341: Coronavirus Impacts Tennessee Courts, and Creditors too

No Suits, No Ties, No Court…For the Rest of This Month! Tennessee Courts acted quickly in response to COVID-19. On Friday, the Tennessee Supreme Court issued an Order that all courts will remain “open” (sort of) during the coronavirus outbreak. I say “sort of” because all in-person judicial proceedings will be suspended through March 31, 2020.

I’m a litigator, and I generally appear in court 3 to 4 times a week. This is going to be weird. I usually appreciate days when I don’t have to wear a suit or tie to work, but this might be too much non-court time. Especially since I’ll be spending this time, 24/7, with my small children.

I love them, but they make the most unreasonable judge seem like a breath of fresh air.

My collections clients are going to hate this. For many courts, the inability to appear at court proceedings means, effectively, that court is closed. Specifically, I’m talking about General Sessions Court, where judgments get entered only in open court.

Following the Supreme Court’s lead, Davidson County General Sessions Court announced they will be closed to in-person proceedings, except for very limited matters (generally criminal matters), through April 13, 2020, at the earliest.

This means that there will be no debt collection dockets or evictions in Nashville for over a month. You can file new lawsuits all month long, because the Clerk will remain operational to accept new filings, including a “drop-box” for non-in-person filings.

This is good news from a “disease containment” sense, as it’s designed to limit physical access in a very bustling courthouse. It’s also good news for those who are economically impacted by the shut down of our local economy.

But, for landlords with pending eviction actions (i.e. non-paying tenants who had already been in default), these extra weeks will be frustrating.

Creditor attorneys won’t like it either. And, for creditor attorneys whose livelihood depends on that monthly collections disbursement check from the Clerk, any interruption in the Clerk’s ability to meet customers to accept judgment payments, process those payments, and disburse those payments will create a huge cash flow problem.

I’m guessing if debtors can’t get in the door, there’s a chance that they can’t get to the Clerk to make their weekly/monthly payments.

The only civil hearings you’ll see are TRO hearings. The Supreme Court order lists a number of exceptions for legal proceedings involving life, liberty, and limb, but most civil actions will not be heard.

The only civil law exception is for “Proceedings related to petitions for temporary injunctive relief.”

That’s a good exception. Injunctions are generally described as “extraordinary relief,” and they are designed to address emergency situations.

I wonder if the Courts will enter “no response” orders–orders that generally get granted as a matter of course and without a hearing, when there’s no response filed.

All Middle District of Tennessee Bankruptcy Court Chapter 13 Meeting of Creditors will be conducted via Zoom.us online video conference. On Friday, the Chapter 13 Trustee sent around an email announcing that all 341 Meetings would be conducted via Zoom online conferences. I think this is very smart, to reduce the number of people having to come to court and, at the same time, to keep the process moving forward.

But, it’s going to have a steep technological and learning curve. I suspect this is going to be a difficult process to master, but I’m impressed with the quick response and effort.

You’ll be getting Zoom invites from me next week. So, I’ve struggled with finding a good mass/video communication platform, and I’ve experimented with a few services.

If it’s good enough for Jordan Furlong, then it’s good enough for me.

Well, with all the great press I’m seeing about Zoom, I signed up and did my first test run this morning, with my 8 year old in the next room. It went fairly flawlessly and was very user-friendly.

The Coronavirus sheds new light on an overlooked paragraph: The Force Majeure Provision

On January 30, 2020, the World Health Organization declared a global health emergency in response to the rapid spread of novel coronavirus (2019-nCoV).

Since then, it seemed to slowly make its way to the United States–but, then, once it arrived, it hit us rapidly and in ways that have unexpectedly changed how we conduct our personal and professional lives.

And, yes, I say this as someone who was scheduled to depart tomorrow on a Disney Cruise. We (obviously) cancelled our trip, and, in the past week, I’ve seen a nearly nationwide cancellation of events, with unimaginable impact on businesses and employees.

So, what if you’re thinking about cancelling an event? Where do you start your analysis? Well, closely review your written agreement for the terms and conditions related to cancellation.

Is there a “force majeure” provision? Those provisions account for an unforeseen, unavoidable, and uncontrollable circumstance that prevents performance by one party to a contract and, more importantly, “excuses” that party for non-performance. The circumstances are intended to be so extraordinary that they are sometimes referred to as an “Act of God” provision.

The first time many of us dealt with these issues were related to September 11, 2001, and most modern contracts reflect this changed world-view (and the acknowledgement that something short of a natural catastrophe can trigger the defense).

Force majeure provisions are valid and enforceable under Tennessee law. The question frequently becomes a matter of contractual interpretation: Is the [event that occurred] truly a force majeure that prevents performance/excuses non-performance?

