Hurricane Sandy Affects Bankruptcy. Lessons from Ike.
Two days after Hurricane Sandy hit the East Coast, I sat there watching CNN. I observed all of the aftermath and devastation and thought about the long road to recovery. I also thought back four years ago when Hurricane Ike hit Galveston and the Houston, Texas area and all the lessons we learned from it. Even today, us bankruptcy attorneys in the region are still experiencing effects of that hurricane. I wanted to share the lessons that we learned from Ike so you will know what to expect over the next few days, weeks, months and even years after Hurricane Sandy has come and gone.
To those of you on the East Coast in the affected areas: Hurricane Sandy Affects Bankruptcy. It will affect your clients, your client’s cases, your potential clients and most of all YOU and YOUR business. It impacts almost everything in your life immediately, affects most people to a degree over the near term and it will continue to have long- range repercussions in the bankruptcy realm over the next few years. We learned a lot during the after math of Ike and I hope that you can glean some knowledge from this somewhat rambling post.
Hurricane Ike hit Galveston and the Houston area Saturday, September 13, 2008. Like most people, we gathered food and water and filled our gas tanks (And maybe you noticed, all the beer was gone too!!). We bought batteries, flashlights, transistor radios, toiletries and for the lucky few; generators. People were hunkering down. Court was canceled Friday as the time was near.
On television, we watched the water surging throughout the day. We sat in amazement as the storm approached closer and closer. We marveled at Geraldo getting blown over on the seawall in Galveston. As the night crept in, the rains and winds got stronger and sometime around 2 to 3 am, it hit full force in Houston. We didn’t know it because we lost power about midnight. We woke up in the middle of the night to a restaurant on fire down the street and worried about the flames jumping the street. At some time in the early morning, we went to sleep. We woke up to a calm day, but looked outside and saw the whole city of Houston turned into a river. As quickly as it came, it went. We ventured out and saw downed trees, branches blocking intersections.
It was Sunday. Nothing was open. There was no power. Cell phone service was non-existent. But text messaging was working and became the best way to communicate. We only had over the air radio to try and figure out what was happening. Galveston, being in direct line of the hurricane, naturally was affected the greatest. Houses were burning, but he firefighters couldn’t do anything during the storm. Even after it passed, the city water got compromised, so they had to use pools and dredge the streets for water to put the fires out.
Later on Sunday, my boss texted me and said he was at the office. There was a problem. The glass atrium in the middle of the building had collapsed and water flooded the whole building. Luckily we were in the back, and only suffered about 2-3 inches of flooding. We had put all the files and computers up on the desks, so we lost nothing, but as it would turn out 3 months later, our building would be totaled and demolished a year later.
After driving back streets, taking detours around trees and branches, eventually I made it to the office and met the other tenants. They wouldn’t let us in. My boss was there and was immediately looking to move. This building would be a health hazard with mold soon enough. Luckily we run a lean business with no real debt, but we knew it was going to cost tens of thousands of dollars and we ended up getting an SBA loan to cover the costs. This has direct costs when you have to mail all of your clients of the address change, update business cards and change all brochures and letterheads. Not to mention clients that waste time looking for you not knowing that you moved.
The Courts and Business. Immediate impact.
Hurricane Ike cause the Houston Division to shut down for the whole next week and all hearings were cancelled. Most Houston residents did not start regaining power until early the next week. We shut our office down through Wednesday the next week. We had a skeleton crew Thursday and Friday to do damage assessment, get the servers up and running, start returning all the phone calls and letting clients know about all the cancelled hearings.
The Galveston Division Court was hit very hard. It was an old postal service building and was severely flooded. Most of Galveston was flooded and it was over a week before anyone that didn’t live on the island could get back on it.
In fact, it was almost two years before there was hearings set again in that Court. Naturally that meant that Debtors and attorneys all had to make the 45 to 60 mile drive to Houston any time there was a hearing.
The Court basically ran on a skeleton schedule for the rest of September and October. All of the confirmation panels set for those two months were pushed to November. Most of the Section 341 meetings of creditors were delayed for weeks. Obviously this affects your client’s cases when you are trying to get them confirmed. It also affected all new cases. We were not told and were unsure exactly when their meetings of creditors would be held and when their confirmation hearings would be held.
Pushing confirmations also pushed back our income. Like many jurisdictions, we do not start receiving attorney fees until cases are confirmed. We had a number of cases where payments were delayed for months.
Flexible Payments. Near Term Effects.
