A Bankruptcy Lawyer’s View Of The Current Business Environment

Where Advocacy Meets Business

A Bankruptcy Lawyer’s View Of The Current Business Environment

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April 2020 – The following are some observations by Chaffetz Lindsey partner Alan Lipkin based on his long-term experience as a bankruptcy lawyer and what he now sees and hears in the bankruptcy world:

  • Contrary to popular belief, the current economic crisis as it applies to many businesses has less to do with the COVID-19 virus than most people think. Historically, whatever the immediate precipitating event causing a financial crisis (here the pandemic), the primary cause of most business bankruptcy filings is management’s prior decisions.  Hence, while the coronavirus has created unanticipated health and financial difficulties of enormous magnitude, eventually (and probably sooner than later) the current magnitude and poor credit quality of U.S. corporate debt were leading towards a severe recession in the U.S. even without the pandemic.   In effect, it was unsustainable to have the current amount of U.S. corporate debt at $10 trillion and the current amount of high-yield debt (a/k/a junk bonds) more than 20 times greater than the amount of such debt less than thirty years ago.  Thus, while the suddenness and enormous impact of the pandemic caused economic disruption that threatens many businesses, the consequences will be far more problematic to the extent a management’s prior decisions left a business with insufficient working capital, an inadequate or no line of credit, too much debt, and no rainy day back-up plan.  Nor does the pandemic excuse a management that recently engaged in substantial stock buy-backs or unwarranted dividend distributions.
  • The current financial crisis will not impact all businesses the same. Even putting aside the influence of government interventions and subsidies, which vary by industry, in the business world there are likely to be groups of “haves” and “have nots.”  In a financial crisis, cash is king as cash is the lifeblood of any business.  Hence, industries whose cash flow has been drastically reduced or cutoff entirely by the pandemic will suffer.  Those industries include airlines, cruise lines, car rental companies, and other travel related businesses, entertainment and sports businesses, restaurants, retailers, gaming enterprises, mining companies, and oil and gas firms.  Meanwhile, businesses whose cash flow remains relatively steady notwithstanding the pandemic should be stable or even thrive.  Some examples include businesses selling groceries and staples (in the broader sense including Amazon, Walmart, etc.), streaming companies such as Netflix, pharmaceutical and healthcare companies, and most utilities.  Accordingly, those companies not lucky enough to be in industries that remain flush with cash will be severely challenged.
  • Don’t be misled by the absence to date of a wave of commercial bankruptcy filings; such a wave is coming. Some of the delay is typical for any businesses in financial difficulty.  First, there is denial of the magnitude of the problem from both the management and creditor perspective.  Second, even once a problem is acknowledged, managers (and creditors) often defer directly dealing with the problem.  Third, management is generally reluctant to talk with bankruptcy professionals due to a misplaced fear that just having such conversations creates a self-fulfilling prophesy in which a bankruptcy filing becomes inevitable.  Fourth, conflicts frequently arise, both within management and between the debtor and its creditors, when trying to reach consensus on the debtor’s financial problems’ causes, magnitude, and solutions.

The current delay in many commercial bankruptcy filings is also due to factors unique to the COVID-19 pandemic.  First, the pandemic created a sudden crisis that takes time for decision makers to absorb and process.   Second, there remains significant uncertainty regarding the length, depth, and commercial impact of the pandemic.  Such uncertainty makes generating reliable financial projections quite difficult and, therefore, interferes with a prospective chapter 11 debtor’s ability to obtain DIP financing (i.e., financing typically needed to fund a chapter 11 case) and to make progress on or even reach agreement with key creditors on a business plan and the proposed recapitalization of the debtor.  Yet, when a debtor files for chapter 11 the debtor wants to have a positive story to tell about having locked in DIP financing and having an exit strategy as to which substantial progress (or even an agreement incorporated in a prepackaged chapter 11 plan) has been achieved.  Third, progress now on many debt restructurings is being hindered because most bankruptcy professionals and many hedge funds that are key creditors are involved in multiple potential chapter 11 cases and, therefore, are stretched quite thin.  Fourth, the fact so many people are working from home and busy with multiple potential bankruptcies also signifies bankruptcy courts are often overwhelmed and only dealing with emergencies.  Thus, there is less urgency to make an immediate chapter 11 filing because it probably would not be followed by much progress in court during the near term.  Still, as the logjam starts to clear many chapter 11 filings should follow.

With all of those considerations in mind, now is the time to evaluate the economic circumstances of your business and those of key counter-parties as well as to utilize advisors to make sure you understand your legal rights and best determine how to survive and even thrive in these challenging times.

