for a very long winter.

I’m telling my creditor clients to be patient. While this good news doesn’t put money into hands today, here are some things I said the last time around, i.e. in 2010, that any creditor should bear in mind while we wait to see what the economy does.

There’s time to be patient.  In Tennessee, the statute of limitations for collection on an unpaid debt is six (6) years, pursuant to Tenn. Code Ann. § 28-3-109. Then, once you sue and obtain a judgment (within six years from the date of the default), your judgment is valid for ten years, pursuant to Tenn. Code Ann. § 28-3-110.  Plus, if your judgment remains unpaid at the end of the ten years, Tennessee judgments can be renewed pursuant to § 28-3-110 for another ten year period.

Don’t wait to act.  In some instances, it may make sense to take no action on unpaid debt. Maybe the customer is a company that has gone out of business and has no remaining assets, or maybe they’ve filed a liquidation bankruptcy.  This is where you make the “don’t throw good money after bad” decision and possibly decide to write this debt off.

But, remember, the first creditor to obtain a judgment is the first in line to seize assets. Granted, you could be the first in line and discover there are no assets, but you should nevertheless record your judgment as lien in the real property records. For less than $25 in filing fees, a creditor can record a certified copy of its judgment in any and all Tennessee counties where the debtor owns real property, and that judgment becomes a lien on any real property owned by the debtor.

Even if they don’t have any equity in their property today, the situation could well be different in ten years (judgment liens remain valid as long as the underlying judgment is valid). What’s more, your lien’s reach will capture any real property they obtain during the life of the lien. In the end, sooner or later, your debtor will have to deal with you, whether it be as part of a purchase of new property, a sale, or a refinance.

Bend, don’t break. Sometimes, it’s important to recognize when a debtor truly lacks any assets to pay toward your debt. When this is the case, aggressive collections—whether it be seizing a work truck or all funds out of a bank account—may put that debtor out of business and, possibly, into a bankruptcy filing. A judgment creditor can take depositions and request financials from their debtor, and this information may assist you in determining whether they aren’t paying anybody…or just aren’t paying you.

Bankruptcy doesn’t mean the process is over.  If your debtor does file a bankruptcy case, there’s still a chance of monetary recovery. In addition to the benefits to the debtor, the secondary point of the bankruptcy process is to maximize return for creditors prior to granting the debtor a discharge of his or her debts. But, in most instances, a creditor in bankruptcy only receives pennies on the dollar in the process.

Keep in mind, however, the success rate in Chapter 13 bankruptcy cases (where debtors repay a percentage of their debts over 3 to 5 years) can be as low as 20%, meaning that most of those cases end with a dismissal. A dismissal is good for a creditor, because there is no discharge of the debt. Instead, the full amount remains due and owing. Debts are eliminated only when debtors receive a “discharge.” That’s an important distinction to know.

Finally, remember that a bankruptcy discharge only discharges “debts”—not “lien” rights. So, if you’ve already obtained a judgment and recorded it as a lien, then your lien on the debtor’s property survives the bankruptcy discharge. As a result, even though you can’t collect your debt, you can enforce your lien in the event of an attempted sale or refinance.

In the end, collection is a process that rewards the patient, especially in a struggling economy. But, a successful creditor must be prepared, and being prepared means having a valid judgment in place and exhausting all enforcement remedies before giving up. It may be a long road to recovery, but, if a creditor is smart and strategic now, the steps you take today will help make sure you’re paid in the future.

Davidson County Chancery Court has scheduled an actual trial that will be conducted via Zoom.

Mark your calendars: On April 28, 2020, Chancellor Lyle of the Davidson County Chancery Courts has scheduled a trial to be conducted via Zoom! (Full text: Lyle Order re Zoom trial).

For the past 5 weeks, Tennessee courts have been closed for most in-person proceedings, but, during that time, many courts have conducted telephonic or video “non-evidentiary” hearings. This is the first instance that I’m aware of that a civil court is conducting a real bench trial with witnesses and exhibits.

The underlying facts are interesting, from a creditor’s rights perspective.

The lawsuit seeks a declaration of the validity of a mechanic’s lien asserted on a Gulfstream GV  (a/k/a a “G5”) private jet, via both a recorded lien in the Davidson County Register of Deeds and with the Federal Aviation Administration Registry.  Per the Complaint, the plaintiff bought the jet from an actual Sheikh.

gulfstream g5(Note for the non-Sheikhs out there: Retail value for new G5s can be between $36MM and $48MM).

The Defendant / lien-claimant is a marketing firm in Kentucky that claimed a mechanic’s lien on the jet for sales marketing services provided to the Sheikh.

(I’ll reserve my thoughts on the validity of a mechanic’s lien when no actual physical improvements are provided, but I will note that, generally, the lien claimant has to show actual improvements to the property. Cases on aircraft liens have held that “gas for refueling” doesn’t even qualify, since gas doesn’t provide an actual improvement to the aircraft.)

This one will be really interesting, both substantively and procedurally.

 

 

Broadway Bar files first COVID-19 Insurance Coverage Lawsuit

What insurance companies do over the coming weeks in response to the COVID-19 pandemic is going to matter a lot to restaurants all across the country. Will insurance companies pay the claims, or will insurers use this this historically unprecedented situation as a way to poke holes in their customers’ coverage? (I’m betting on the latter.)

This question is of supreme importance to downtown Nashville, where the downtown honky tonks and restaurants stay jam packed 7 nights a week.

Except for, of course, the past 4 weeks.

undergroundToday, one of the downtown bars filed a lawsuit (full copy here: COVID Insurance lawsuit) against Nationwide Property and Casualty Insurance Company, challenging the denial of a coronavirus-related claim. The plaintiff is Nashville Undergound, described as “a seven-story restaurant, bar, nightclub and live music venue” and exactly the type of place that has never, ever practiced social distancing.

The lawsuit alleges that Nationwide denied the claim by citing policy “exclusions” for losses related to bacteria or virus and by arguing that there was no physical damage or physical loss to the restaurant. These are exactly the arguments that I told you they’d be making.

This will be interesting to watch, and, of course, this lawsuit will be the first of many just like it. (Another free prediction? This will nearly instantly be removed to federal court.)

For more background, this article, titled Opposite Sides of the Table: Restaurants Seek Recovery From Insurers for Business Interruption in the Wake of COVID-19,  has a really good and comprehensive recap of the insurance issues facing restaurants.

“According to restaurant.org, since March 1, the industry has lost more than 3 million jobs and $25 billion in sales, and roughly 50% of restaurant operators anticipate additional layoffs in April.  The National Restaurant Association has predicted that the industry will suffer $225 billion in losses in the next few months, forcing the elimination of as many as 7 million industry jobs.”