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Bankruptcy Matters: The New Pandemic Wave Is Coming | JAMS

Three JAMS neutrals share their views on business disruptions and the impact of COVID-19 on bankruptcy courts

You can reasonably assume, given the ongoing economic upheavals due to the COVID-19 pandemic, that the number of personal and business bankruptcies would have exploded. But this has not been the experience of three JAMS neutrals who operate in this area: Ann Marshall, Patrick McManemin and Charles Clevert. In fact, the exact opposite has happened. “Bankruptcy filings in the Pacific Northwest were down in 2019 and this trend continued through 2020,” Marshall said. “And then, to most people’s surprise, it continued until 2021. Every month, year over year, choosing the right bankruptcy attorney filings have gone down.”

Marshall, who has experience with consumer bankruptcy cases, speculates that government intervention explains this trend, for example, moratoriums on foreclosures and other types of government assistance. McManemin, whose area of ​​expertise is corporate bankruptcy, offers another interesting theory: “While cases can be filed, they don’t move as quickly. Before the pandemic, these cases would have almost been out of the box. But now they might not take off for 60 or even 90 days. The reason for this, suggests McManemin, is twofold: First, the courts were completely closed for some time during the pandemic, creating a considerable backlog. And second, because it is often advantageous for one party to prolong bankruptcy proceedings, it is not uncommon for that party to use dropout tactics. “In an ordinary situation, judges see this tactic and can overcome it fairly quickly. But in the COVID context, it has become virtually impossible to get an audience unless everyone is prepared to do so on Zoom. It was therefore very difficult to move the files forward unless everyone involved in the file wanted to. ”

The three neutrals predict that as the effects of COVID-19 wear off, the number of bankruptcy cases will increase. “I expect an increase in the number of filings and the number of cases where creditors will sue plaintiffs,” Clevert said. But their opinions on what might precipitate this increase vary. “But most people seem to think the foreclosure moratoria will start to expire. And when that happens, foreclosures will increase, followed by bankruptcies, ”says Marshall. Clevert, whose cases during the pandemic have so far been mostly related to credit problems, has a slightly different assumption: “When people go back to work and have an income, creditors are more likely to sue them.” He said. When this happens, he explains, “individuals are more likely to file petitions in bankruptcy court or state court for some type of debt relief.” As for McManemin, he believes the triggering event will be when the government turns off its tap – for individuals and businesses. At the individual level, “people won’t have that much money to spend,” McManemin says. This, in turn, will cause demand to contract, which will have an effect on the companies where these individuals trade. At the same time, those same companies will undoubtedly have already spent all of the paycheck protection program funds they received from the government, putting them even further into the hole. All of this, added to the inevitable rise in interest rates, means that “there will be a margin of borrowers who don’t have the cash they once had, and they’re going to have big problems,” McManemin says. . .

In the meantime, for the bankruptcy cases they already have, the three neutrals have had to adapt to the use of virtual procedures using platforms like Zoom. “I like virtual debates,” Clevert says. “I think they lend themselves to greater participation of entities and leaders who otherwise might not be able to take part in the process. And it helps eliminate delays you would have if someone was not present due to travel limitations. Virtual procedures can be particularly beneficial for debtors. “Case processing basically means that debtors don’t need to stop working at a time that can be very critical in terms of employment. It also reduces the legal fees they will have to incur. Perhaps more importantly, “it expands debtors’ access to experienced lawyers outside their home region.” Marshall also sees virtual procedures in a positive light. “I think mediation is efficient both in terms of time and cost. This allows you to more effectively resolve some very difficult issues, such as detailed escrow account disputes, where the debtor and creditor can process and discuss the dispute in mediation. For his part, McManemin still prefers in-person mediation, but he agrees that the cost and convenience of virtual proceedings make them an attractive option for clients. Either way, the three neutrals believe virtual procedures are here to stay. “I think it’s gotten to the point where people feel a lot more comfortable with the process, and I don’t think it’s going to go away,” Clevert said. Clevert also predicts an increased use of hybrid procedures, “where some people appear in person and others appear virtually.”

“It’s hard to predict what will happen with deposits in 2022,” says Marshall. Clevert anticipates an increase in efforts to bring class actions, for example against creditors who may have sued debtors in an unethical or illegal manner. This, he says, could help debtors who might otherwise have difficulty obtaining legal representation. And McManemin theorizes that lawyers will get pretty creative in their attempts to deal with COVID-19-related losses with insurance companies.

What seems certain is that painful as the pandemic has been, certain effects of the pandemic, such as strengthened courts and the increased use of virtual procedures, offer opportunities to expand the use of mediation to resolve bankruptcy disputes. For example, Marshall predicts increased use of mediation for cases involving lower dollar amounts. She explains, “Normally in a bankruptcy mediation, if it’s in person, the bank has to send someone. You have flights. You have hotels. You have a waste of time. And in a smaller case, that just wouldn’t happen. But Zoom opens the door for that to happen more. Marshall also suggests that mediation could significantly help courts with high caseloads if bankruptcy filings increase significantly next year. Finally, parties on both sides of a bankruptcy claim might appreciate the traditional benefits associated with mediation, such as confidentiality, flexibility, and the ability to design a solution that works for all parties. Ultimately, says McManemin, “the question in my mind is, how are bankruptcy judges going to handle things? Will they prioritize mediation as the first alternative? Or will they look for other ways to solve these problems? ”