Learn more about Chaffetz Lindsey’s Bankruptcy & Business Reorganization Practice.

 

Click here to view our full list of COVID-19 Information and Resources.

What COVID-19 Means for Latin American Arbitration

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April 2020 – Latin Lawyer turned to Aníbal Sabater for insight into “What COVID-19 Means for Latin American Arbitration.” In his article, Aníbal analyzes COVID-19’s impact on the arbitration process, arbitral institutions, and users. Aníbal also examines the economic and political impact of the pandemic on Latin American countries, and the potential short and long-term effects on commercial and investment arbitration in the region.

According to Anibal, “COVID-19 is creating challenges and uncertainty for international arbitration practitioners across Latin America, but it is also generating opportunities.”  His article is an early attempt at analysis and prediction.

Latin Lawyer is the definitive source of news and analysis for private practitioners and in-house counsel in Latin America’s business legal market.

Click here to view the entire article, or access it on Latin Lawyer’s website. This article is also available on Global Arbitration Review, Latin Lawyer‘s sister publication.

 

Click here to view our full list of COVID-19 Information and Resources.

Law360 Highlights Chaffetz Lindsey’s “Donate Your Commute” Campaign

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April 2020 – In response to the tremendous need created by the COVID-19 crisis, Chaffetz Lindsey’s team came together in support New York Lawyers for the Public Interest (NYLPI) and City Harvest, both of which are addressing the critical needs of New Yorkers hit hardest. We are honored to have our “Donate Your Commute” campaign featured in Law360’s story titled, “Counsel Who Care: How Attys Are Helping During A Crisis.”

Law360 writes, “New York-based disputes boutique Chaffetz Lindsey LLP has created an online donation form for the general public to donate money they have saved during the lockdown to organizations that help New Yorkers who have been hit hardest by the crisis. All 28 lawyers and 17 support staff members have made individual donations, the firm said, adding that it will match up to $20,000 on outside contributions. As to date, Chaffetz Lindsey has raised nearly $17,000 from the campaign. All donations will be split 50-50 between New York Lawyers for the Public Interest and City Harvest, New York City’s largest food rescue organization.”

View the entire article by Xiumei Dong on Law360’s website.

Learn more about our fundraising efforts and how to donate by clicking here.

New York Makes Significant Changes To Its Fraudulent Transfer Law

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April 2020 – A state’s fraudulent conveyance statute enables certain disadvantaged creditors to seek to recover a transfer made by an account debtor if that transfer was made either:  (a) with the debtor’s actual intent to hinder, delay, or defraud creditors (a/k/a actual fraud); or (b) without the debtor receiving reasonably equivalent value in return at a time the debtor was in financial distress (a/k/a constructive fraud).  If the debtor subsequently becomes the subject of a bankruptcy case, then the right to pursue such fraudulent transfer claims for the benefit of creditors (as well as claims to avoid certain obligations incurred by the debtor), shifts to the debtor, to its trustee (if there is one), or in rare instances, to the debtor’s official creditors’ committee or other estate representative.  Those claims may be pursued for the benefit of creditors under either section 548 of the Bankruptcy Code, which has a look-back period of two years prior to the bankruptcy petition date, or section 544 of the Bankruptcy Code, which enables a fraudulent transfer action to be pursued based on applicable state law, typically because it has a longer look-back period than the Bankruptcy Code provides.

As New York is a major commercial center, its law often governs fraudulent transfer claims.  Thus, it is notable that on December 6, 2019, New York State replaced its version of the Uniform Fraudulent Conveyance Act (“NY-UFCA”) with the substantially different Uniform Voidable Transactions Act (“NY-UVTA”), N.Y. Debtor and Creditor Law §§ 271-281.  The NY-UVTA became effective on April 4, 2020 and applies to transactions occurring on or after that date.