This is where the lawyers make their money, and it comes down to how clear and detailed the contract’s definition of a force majeure is. Tennessee law doesn’t define it, so it’s up to the parties to negotiate the definition, scope, and application.

I’ve prepared marketing agreements that are currently being used by the Big 12 Athletic Conference, with Fortune 50 businesses as the counter-parties. Needless to say, these were really big deals. In working on those documents, we spent hours on all sorts of negotiations, but rarely–maybe never–talking about the definition of a force majeure.

So, if you are a business that is shut down–either by choice or by necessity–and it’s preventing you from performing under an agreement, look at your contract and see what it says about cancellation (and damages for cancellation). And, skip to the end, and see if there’s a force majeure provision.

If there’s not one, make sure that your future agreements have them.

With the 2020 Legislature in full swing, here are three bills to watch.

The Tennessee Legislature is considering three new laws for 2020 that impact debtor-creditor lawyers and that you should know about. Here’s a quick recap:

Increased homestead exemptions. This is at Senate Bill 2235 and House Bill 2682. This bill increases the individual Tennessee homestead exemption to $35,000, increases the joint exemption to $52,500, and eliminates the enhanced exemptions based on age and parental status.

My thoughts? Current law provides for a $5,000 exemption for individuals and a joint $7,500 exemption for married couples. While a jump to $35,000 seems pretty steep, keep in mind that the homebuilder lobby is asking for an increase that ranges from “unlimited” to one million dollars to $250,000. Based on my conversations with the Tennessee Bar Association and Tennessee Bankers Association, the $35,000 is designed to both acknowledge that Tennessee currently has one of the lowest exemptions and to head off a greater increase.

This amount is going up, so why not participate in that process and have it go up to an amount everybody dislikes (but not enough to try to get it higher)?

Decrease in number of days to appeal a Detainer Judgment. This is Senate Bill 2563/House Bill 2372. Current law provides a tenant ten days to appeal an eviction judgment, which means that they have ten days to remain the property before the property owner can file a writ of possession to have them removed. This bill reduces that time period from ten days to two.

My thoughts? I don’t support this. This is too creditor friendly. The ten day appeal period gives a tenant time to either prepare an appeal (and the associated possessory bond) and also time to voluntarily move out. The current time period, frankly, feels like a reasonable amount of time. Two days feels inadequate and onerous.

I mean, if the guy who writes Creditor Rights 101 says something is too creditor-friendly…yikes.

The “Medical Debt Protection Act.” This is Senate Bill 2700/House Bill 2346. This proposed law proposes a number of protections onto the medical bill debtor, and it imposes a number of pre-lawsuit and filing requirements onto the medical bill collection agency/attorney, including a shortened statute of limitations. Further, once a judgment is entered, there are limitations on collection, limits on adverse credit reporting, and restrictions on post-judgment interest.

My thoughts? This is clearly in response to the crisis in our country’s healthcare system that impacts the poorest people, and we’ve seen this in Memphis over the past year. While I don’t agree with all the details of this proposed legislation, I see that it’s coming from a legitimate place. We need to do something.

But, according to insiders at the Capitol, it’s a moot issue. I’ve been told that this bill was taken off notice by Rep. John Ray Clemmons after the Tennessee Hospitals Association promised to create a task force to address this issue (and after the Tennessee Bar Association had already expressed concern with this bill).

Four New Bankruptcy Filings add More Mystery…and Misery…in the Riverwood Cabins Case

A few weeks ago, I posted about the Riverwood Cabins, LLC Bankruptcy, which was notable to me because of the scope and magnitude of the amount of money that the Riverwood cabin buyers lost.

It’s a case where about 65 customers (and that number continues to grow) are asking what happened to their $4.5 million in deposits (also a growing number). The customer deposits appeared to evaporate into thin air in the months before the Bankruptcy case was filed.

One of the biggest questions was when the related companies were going to file their own bankruptcy cases (and why hadn’t they already?). The hope was that, when that happened, maybe we’d get some answers then.

Well, we know the first part: Woodtex, LLC, Woodtex of New York, LLC, Woodtex of Tennessee, LLC, and Woodtex of Texas, LLC all filed their own Chapter 7 bankruptcy cases in Nashville Bankruptcy Court late on Monday afternoon.

As far as answers beyond that, the filings don’t do much else, but add more questions.

And more aggrieved customers. These filings show that there’s at least twice as many customers who lost their deposits, with these deposits still being unaccounted for.

But, strangely, there’s not that much debt owed, relative to the deposits that the companies were constantly taking in. With this much money coming into the company (as deposits), you’d expect to see an equally staggering amount of unpaid bills.

The only good news for the Woodtex customers is that, because the Woodtex entities focused on sheds and smaller buildings, the deposits are about 10% of the money that the Riverwood Cabins customers lost.

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.