Bankruptcy Courts Gear Up, Dress Down With Filings Surge to Come

(Bloomberg) -- U.S. Bankruptcy Judge Christopher Sontchi may not be ready for a bathrobe in pandemic work-from-home style yet, but his black judge’s robe is gone.

When he and his colleagues in one of the nation’s three busiest corporate bankruptcy venues switched to video hearings, they adopted a more informal approach that doesn’t include their tradition-bound courtroom attire.

“The judges all talked about it and we decided that was unnecessary and sort of silly if you are at home,” Sontchi said in an interview.

Dispensing with formalities is just one of many coping mechanisms deployed by the U.S. bankruptcy system during the coronavirus pandemic.

Judges across the country have pushed off non-urgent cases and big law firms are gearing up for a wave of multibillion-dollar cases. The U.S. Trustee, which oversees the bankruptcy system, has canceled tens of thousands of in-person meetings between debtors and creditors, installed 1,200 new conference lines and added 250 attorneys to specialize in small-business cases.

The result, say those in charge, is a system that is more prepared today than it was during the last major default crisis that pushed so many consumers and companies into bankruptcy after the 2008 financial crash.

“I think we are better positioned to deal with the roller coaster today than we were years ago,” said U.S. Trustee Clifford White, who oversees 360 government attorneys who are vital to helping consumers and businesses navigate the bankruptcy courts. “We have learned from experience.”

While big, corporate reorganization cases ticked up in March compared with a year earlier, overall, fewer businesses and consumers filed for court protection that month, according to the American Bankruptcy Institute. The dip in smaller cases will likely reverse itself in the coming months, said ABI Executive Director Amy Quackenboss.

Lawyers Vetted

Because of a bankruptcy law change, small business cases had been expected to rise even before the current economic turmoil, leading White’s office last year to vet about 250 new lawyers to help handle a surge of filings.

The new law lets smaller companies use bankruptcy to clear their debts and reorganize faster and more cheaply than previously. Last month, Congress boosted the number of businesses eligible for the program by making it available to any company with less than $7.5 million in debt.

The new lawyers aren’t government employees, but instead will be appointed to act as mediators and advisers in small-business cases. White pre-selected them from among 3,000 applicants, picking those with some accounting and general business backgrounds to give courts a pool of experts to draw from.

Consumers and small business owners have seen the most dramatic change in the bankruptcy system so far. That’s because in normal times, U.S. Trustee attorneys preside over thousands of meetings a month between debtors and creditors. These so-called 341 meetings, named after a section of the bankruptcy code, are the only time a creditor can directly ask a debtor questions under oath. The answers are key evidence in every consumer and small business case.

Because of social-distancing requirements, 60,000 such meetings were canceled, White said. Future meetings will be held by telephone, which is why U.S. Trustee offices have added 1,200 new conference lines, according to an agency statement.

‘Pivotal Step’

“It’s a pivotal step particularly for consumers,” White said. The U.S. Trustee has probably sent 1 million notices to people about the cancellations, he said.

The changes have been more subtle in big corporate cases, which generate almost all the headlines but were a tiny fraction of the 757,000 bankruptcies filed last year.

At the start of the pandemic, judges in the three main corporate bankruptcy venues -- Delaware, New York and Texas -- switched to video for most routine court hearings and in some cases canceled more complicated proceedings. In Wilmington, Delaware, where Sontchi is chief judge, lawyers were told to wait until May if a dispute wasn’t time-sensitive.

Retail cases like, Pier 1 Imports and Modell’s Sporting Goods, were put on hold because they involved liquidation sales that can’t be held when stores are under orders to stay closed.

“It is hard,” Sontchi said. “If it’s important, if it’s urgent, we’re hearing it.”

Oil-Patch Cases

In Houston, which will soon be swamped with insolvent oil industry companies, Judge David R. Jones and Judge Marvin Isgur have been holding training sessions for lawyers on how to use the court’s videoconferencing software to smooth out proceedings.

Corporate bankruptcy lawyers, who often charge more than $1,000 an hour, have been busier than ever preparing cases. Still, they are holding back on filing them because the system is under so much strain.

The cases that may be ready to go probably won’t make it to court until the end of June, said Robert Hirsh, a bankruptcy partner with the law firm Lowenstein Sandler.

There will be fewer filings in April “unless it’s a true, dire emergency or pre-arranged case,” he said. “There’s so much backlog and things are on hold. Getting first-day hearings are not going to be easy.”

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