The NY-UVTA makes New York’s fraudulent transfer law simpler and more consistent with the federal Bankruptcy Code and the law of most other states. Also, the new statute eliminates the misleading labels of “fraudulent conveyance” and “fraudulent transfer”. The change clarifies that the focus is not on fraud, but on “voidable transactions”, which typically are those in which the debtor did not receive fair value. Significant substantive changes to New York law include the following:

  • Shorter Look-Back Periods. Perhaps the most significant change will be reducing the look-back period from six to four years after the challenged transfer occurred.  Also, actions to avoid an intentional fraudulent transfer now also may be brought within one year of when the disputed transfer or incurred obligation was or reasonably could have been discovered (if later than the expiration of the four year look-back period) rather than the two year discovery period under prior law.
  • Changes to Burden of Proof. Under the NY-UVTA, the burden of proof for all claims and defenses is a preponderance of the evidence.  Previously, clear and convincing evidence was required to establish actual fraud.  Additionally, the NY-UVTA allocates the burden of proof on each element of the affirmative claim to the plaintiff and most elements of affirmative defenses to the defendant.
  • Elimination of “Good Faith” Requirement for Constructive Fraudulent Transfers. Previously, a transfer made or obligation incurred in exchange for reasonably equivalent value could be avoided as being constructively fraudulent if it was made or incurred in bad faith.  Under the NY-UVTA, however, the standard is the more objective (and more certain) requirement of receipt of reasonably equivalent value, not “good faith.”
  • Simplification of Choice of Law Determination. Under the NY-UVTA, the governing law is the law of the place the debtor/transferor is located when the disputed transfer is made or challenged obligation is incurred.  For a business, that location is its sole place of business or, if it has multiple places of business, its chief executive office.  This new approach should produce more predictable outcomes than the prior NY-UFCA multi-factor choice of law analysis.
  • Elimination of Unique Provisions for Pending Litigation Defendants. Under the prior NY-UFCA, a solvent litigation defendant’s transfer while the litigation is pending is voidable by a successful plaintiff if the transfer was not made for fair consideration.  The NY-UVTA eliminates any such special provision for litigation defendants.  Instead, they are only subject to the general actual and constructive fraud tests.
  • Safe Harbor for Regularly Conducted Foreclosures and Remedies. Unlike current law, the NY-UVTA shields from avoidance regularly conducted real property foreclosures and the exercise of UCC Article 9 remedies against personal property.
  • Greater Availability of Attorney’s Fees Awards. The new NY-UVTA enables courts to award attorney’s fees to successful plaintiffs in both constructive and actual fraudulent transfer actions.  Prior law only permitted such awards for actual fraud.

Learn more about our Bankruptcy & Business Reorganization practice.

Chaffetz Lindsey Launches “Donate Your Commute” Campaign to Help COVID-19 Affected New Yorkers

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April 2020 – To help those hit hardest by COVID-19, Chaffetz Lindsey is sponsoring a fundraising drive to benefit two great organizations that regularly help New Yorkers in need, and that are now stepping up their efforts to support those hit hardest in this time of crisis. Please join us.

Each week during the shutdown, we have been holding a zoom staff meeting. On one of these sessions, we were discussing how fortunate we feel to be able to work throughout this crisis. We remain concerned about the ongoing health risks and about the crisis’s full economic impact. But so far, we’ve been spared being hit as hard as many others who have lost loved ones and/or who cannot continue their work during this shutdown. That got us thinking about how we can help. While working from home, our team is not spending money on subway or train fares, lunches, taxis or Ubers, dinners out, etc. We decided to pool some of that money and donate it through a “Donate Your Commute” campaign.

Our Administrative Assistants (aka the Chaffetz Lindsey “A-Team”) stepped up and took the lead on fundraising.  They also took it upon themselves to determine where we could direct the funds that would be most impactful in the current environment.

Our firm regularly supports New York Lawyers for the Public Interest (NYLPI), a legal services organization that helps the underserved navigate a difficult legal system. Therefore, NYLPI was an obvious choice for donating some of our commute savings. This crisis exacerbates the hardships faced by NYLPI’s clients because many of them cannot work from home, do not have access to quality healthcare, already have higher rates and risk of respiratory disease due to environmental harm, are afraid to get treated because of their immigration status, or are individuals with disabilities, or seniors. In this time of crisis, NYLPI’s advocacy for the rights and safety of front-line workers (sanitation, healthcare, education, and transit sectors) also is critical.

Our A-Team also suggested we should support another organization along with NYLPI that will provide the immediate basics that people need, like nutritious meals. They selected City Harvest, New York’s largest food rescue organization. City Harvest has mobilized to help New Yorkers in need during the COVID-19 pandemic.  They are working hard to ensure that, while schools and businesses are closed, and during the fallout from the shutdown, children and their families can put meals on their tables. Food banks are facing unprecedented strain in the face of the shutdown. In this April 19th New York Post article, Racine Lee Droz, City Harvest’s director of food sourcing, says “the group is bracing for the situation to get worse in the weeks and months to come. ‘The need will last far longer than when the government reopens the city because so many people are unemployed. We plan on operating this way until the end of September.’”

