In this edition of Coronavirus Q&A, Bilzin Sumberg's leader of business finance and restructuring, as well as its corporate practice, chatted with Law360 about the transition to remote bankruptcy court and how the accelerated timeline of COVID-19 has affected legal work.
Jay Sakalo, who leads Bilzin Sumberg Baena Price & Axelrod LLP's corporate practice and its business finance and restructuring group in Miami, shared his views as part of a series of interviews Law360 is doing with lawyers to examine how COVID-19 has impacted business and brought about myriad legal considerations and questions.
Sakalo counsels various parties on bankruptcy matters, and also works in the real estate finance and hospitality spaces.
This interview has been edited for length and clarity.
How has your practice changed over the last couple months amid the pandemic?
My practice, which is a hybrid practice doing new financing deals, restructurings, workouts and bankruptcy-related matters, has changed in two significant ways. The number of workouts and bankruptcy-related engagements has increased dramatically from where I was just a few months back. And the work that I'm doing for my financing clients has changed to some extent, in that a lot of it is addressing COVID-related issues more so than closing deals.
I'd like to get into both points. Let's talk first about the bankruptcy element. How is the bankruptcy work different than it was during the Great Recession?
We're still at the infancy stage this time, and so I don't know yet how it will ultimately turn out. The things that have been caused directly as a result of the pandemic have happened much more rapidly than they occurred last time around. With the benefit of hindsight — or passage of time, perhaps, is a better way to look at it — the Great Recession we tend to think of as happening all at one time. But it was over a period of time, if you sit and look at the pivotal moments that led to that. The tightening of credit that occurred, the losses in the market took place over anywhere from a nine- to 12-month window.
With COVID, we went from a humming-along economy with some bumps along the way to almost a dead stop within a couple of weeks. As the shutdown orders started coming through and as the pandemic spread, the velocity of the shutdown was so much greater than what we suffered through in the Great Recession, and the reaction to it has been much more acute. The analog would be somebody who gets ill and they have a chronic condition. Over time, they can die from that. But somebody who suffers a really acute accident, like some kind of really bad trauma, it's likely they can survive that initially, and over time, it might be OK. What we're facing here is such a rapid deterioration of the marketplace. The number of companies, businesses, enterprises that had a pandemic plan in place we probably can count on our respective hands. This wasn't something that people could plan for.
The recession that we went through last time was a market-driven recession, and the over-leveraging of credit that occurred pre-recession and the incredible tightening that occurred as a result of that recession is what really drove the restructuring and bankruptcy work that time. This time, it's being driven much more from a consumer side. You've had the consumer shutdown and we've had this great loss of jobs. The credit markets have sustained themselves, and I think people should pat themselves on the back a little bit. That demonstrates the underwriting quality so far has proven to be stronger than it was during the last recession. But at some point, even the strongest bridge breaks with enough weight on top of it, so we'll see what happens ultimately. Where these bankruptcies turn out will largely, I think, depend on the industry that they're in. And what the next phases of the recovery look like.
Here in South Florida, hospitality makes up such a large component of our local economy, and nobody's getting on airplanes right now. Local people aren't vacationing. We have developed this great cottage industry of staycations down here, where locals got to take advantage of fabulous hotels that we have locally, but that's not happening either. Dade, Broward and Palm Beach County are the only three counties in the state that have not been reopened yet, and we don't know when that's going to happen. So the impact of bankruptcies will, I think, in large part be a result of, 'When do things open up and what do they look like when they open up?' Retail has taken huge hits. I think for a number of the retailers, all COVID proved to be was an accelerant of their ultimate demise — or will prove to be an accelerant.
How has the accelerated timeline changed the scope of bankruptcy work?
It has caused and demanded incredible levels of creativity. The reaction time is much shorter than it was when we had the prolonged nine- or 12-month demise last time. The velocity of the requests coming from clients and the need to turn those around with advice on an unprecedented issue has required great degrees of creativity and collaboration among our colleagues, all happening at a time when we're not physically present in the same office. And our firm is a single-office law firm, and it's been one of the hallmarks of our law firm, and the collaborative nature.