Hurricane Sandy affects bankruptcy creditors too! The one good side to all of this was that both creditors and the Judges were very flexible when it came to plan payments. As most of your clients and potential clients will find out, car finance companies, student loan lenders, mortgage lenders (and yes, even credit card companies) were advertising and making it very clear to their customers, that they could defer payments for a month or two or request more flexible payment arrangements. We certainly appreciated those type of rapid responses from
Even in active cases, creditors were more flexible with missed payments that were blamed on Ike. Where normally a lender may have been quick to file a motion for relief from stay, they were very flexible in extending longer repayment terms and making deals to add in payments into the bankruptcy plan. I even had a few car lenders agree to put payments on the back end of a loan when it was a direct pay by the Debtor case.
The Judges had had meetings throughout all of this, working with the Trustees, to determine how best to handle the situation. I would say, looking back now, that the overall arrangement focused most on immediate relief for debtors and their cases and to let the situation work itself out over the next few months. This is not to say that Judges completely excused Debtors not making payments on their cases, but they understood. Instead of immediately dismissing a case, the Judges were more flexible in granting one, two or even three months to allow debtors to catch back up.
With the Court and creditors being more flexible, we decided to offer a one month amnesty in trustee payments to our current chapter 13 debtors. A number of them took up the offer and modified their plans to forebear one month and spread it and the mortgage payment out over the life of the plan. We confirmed a number of these modifications. It wasn’t designed to be a money maker – we were trying to help our clients – but we are allowed in this jurisdiction to charge for modifications. Just like we are able to for motions to dismiss and motions for relief.
Hurricane affects incomes, jobs and businesses AND YOUR INCOME over the near term
Like our own business was affected by Ike, tons of others were as well. Although we don’t have the density on the ocean like New York and New Jersey do, we still had multiple economies greatly affected by the Ike. I can only imagine that Hurricane Sandy will as well. In Galveston, EVERYTHING was shut down for weeks with no water and no power. Businesses that cannot operate because of damage cannot do business. If they cannot do business, they don’t make money. They don’t employ people and they don’t make payments on their commercial leases or mortgage payments. It can affect businesses for months, even years. And some businesses don’t come back. Even then, the ramifications of this continue outward like rings in a pond when you toss in a rock.
Your clients and your potential clients obviously are affected. The economy is still not great and many debtors live paycheck to paycheck. If they don’t have vacation pay or other income to cover the lost work, they are broke. As you know, between deciding to pay their trustee payments or even you, versus buying food, they are choosing food.
The money that clients owe you dries up. Over the next week and even the next few months, the desire to file bankruptcy or stay in their chapter 13 plan isn’t as strong as the desire to find work, buy food and keep gas in the car. This is not to mention those debtors who houses were destroyed or severely damaged by the hurricane. Their bankruptcy is not as important anymore.
We saw it in our practice. For the next couple of immediate weeks, we had little business. The money that was owed to us didn’t come in. As mentioned above, the confirmation hearings were all postponed so even our Trustee money was less.
You will have to be prepared for a number of months of lesser income. Your clients will be directed impacted money-wise for many weeks and months. A lot of laborers will not be able to work. A number of people couldn’t work because of power outages. A number of people choose to buy household necessities instead of you. You may have to offer discounts for those that owe you money. You may send out special flyers to current and potential clients stressing the help you can provide. Even current clients will need your help. Make sure you reach out to them and discuss their options with them
Long Term Impact – What you must know about hurricane claims, insurance d disputes and their involvement in bankruptcy cases.
It should be obvious by now that Hurricane Sandy affects bankruptcy. What is amazing is how long the impact will last. We saw it with Hurricane Ike. Obviously hurricanes immediately affect businesses, employees, customers, landlords, your clients, their cases and your business. But the impact of Hurricane Sandy will be much larger and longer.
We have elderly clients with paid in full houses that didn’t have insurance. They still suffer damage to their houses. How they choose to try and fix their place will affect their cases. Some may decide to let the house go because the costs to fix it outweigh what they can afford.
We have clients that HAVE insurance that STILL don’t have their houses fixed. It is four years later and we still have a number of clients with Hurricane Ike claims. This has dramatically played out in our Courts and it will impact your courts.
Many attorneys will develop a specialty for Hurricane Sandy claims. You will see the tv ads, hear the radio ads and see the billboards everywhere. They will harp on the deadline to file claims and the deadlines to sue insurance companies.
A number of our clients made claims that were either denied (windstorm, water surges, flooding, etc) or the proceeds were limited. Naturally, over time, they see these ads; they talk to their neighbors and they think that they should get more money. They will call these law firms. But they won’t tell you. They will file suits two years after you file your case and they still won’t tell you.