We decided to split our pooled donations 50-50 between City Harvest and NYLPI, and our A-Team set their individual bar for donations at a generous $100 each. They rallied to get 100% of our firm to give generously, too. They also are reaching outside the firm, to their own network of friends and families to raise money, and they have encouraged all of us to do the same.

Because of the enthusiasm and leadership of our A-Team, we have so far pooled individual donations of almost $15,000.  The firm has also agreed to match up to $20,000 of additional outside donations.

If you also are working from home right now and are saving money by not having a daily commute, we would love to have you join us to support NYLPI and City Harvest.  To calculate your own commute savings and to donate to these two great organizations, please click here.

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Practice Makes Perfect When It Comes To Virtual Hearings

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April 2020 – Law360 interviewed Chaffetz Lindsey partners Peter Chaffetz and Yasmine Lahlou for an article titled “Practice Makes Perfect When It Comes To Virtual Hearings,” published on April 15, 2020.  The article takes a look at how widespread shelter-in-place orders enacted to slow the spread of COVID-19 have forced many technophobic arbitration lawyers into conducting virtual hearings, but practice and assistance from institutions can help even the least tech-savvy get comfortable with this new normal.

“I think if we’d had to decide in advance whether to do a two-week hearing about a $500 million dispute by video, I’m not sure we would have decided that with a positive answer,” said Chaffetz Lindsey partner Yasmine Lahlou. “But if you’ve had a week of hearings, and you have the potential of losing the momentum … and you think you’ve done well with your witnesses, and it makes so much more sense to continue with the experts and to continue with the same dynamic, then you do it. It was a somewhat unique set of circumstances.”

Learn more about their experience and how the arbitration institutions and lawyers are adapting to the new era of holding video hearings. View the entire article by Caroline Simson on Law360’s website. A subscription may be required.

 

Click here to view our full list of COVID-19 Information and Resources.

An Early Experience With Arbitration By Video

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Few things are more frustrating and costly than an indefinite interruption to a trial or arbitration that is in full swing and within days of completion. That is the prospect we faced when the COVID-19 shutdown forced a mid-hearing adjournment of a complex, high-stakes International Chamber of Commerce (ICC) arbitration on which we had been working for years. This article recounts how we worked with opposing counsel and the tribunal to restart and complete the hearing a week later by videoconference.

Unexpected Developments

Our hearing opened normally on March 9 , with both sides’ fact witnesses and party representatives, as well as one of the arbitrators, having traveled to New York from abroad.  Because none of the fact witnesses was a native English speaker, translators were also on hand. The plan was to complete fact witnesses in the first week and expert witnesses in the second. While COVID-19 was in the news, we did not yet foresee any difficulty in completing the hearing on schedule. Indeed, we planned to share a good New York steak dinner with our client and team after the final day, two weeks hence.

How wrong we were!

Over the course of that first week concern about COVID-19 grew daily. Nonetheless, we still didn’t imagine the scope of what was coming and remained determined through the week to forge ahead and complete the hearing as planned. However, by Friday of the first week the potential for adjournment was clearly there. By Sunday it became reality, as the parties and witnesses were called home ahead of impending travel restrictions. Everyone who had been with us in New York that week returned to two weeks of self-quarantine in their home countries.

Not very long ago, that would have thrown the case into an open-ended limbo. Leaving aside the uncertain duration of the COVID-19 crisis, it would likely have been many months before we could find a an open week for all participants. Fortunately, our tribunal was committed to avoiding that outcome. It recognized that in the circumstances, meeting by video would become the “new normal,” if the technology was ready. The tribunal directed the parties to meet and confer and, if possible, come back by Wednesday of what would have been week two of the hearing with a technical and procedural protocol for resuming by video. Counsel for both sides worked together to make this happen.

The Challenge

The requirements seemed steep. We needed a system that would allow up to 40 individuals to participate or observe. Everyone had to have a clear view of the tribunal, the witnesses and examining counsel. All participants had to be able to read the expert PowerPoint presentations and the numerous exhibits to be used in cross-examination. We also required that the tribunal and counsel continue receiving individual feeds of the LiveNote transcript.

In any event, the technical solution proved to be much simpler than anyone expected. Although we had been using Zoom and similar products for some time, we had not fully appreciated their full capabilities. We also had been used to doing video conferences with professional video equipment from our office conference rooms. With that experience, we initially contemplated that participants would use their firms’ conference facilities or go to commercial videoconference centers in each of the relevant cities. That approach proved to be both unfeasible – as offices around the world were closing – and out of date.

