BANKRUPTCY BOOM

‘Bankruptcy is going to be a popular field of study’

Are there enough lawyers to handle the expected wave of cases?

BY STEPHEN ELLIOTT

arc McNamee of Neal & Harwell has seen

M a lot in his 40-year career in bankruptcy law. First came the fall of the Butcher banks in 1983 and 1984. en there was the Tax Reform Act of 1986 and the savings and loan crisis of the late ‘80s and early ‘90s. e dot-com boom and bust and the 2008 nancial market collapse followed.

Each wave could be traced back to human activity, unlike the crescendo of bankruptcy lings McNamee expects to see as a result of COVID-19.

“ere is no way that we can have this level of unemployment and disruption in the service economies and not have fallout,” he says.

Bankruptcy courts will be full of coronavirus fallout, experts believe, but attorneys haven’t yet seen much of an increase in cases. at will come late summer or early fall, predicts Nancy King of EmergeLaw. e lull in new lings can be traced to extreme uncertainty around the state of the economy, the timetable for recovery and the status of relief programs. Bankruptcy lings — unlike, say, unemployment rates — are a lagging economic indicator.

“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,” King says. “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.”

King left her longtime job as a clerk in federal bankruptcy court to enter private practice late last year. It may end up being auspicious timing: As bankruptcy lings rise and fall with the economy, so too do the number of local attorneys specializing in bankruptcy. e supply problem could be exacerbated in Nashville, where a decade of recovery and rapid development has seen more and more lawyers specializing on the front end of business deals.

“at’s all we do, so we’re ready,” King says of EmergeLaw. “But other rms aren’t fully staed for it. It’s almost like there’s a — not a whole generation but a long period of time where young lawyers haven’t been trained in the bankruptcy eld because there was nothing to train them with. Bankruptcy is going to be a popular eld of study for people in law school.”

McNamee sees the same issue. He’s looking at younger attorneys at his rm who need “a little more seasoning” — that is, real-life bankruptcy experience.

“When there’s no bankruptcy work to be done, good commercial lawyers have to nd a way to get paid,” he says. “ey go o and they do front-end work. e same thing happens when the real estate market dries up. When there weren’t any real estate loans being made, when there weren’t any big business deals being done driven by real estate, those lawyers had to go and nd something else to do. So at that time, they became bankruptcy lawyers.” e ow of those skills was massively one-directional during Nashville’s 2010s boom, which saw the area economy add 288,000 jobs from the beginning of 2011 through the end of last year. Debtors led 48 Chapter 11 cases in U.S. Bankruptcy Court for the Middle District of Tennessee in 2019, down from an annual peak of 158 during the Great Recession. at number is sure to rise dramatically and will call for many lawyers to dust o their restructuring skills.

Nancy King

‘The early filers will be the ones that jump rather than being pushed.’

MARK MCNAMEE, NEAL & HARWELL

400

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250

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150

100

50

FILINGS

81

2005 368

30

Widespread pain One prominent Nashville industry bearing the brunt of COVID’s impact and likely to make a notable contribution to the expected bankruptcy boom: tourism and hospitality. In April, local employers in the leisure and hospitality sector laid o about half of their workers — roughly 60,000 people in the Nashville MSA.

“ey’re going to take it in the neck,” McNamee says.

Companies like Ryman Hospitality, he says, will experience “a great deal of suering for a period of time, driven by the fact that they simply can’t ll their resorts.” Other businesses that rely on large crowds on Lower Broadway are being similarly hit by the pandemic shutdowns.

Another of Nashville’s most prominent industries, health care, could see mixed results as some companies suer from months-long cancelations of elective procedures while others reap the reward of large-scale investment in certain priorities.

A less visible beneciary of Nashville’s recent growth could also take a hit: oce space and commercial real estate. As many Nashville workplaces have transitioned to telework during the pandemic, executives may nd it attractive to downsize their oce leases. at could include some of the large corporations that have moved their headquarters to the area in recent years. Meanwhile, local and state governments strapped for cash will have less to give to lure new headquarters to town. 158

Business bankruptcies filed in the Middle District of Tennessee

Bankruptcy lawyers are gearing up for a wave of new filings, after a steady decline since the height of the Great Recession. Chapter 7 Chapter 11 Chapter 13

Source: Administrative O ce of the U.S. Courts

147

16

2012 42 104

2 126

48

2019

“We might see a lot of real estate bankruptcies as we come out of this and some companies decide they kind of like this model and they don’t need as much space as they had,” King says. e nature of recent growth in Middle Tennessee — as well as many other areas — could put more businesses in danger of falling into bankruptcy. Specically, it’s been built on debt that has become more attractive thanks to very low interest rates.

“Companies have been using debt to their advantage, so they’re all pretty leveraged up,” King says. “Now, most of them probably can’t make their debt service and they’re going to end up having to le to deleverage. at’s sim ilar to what happened before with real estate. ere was just no other option. ey’d tried to work it out with the bank and it had failed.” at situation could create a competitive advantage for some businesses that come out of the Chapter 11 process “lean and mean” — unburdened by debt.

While McNamee stops short of calling bankruptcy a competitive advantage under current circumstances, he points out that “clearly, bankruptcy does not have the stigma that it did 40 years ago.”

Some businesses will be able to work out their issues with lenders without ling for bankrupt cy protection, the attorneys say. According to McNamee, lenders prefer to work with loan recipients during hard times rather than push for bankruptcy, in part because it’s hard to get repaid in full through the bankruptcy process. at approach was evident during the early shock caused by COVID-19: Many lenders in the area, from small community banks to some of the country’s biggest nancial names, rolled out forbearance programs for their customers.

But those programs will run their course at some point and Chapter 11 is inevitable for some.

“e early lers will be the ones that jump rather than being pushed,” McNamee says. “e later lers will be pushed. ey’ll be pushed by their lenders; they’ll be pushed by the venture capitalists who backed them. ey’re going to want to become more ecient, and they’re go ing to want to convert, to the extent that they can, debt to equity.”

But with the challenge of a new wave of bankruptcy lings looming, one of the city’s most experienced bankruptcy attorneys might be sitting on the bench. is time around will be worse than 2008 or the fallout from the 9/11 terrorist attacks, and less predictable, McNa mee says, and banks are going to become much more risk-averse after years of free-owing cash.

“I don’t know how ready I am,” McNamee says. “is would either be my fth or sixth nancial downturn, and I don’t know that I’ve got the re in the belly to go ride out another. I’m 66. I’ve had all the fun I can stand. I’m happy to turn it over to my well-positioned lawyers in my rm.”

Regardless of how closely he’ll be involved, McNamee knows one thing: “It’s coming.”