We know that any pre-petition claim is an asset of the estate. However, most debtors don’t understand this. They don’t think they have a claim until they meet a lawyer two years later. Then they don’t think to tell you. It has blown up on debtors here in the past. I don’t need to remind any bankruptcy attorney about the potential impact of filing to list a claim in a case and then trying to pursue it down the road. Luckily, our Judges have been allowing post-petition amendments to include these claims and the approrpiate exemptions. Further being lucky is that no insurance company has tried to argue judicial estoppel in any underlying state cases.
For your procedures. Make sure; no make doubly sure, that you ask EVERYONE if they have a Hurricane Sandy claim. But that’s not enough. You also have to ask if they made a claim that was denied. You have to ask if they made a claim but recovered proceeds that were less than the damage. If they say yes, then you need to list the potential claim. Even with ongoing cases, you need to follow up to see if anyone later acquires a potential insurance claim. If they do, then their attorney likely will need to file an application to employ (see below). Of course this all depends upon how your jurisdiction handles post-petition assets of the estate.
Four years later, we STILL ask about any lingering or outstanding Hurricane Ike claims.
Who really needs to watch out for this full disclosure is the attorneys that will handle the upcoming Hurricane Sandy insurance claims. We have a couple of firms in town that have made a cottage industry out this. Their problem was that they had no systems, controls or procedures in place to ferret out debtors who may have been in bankruptcy. Any attorney that does personal injury work or insurance claims MUST ask every potential client if they are in bankruptcy. I wouldn’t stop there. I would go ahead and run a PACER check by social security number as well.
We have had some major cases involving major firms who lacked these controls. They were lucky their attorney fees were not denied. They were required to go back and run PACER on every case to determine if anyone was in a bankruptcy case. They were then required to hire independent bankruptcy counsel and file Applications to Employ Nunc Pro Tunc in each and every case. I don’t know of any case where their contractual fees were denied, but some creditors and trustees certainly tried.
So any attorneys representing Hurricane Sandy claims better ask every potential client if they are in bankruptcy and they better get a PACER account and run that person’s social security number. In fact, they better make sure they tell their clients to tell them if they ever file bankruptcy and run another PACER at the time of the settlement.
The minute you or the insurance claim attorney finds out about the bankruptcy, you need to make sure you amend the schedules immediately to include the claim. As stated above, our Judges have been pretty forgiving with Debtors who didn’t realize that they even had a claim until well after their bankruptcy was filed. The key is disclosure as well all know.
Like most courts, our Courts require attorneys representing debtors and estate claims to file an Application for Employment. It became such an issue that our Courts created local forms for those attorneys to file for cases that they just got and for cases that they have already done work on. Feel free to log onto the Southern District of Texas web site for the samples.
I can’t speak to your homestead exemptions, but the courts here are currently ruling that the claims are exempt under federal wildcard and Texas homestead exemptions. There is still a groundswell about this and it is not settled. Some of the trustees’ positions are that these claims are actually breaches of contract and breach of good faith under insurance statutes and are not insurance proceeds nor entitled to homestead exemptions. Rather, they contend that damages from the breach are not exempt. Be wary of this and start reading up on old state case law now.
Luckily all the trustees seem to be in agreement that the actual proceeds from the settlement for damages is exempt. Past of the reasoning is that most mortgage notes state that insurance proceeds are secured by the lien and the mortgage company can dictate how the money is spent. So rest assured, your client’s actual damages should be covered and compensated in the bankruptcy. But the extras for breach, etc may not be.
This is all I can think of. Houston and Galveston were hit by category 4 Hurricane Ike four years ago. Although it was a stronger hurricane, Houston is 45 to 60 miles north of Galveston, which was directly hit. I know Hurricane Sandy was a lesser category, but I can tell from the pictures that she brought a lot of the same damage. Plus, the East Coast is older and more dense and more apt to suffer damage from water swells and waves. I hope you don’t suffer the way Galveston did. I suspect you won’t. Being on the water that long, your area has learned over the years and has procedures and devised ways to combat these types of storms.
The initial impact of the hurricane was immediate and mostly monetary. I trust that your bar and Courts will apply some of the lessons we learned and offer relief for the next two to three months. We are still feeling the impact of Ike four years later. I suspect that in some areas, you will also feel the impact for that long. Understand how it will affect your client and potential client’s incomes. Understand how it will impact their cases and their assets like their homes. Understand how it will affect your income and your business. Plan now to deal with it.
Most of all, understand how these claims affect bankruptcy cases and estates and impact of exemptions on them. Understand your required diligence to find out about potential claims and how you may need to change your procedures and disclosures.
Good luck to all of you. Have your Judges and/or Trustees contact ours for their help. Contact us with any questions that we didn’t address in this post.
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