The Solution

Instead, like so many others during these past days, we quickly became familiar with how robust modern videoconferencing applications have become. In our case we chose to work with Zoom, which under our firm’s license can support a video conference of unlimited duration with up to 100 participants. Within a short time, all involved learned to choose between “gallery view” which displays all participants in thumbnail-sized windows, and the self-explanatory “speaker view.” By asking non-speakers to silence their microphones and stop their video feed, we could limit the video display to the person speaking or to selected participants. Once the hearing got under way, we generally had the tribunal members, the witness, and the examining attorney on the screen. The remaining participants, usually between 30 and 40, could observe quietly.

By selecting the “share screen” function, the expert witnesses were able to present their PowerPoint slides while remaining visible in a separate window to the right of the screen. As needed, the arbitrators and attorneys could also come on view alongside the shared document. During cross-examination, a trial support person took over the “share screen” function to display and highlight documents, portions of witness statements and the hearing transcript that were the subject of the questioning. That worked exactly as in an in-person hearing.

The court reporter listened in as a participant and transmitted her real-time transcript via a software application called “LiveLitigation,” which has long been in use in the United States for video depositions.

The Videoconference Meeting Rooms

Our firm set up the virtual hearing venue as a permanent Zoom meeting room for the duration of the hearing. We provided the necessary credentials to all participants, who were then free to enter or leave the room at any time over the course of the week. Just as in an in-person hearing, the tribunal and each of the parties also maintained separate “breakout rooms” where they could confer privately among themselves.

On Friday, March 20, exactly one week after we had last met in person, we reconvened with the tribunal, opposing counsel, and the court reporter on video for a “technical rehearsal,” just to make sure the system would work and to give the arbitrators and counsel a chance to become familiar with the pertinent Zoom features. For that test run, there were well over 30 participants, all joining from their own homes, in three different countries and four time zones. We found the sound and picture quality to be excellent. After a few minutes, we knew we could resume on Monday and finish our hearing.

What We Used at Home

While we had done individual witness examinations by video or telephone, this was our first experience with a full-blown video hearing. It was also our first time presenting and cross-examining witnesses with limited, and in some cases, no paper documents. This also was not as difficult as expected. For us, the ideal personal set-up involved three devices with screens plus a mobile phone. We used an iPad to work with documents uploaded to PDF Pro. This allows the creation of virtual examination binders in which you can mark up and highlight documents just as you would with paper. We participated in the hearing through our main computer or laptop, and then received the transcript on a third device. A person with a large enough monitor could display the hearing and transcript in separate windows on one screen. No doubt other approaches would work equally well. While Zoom has a “chat” function, it only allows the choice of sending your message to a single participant or everyone. For that reason, and to avoid mishaps, our lawyers team used our phones to keep a private group chat open on which we could confer among ourselves as we were listening. This was a big improvement over trading post-it notes at the counsels’ table.

Examination Notebooks, Real and Unreal

The one throwback to our old ways was the parties’ agreement to provide physical cross-examination binders to the expert witnesses. One of the arbitrators also asked to receive physical binders. Fortunately, our vendor was still available to produce and deliver the binders. We agreed for these to be delivered in a sealed package to the witnesses no less than one hour before their cross-examination was scheduled to begin. We instructed the witnesses that they should only unwrap their notebook on camera at the start of their examination. We also agreed to exchange these files electronically with opposing counsel within 45 minutes of the start of cross-examination, on the understanding that there would be no discussion of their contents with the witnesses. Our protocol also specified that anyone in the room with the witness be visible at all times. That rule proved moot, however, because every participant joined individually from their home or office.

Final Impressions

The hearing wrapped up on Friday, March 27, only a week later than planned. Over the course of five days seven experts made presentations and submitted to cross examination. There were also three “hot-tubbing” sessions where experts for both sides answered questions from the tribunal. The hearing days ran on the same schedule as when we had been meeting in person and ran with equal efficiency. Weekend and evening preparation sessions with the witnesses also worked very well by video.

It was clear from the informal parting exchanges that everyone thought the video format had been a success, with little or no disadvantage compared to the in-person meeting at which we had started. The parties have also agreed to hold closing arguments by Zoom.

Nonetheless, we can’t yet conclude that video offers full equivalence.

As noted, all of our percipient witnesses testified in person in the first week. We don’t know whether the tribunal could have assessed the credibility of such evidence just as effectively by video. Also, it was probably easier to meet by video following an entire week of being together in a conventional hearing. Moreover, it was only in the first week that we required simultaneous translation. Because all of our second week testimony was in English, we did not face the additional challenge of adding separate language feeds to a video hearing. We can also foresee logistical issues where participants are based in more divergent time zones. In our case most participants were on Eastern Daylight Time. The maximum time difference from that time zone was three hours and that affected only a single participant.