But the need to be collaborative in this environment with your colleagues is even more heightened. I remember when I was a child, you would learn about the different senses that you have in your body, and they would teach you that if somebody lost their hearing, their other senses would try to make up for that. Or if they lost their sense of touch, their other senses would try to make up for that. The loss of having access to our colleagues directly in the office heightened our collaborative nature. The amount of daily phone calls, Zoom calls and other communication among the different practices of our firm has really just blossomed. In part it speaks to the culture that we had within our firm of working so collaboratively, but also the need to provide the service to our clients on such a rapid return time.
Are you involved in bankruptcy proceedings for clients at the moment, or is it more of a discussion phase at this point? And if you're involved in proceedings, I'm wondering what it's like navigating bankruptcy court.
I am involved [in proceedings] for clients at this moment, and also in discussions. So it's a little bit of both. The bankruptcy court for a number of years has been at the vanguard of remote participation for lawyers. My practice is based here in Miami, but my practice, especially on the bankruptcy side, is a national practice. I've spent years in cases in New York, Delaware and other venues around the country. Virtually all of those courts at this point are very comfortable allowing for telephonic participation. And in bankruptcy we don't have juries. Everything is decided by the judge. And so the ability to maintain active cases before bankruptcy courts in this environment hasn't changed very much.
It's a bit different that judges are home. Normally when we're doing it telephonically there are always some people that are in the court room, including the judge, and there are others that are participating by phone. The dynamic is different in that we're all on the phone, so nobody has the ability to necessarily look the judge in the eye and the judge doesn't have the ability to look attorneys in the eye. But the ability to move things quickly hasn't suffered very much, and the bankruptcy courts in the Southern District of Florida and in the other courts where I have active cases were really at the forefront. They issued orders right away, requiring cases to move to remote hearings so nobody would be concerned about a health issue of having to come into a court room or what have you. I don't think it's changed very much. For other courts, it is a bit different. I don't practice in state court. I don't practice in federal district court all that often, although I do it from time to time, and that is a bit different with the need to have juries and the like, but that's not really part of my practice.
Let's shift to financing. What does your financing practice look like these days?
The financing work that I do involves a lot of mezzanine financing and preferred equity investing along with mortgage-related or first lien-related financing. That's a bit unusual. We don't represent banks and institutional lenders per se. We tend to represent a lot of non-bank lenders and the like. And we also represent a lot of borrowers and I'm involved on both sides. What's happened now is we're making sure that we have our footing in all areas. What I mean by that is we're doing a double-check of our loan documents to make sure there are no gaps. We're fielding a lot of requests from borrowers for accommodations under their existing loans. And on behalf of a number of our borrowers, we're working on requests to their lenders seeking some accommodation.
Those really run the gamut from short-term accommodation — it could be something like a debt service abatement for 30 days, 60 days, 90 days — or it could be something more substantial, and that would look like an actual modification of the loan. We're handling, and I'm involved in a number of these, that whole spectrum of financial accommodations that need to be made in light of what's going on. It's literally changing by the day.
I've got a couple of mezzanine lending clients who are very comfortable in the position that they're in in their deals. They feel like their sponsor is very strong and the sponsor's going to maintain the project. And they're all working very collaboratively to move it forward. But I have some other clients who are not as assured of the strength of the sponsor and they're looking at these much more carefully because they need to be in a position where if things start to go sideways, they have the ability to step in, exercise their rights and take over the project or take over the deal.
Do you think most of these disputes will be worked out, or do you think many will go to litigation?
It's a bit hard to generalize. Undoubtedly some subset of these will wind up in litigation. Either commenced by the borrower or the lender. Sometimes borrowers believe in this environment if they take the first shot it gives them leverage. Others are much more peaceful in their approach to try to reach an agreement. And then there will be some lenders who can't reach a deal with a borrower either because there's no economic deal to be reached or they can't reach a consensual deal that each side thinks is better than their alternative of going to court. And in that situation the lenders will certainly exercise their remedies in court. Part of that will be how quickly can they get to court. The state court system in Florida is open, but really only open for emergencies.
But I do think that the borrowers and lenders will for a period of time largely be trying to find consensual resolutions. I think both sides recognize that a lot of this was thrust upon them as a result of COVID, and that if a solution can be reached, than they will attempt it. But what each side has to recognize is that just because this was thrust upon them, it doesn't mean everybody should just ignore what their loan documents say.
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