It is still less than three weeks since we learned we would be completing our case by video. Given the exigent circumstances, we did not have time to canvass the literature or discuss the merits of the 2018 Seoul Protocol on Videoconferencing in International Arbitration. Our approach was ad hoc and guided by common sense.

Nonetheless, the decisions we made and the arrangement we landed proved to be largely consistent with that guidance. Overall, this was a good and memorable experience that opened our eyes to how far video meeting capabilities have evolved. We do not predict that video will replace in person hearings when normal times return, but we also think this alternative approach will see far greater use.

Peter Chaffetz is a founding partner of Chaffetz Lindsey. Yasmine Lahlou and Andrew Poplinger are partners at Chaffetz Lindsey.

View this article on the New York State Bar Association website.

 

Click here to view our full list of COVID-19 Information and Resources.

 

Navigating a Crisis: Dealing with Delegated Authority

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Insurance and reinsurance companies, banks, and other financial institutions sometimes engage third-party agents to underwrite or administer their business. Often, the agents are paid based on business volume (a share of total premiums or fees generated), not business quality (final loss ratios or loan/investment performance). When paid on volume, the agent has incentive to maximize volume, regardless of the risk of loss to the principal.  Principals generally control for this misalignment of interest by limiting the scope of agent authority through agreed underwriting guidelines.

When business that previously looked profitable starts to turn sour in a crisis, disputes over guideline compliance can arise. Principals contend the poor results are on business written outside of guidelines. Agents contend the business complied with original guidelines or with modifications or waivers made by the principal. We have seen this issue recur often throughout the years, from the Savings & Loans crisis in the 1980s to the Subprime Mortgage crisis of the late 2000s, and at many times and on many products in between (workers’ comp insurance programs, auto programs, life and health programs).

Given the current crisis, we expect defaults and claims to spike significantly in loan portfolios and financial insurance (e.g., reps and warranty coverage, trade credit insurance, political risk insurance). Now is the time to assess and review guideline compliance. If you are a principal, check in with your agent now. Audit and monitor all aspects of the business the agent is responsible for. If you are an agent, make sure your records are clear and up-to-date so you are prepared to answer questions from your principal.

 

Click here to view our full list of COVID-19 Information and Resources.

 

 

 

 

Navigating a Crisis: Special Valuation Issues

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COVID-19’s impact on businesses, deals, projects, and markets is likely to spawn a flood of valuation issues and potential valuation disputes. Valuation exercises often are factually complex and difficult in the best of times. In times of economic crisis and market downturn, valuation is particularly challenging.

In the coming weeks and months, our clients are likely to face difficult valuation issues. Valuation is critical in disputes over business interruption insurance claims; disputes involving delayed or abandoned construction or investment projects; post-M&A disputes, including representations and warranty disputes between buyers and sellers or between insurers and insureds over rep and warranty insurance; IP disputes; and disputes over collateral asset valuation.

In normal economic times, historical data like past revenue or comparable sales generally is useful to determine current value. However, in times of sudden crisis, the relevance of historical data is less clear, and the valuation exercise becomes more complex. We have seen this several times. In the late 1990s, the Russian government imposed severe currency exchange restrictions, and the market for ruble/dollar swaps froze. Collateral valuation became difficult with no market to mark the assets to. Similar issues arose during the subprime financial crisis, when the market for mortgage-backed securities and CDOs seized. And following the September 11 attacks, businesses in and around the vicinity of ground zero in New York shuttered and claimed lost profits under business interruption insurance policies. But the attacks occurred in the midst of a recession. To what extent were the lost profits the result of property damage from the shutdown, as opposed to the expected consequence of an economic slowdown?

When facing potential valuation issues in this sudden COVID-crisis, it is critical to take stock of those issues early. We recommend that you:

    1. Form an internal team. Assign internal responsibility for your serious valuation issues early. Familiarize them with the complexity around valuation in these times. Instruct others in your organization to work with this team on any valuation issues they face so that you have a consistent and coordinated approach.
    2. Be careful about written communications. In times of uncertainty, people tend to speculate. Later, in a dispute, your written communications speculating on value (whether internal or with your counterparty) could be taken out of context and used against you.
    3. Get your outside advisors on board early. If you have a dispute over valuation, you will need outside advisors—experts and attorneys. Engaging them early will help you form a cohesive strategy that can survive throughout the course of any dispute you face. Make sure you engage experts who understand the concepts around valuation in a down market/valuation of illiquid assets.

 

Next Article in This Series —

Navigating a Crisis: Dealing with Delegated Authority

 

Click here to view our full list of COVID-19 Information and Resources.

Navigating a Crisis: Bankruptcy and Other Governmental Interference with Contracts

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The most basic rule of contract law is that the plain and unambiguous language of a contract controls, but every rule has its exceptions. In times of crisis, government authorities sometimes step in to modify or supersede even the clearest terms of private contracts.

Bankruptcy

The bankruptcy of a counterparty to any contract (whether an insurance policy, lease, construction agreement, project finance agreement, investment or other agreement) can result in the modification or even termination of certain contractual rights. At minimum, immediately upon a bankruptcy filing, an automatic stay generally prevents you from terminating your contract or enforcing obligations past due. If you think your counterparty is financially stressed, you should immediately consider the following steps:

  • Review the contract. Consider provisions relating to non-performance and defaults so you have a full understanding of your contract rights, including how a bankruptcy filing might affect them.
  • Be proactive, and consider a non-bankruptcy solution. Communicate with your counterparty and other stakeholders early, including to explore creative, mutually beneficial solutions. To achieve certainty and mitigate costs, a negotiated solution usually is preferable to a formal bankruptcy case. Understand your counterparty’s needs and financial circumstances, as well as the impact on any lenders, other creditors, and guarantors.
  • Consider what, if any, action to take before a bankruptcy filing triggers the automatic stay. Pre-bankruptcy actions could range from sending a default notice or requesting adequate assurance of future performance (if permitted by contract or by the UCC), to terminating the contract. Make sure any contemplated action will not run afoul of any government moratorium such as on commencing actions or eviction.
  • Be careful about what you agree to and how you implement it. Make sure your “informal” email or other communications do not bind you unintentionally. If you find an agreed pre-bankruptcy solution, observe corporate formalities when implementing it to avoid challenges or potential unintended liability down the road.

As we have seen over and over in past financial crises, numerous businesses (landlords, lenders, insurance companies, energy and construction companies, funds, just to name a few) need considerable assistance and counseling in order to maximize the value of their contract rights during pre-bankruptcy and bankruptcy-related disputes and negotiations. As the impact of COVID-19 shakes out, we are likely to see numerous companies stressed and seeking out-of-court debt restructurings or filing for bankruptcy.

Ad Hoc Government Actions

In times of crisis, especially in highly regulated sectors—e.g., insurance, finance, housing, public health—governments can try to alter contract performance to alleviate the crisis.

Following disasters like the Northridge Earthquake (1994), the September 11 attacks (2001), and Hurricane Harvey (2017), politicians and regulators put severe pressure on the insurance industry to pay claims their policies did not cover. Similarly, states also have imposed moratoria on enforcing rent and mortgage obligations in times of financial crisis.

In the midst of the COVID-19 pandemic, governments are actively seeking to alter both insurance and housing contract rights. Several states have proposed legislation prohibiting insurers from denying business interruption claims, regardless of their policy terms. Several states have issued or are exploring eviction and foreclosure moratoria, or even rent or mortgage forgiveness, not just deferral.

These government measures will face constitutional challenges. First, the US Constitution’s Contracts Clause provides, “No State shall … pass … any Law impairing the Obligation of Contracts.” In Sveen v. Melin, the US Supreme Court recently stated the legal standard: Has the state law “operated as a substantial impairment of a contractual relationship”? If so, was the impairment an “appropriate” and “reasonable” means to “advance a significant and legitimate public purpose.”

The Fifth Amendment’s Takings Clause may also be relevant. The Clause states that no one shall be “deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.” What is “just compensation” will likely be open for dispute.

 

Next Article in This Series —

Navigating a Crisis: Special Valuation Issues

 

Click here to view our full list of COVID-19 Information and Resources.

Navigating a Crisis: Contract Disruptions and Delays—7 Key Steps

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The COVID-19 crisis has disrupted deals, projects, supply chains, and other transactions across the world. To handle the resulting potential disputes, you need lawyers who understand your transaction, not just the legal elements of force majeure, impossibility, MAE/MAC, etc. Despite the recent flood of client alerts, these legal concepts are not novel—lawyers everywhere know the basic rules. The best lawyers will dig deep to learn the complex commercial context surrounding the troubled transaction. By understanding the dispute in detail, and in the context of your business needs, we will help you develop your best arguments and strategy.

Every case is different, but here are some basic steps we follow with our clients when dealing with contract disruptions or delays:

    1. Determine Applicable Law. In some form, the concepts of impossibility, frustration, force majeure, etc. arise across multiple jurisdictions, but there are variations in application. Under New York law, for example, impossibility may be an excuse for non-performance even absent a specific contract clause permitting the defense. That is not so in all jurisdictions.
    2. Consider the Relevant Contract Provisions. Even where an impossibility defense may be available absent a specific contract provision, the contract terms are still paramount. They may modify, narrow, or broaden the scope of permissible excuses for non-performance in a crisis. Consider the contract as a whole.
    3. Take Steps to Avoid Disruption or Mitigate Damages. Parties who claim that non-performance is excused generally must show they were unable to avoid the non-performance. Parties claiming damage from non-performance need to take reasonable steps to mitigate their damages.
    4. Identify Potentially Relevant Procedural Provisions. Follow the contractual process for notifying and proving up a claimed excuse for non-performance.
    5. Identify Dispute Resolution Provisions. Your aim will be to avoid litigation or arbitration, but being prepared for formal proceedings is critical to winning them if you have to. Showing your preparation also is critical to achieving the best negotiated resolution, if one is available. Some contracts contain mandatory mediation or dispute escalation provisions that you will need to consider prior to formal proceedings.
    6. Assess Practical Considerations Beyond this Contract. Don’t lose track of how this particular delay or disruption impacts your entire business. Do other contracts (warranties/cross-defaults/contingencies) depend on your performance of this one? Will the financial impact of this delay cause any lost opportunities? Are there public relation needs to consider? What other stakeholders need to be brought into the loop? Identifying these issues early will maximize your options.
    7. Define Your “Win.” Keep the Team Focused on Achieving It. In light of all the commercial and legal realities, what is your best outcome? Agree on a budget for achieving it that contemplates all of your outside advisors, legal and otherwise. Make sure your entire team is working cohesively to stay on target and within budget. Reassess from time-to-time to gauge progress and to determine whether changing circumstances require you to adjust your ultimate goals.

 

 

Next Article in This Series —

Navigating a Crisis: Bankruptcy and Other Governmental Interference with Contracts

 

Click here to view our full list of COVID-19 Information and Resources.

NAVIGATING A CRISIS: Lessons from Running Our Own Businesses (Part 2)

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Two senior Chaffetz Lindsey partners share some thoughts on operating a business during a financial crisis. This page: Thoughts from Charlie Scibetta, Chaffetz Lindsey Managing Partner. Previous page: Form Your Crisis Team and Strategy. (Sandy Litvack, former General Counsel, Chief of Corporate Operations at the Walt Disney Company)

A Crisis Can Drive Innovation and Opportunity.

During the subprime crisis of the late 2000s, premier law firms faced severe demand contraction as the economy seized. Hoping to emerge from that crisis somewhat smaller, but otherwise not much different from the way they went in, they laid off attorneys and staff and cut other costs. We thought differently.

As partners in a leading global law firm, we faced conflicts of interest and a high cost structure that impeded our ability to serve our clients when they needed us most. We did not want to emerge from the downturn only to face the same obstacles.

So, while other businesses hunkered down and cut their teams, we leaned in and started a new disputes boutique. Our founding team was, in essence, our “crisis response team.” That team included our founding partners, our in-house IT and operations manager, and our outside marketing and branding advisors and other consultants. We took advantage of affordable real estate options. We created jobs while others were shedding them. Most importantly, we built a firm that was far better suited to serve our clients, in good economies and bad.

Now, in the face of the COVID-19 crisis, we will face challenges, but we stand even more prepared than we were as a brand new business in 2009 to lean into them. As an established firm, we do not have the administrative burden of building a new business. We are focused 100% on helping our clients. And as we do that, we continue to learn from the lessons we are presented. Like many others, we already are improving client service and value through even more robust use of remote working procedures.

Finally, we do not for one second take for granted the good fortune of being able to operate our business, serve our clients, and keep our lawyers and staff employed and safe during this crisis. We know that others are hit much harder, and we know that because we are still able to work we have the opportunity, and responsibility, to help our community through this. We will take a leadership role in that effort.

— Charlie Scibetta, Founding and Managing Partner, Chaffetz Lindsey

 

 

Next Article in This Series —

Navigating a Crisis: Contract Disruptions and Delays—7 Key Steps

 

Click here to view our full list of COVID-19 Information and Resources.

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