Posted Feb 21, 2006 10:46 am CST
For Commercial Establishments, Starting Again Involves Many Legal Steps
Van Staub owns The Art of Fishing, a store on Magazine Street a little bit west of downtown New Orleans that deals in coastal decor. He describes his postKatrina business as “a little fish in a big pond—literally in a big pond.”
Like many business owners in the Crescent City, Staub is trying to stay afloat in the wake of the floodwaters that inundated the city after Hurricane Katrina struck in late August. And he faces many of the same problems: trying to find employees in a population that has shrunk to 100,000 from nearly 500,000 before Katrina, arranging for prompt delivery of goods, and haggling with insurance companies and landlords.
And that’s just a start. Lawyers say owners of smaller businesses like Staub’s face myriad legal issues. Erin McManus, a lawyer in Gunnison, Colo., who has provided legal assistance to business owners in the Gulf states through the ABA’s Katrina Task Force, outlines six key legal issues that many business owners in the region face:
• Property: Do the business’s quarters need to be rebuilt, restored or relocated?
• Financing: If the business has debts, will it be possible to obtain forbearance for payments or refinancing? Are loans available from the Small Business Administration, and what is the process for obtaining them?
• Contracts: Is it possible to revise contracts with customers and suppliers under the principle of force majeure?
• Employees: Assuming employees are still available for work, will it be necessary to renegotiate pay and hours to accommodate the posthurricane state of the business?
• Governance: If the business is incorporated, are the annual reports and other required paperwork current so the state does not dissolve the corporation?
• Accounting: Are business records current so that tax returns can be prepared? Despite the urgency of some of the issues facing small businesses, “you cannot take a shortterm view of the situation,” says Marie Moore, a lawyer in New Orleans. “You have to take a longterm view. You need to take stock of your people in order to have a longterm business. You need to contact your insurance adviser and your lawyer.”
Nevertheless, some problems have to be tackled first, say Moore and other lawyers. Two of the biggest difficulties for businesses, she says, have been to find a dry, safe place to set up shop and employees to help keep it going.
Insurance claims also must be dealt with quickly, says Steven Klein, one of Moore’s partners.
One problem, according to Klein, is that “you don’t see consistency in results” in settlements with insurers. “It’s a place where lawyers can play an important role for the clients, helping them wade through the policies.”
One key coverage issue, Moore says, is the question of what constitutes a business interruption.
“If the physical plant of a restaurant has suffered no damage but it is sitting in the middle of an area where there is no access, you will see a denial of coverage,” says Moore, explaining that insurers often interpret interruption to mean actual physical damage and not the fact that patrons are unable to enter the establishment.
Then there’s the issue of rents. Staub says most property owners wrote off September rents for their business tenants, but “come October, there was no electricity, yet you had landlords saying, ‘I don’t care; I want my rent.’ ”
Moore expects that there will be extensive litigation interpreting provisions in Louisiana’s unique civil code regarding landlordtenant issues.
Business owner Staub remains optimistic even as he sorts out all his legal issues. “People are coming out spending money, buying locally to make the city run,” he says. “I’m pleasantly surprised.” Bankruptcy:
Lawyers Are Still Trying to Assess How Changes in Federal Law Will Affect Katrina Victims
It appeared to have the makings of a perfect legal storm: Hurricane Katrina, the worst natural disaster in U.S. history, pounded New Orleans and the Gulf Coast in late August. Then, a tough new bankruptcy law rolled in Oct. 17.
Several months later, however, there has been no storm just a lot of murkiness. Maybe that’s why many consumer bankruptcy firms appear to be holding back on any postKatrina filings.
“Everybody is letting the folks who have the bigvolume practices let their feet get wet first,” says Melanie T. Vardaman, a bankruptcy lawyer at Harris & Geno in Ridgeland, Miss., near Jackson.
Bradford W. Botes of Bond & Botes, a consumer bankruptcy firm with 19 offices in Alabama, Mississippi, Florida and Tennessee, offers a similar assessment. “The filings are dramatically low right now,” he says.
That doesn’t surprise Botes, who is executive director of the National Association of Consumer Bankruptcy Attorneys. After Hurricane Ivan hit the region in 2004, Botes says, “I thought filings would increase almost immediately, but I learned that hurricane victims don’t need that protection until later.”
Creditors aren’t collecting at least not yet. Banks and other lenders imposed a temporary moratorium on mortgage payments after Katrina. Hurricane victims are just trying to find places to live, jobs and schools for their children as well as trying to collect on insurance claims.
It would be “a mistake to put somebody who has experienced something like this into bankruptcy immediately,” Botes says.
Actually, bankruptcy filings in the region did spike after Katrina, but Botes says this was caused by debtors who already were planning to file before the hurricane hit. Indeed, bankruptcy courts around the country experienced a similar increase in filings during the fall in anticipation of major changes in federal bankruptcy law.
As of late November, Botes says, filings dropped dramatically. But he predicts this will soon change again as residents of the Gulf region absorb the longterm effects of Katrina. “Four, five and six months [after the hurricane], they are without income, they don’t have homes, and they’ve run up credit cards paying for temporary housing and food,” Botes says. “They are the ones who don’t realize they need bankruptcy yet.”
Filing Storm Still Building
Once that happens, debtors will have to contend with changes in federal bankruptcy law imposed by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 that became law in October.
One of the most significant elements of the law is a stricter means test intended to steer struggling debtors to Chapter 13 filings that require ongoing payments to creditors rather than Chapter 7 filings that allow them to wipe out debts after liquidating assets. The new law also requires many debtors to undergo credit counseling and imposes stricter filing rules.
It is possible for a debtor to get around the means test under a “special circumstances” exception. But to qualify for the exception, the debtor must provide itemized and documented evidence of certain expenses or income adjustments and attest under oath to the accuracy of the information provided.
But that kind of documentation may not exist anymore for many on the Gulf Coast, Botes says.
Congress has declined to pass any of the bills introduced to provide relief from the new bankruptcy law for Hurricane Katrina victims.
“The only exception,” Botes says, “is that the U.S. trustee in the Southern District of Mississippi and all of Louisiana waived the requirement of credit counseling for an indefinite period of time.”
Lawyers say they are hoping bankruptcy judges and trustees on the Gulf Coast will show some leniency toward debtors. “The judges and trustees were just as affected as the debtors,” Vardaman says. “It is not like they’re operating in a vacuum.”
Homeowners Scramble to Make Monthly Payments as Mortgage Lenders End Waiver Periods
Homeowners whose dwellings were pummeled by Hurricane Katrina in August enjoyed a little breathing room after the storm when lenders held off on collecting monthly mortgage payments.
But the clock is starting to tick again on mortgages, say real estate lawyers in the region, even though many homeowners still may not be able to make their payments.
The most common problem for homeowners is that they owe mortgage payments on homes that were demolished, says Jack L. Denton of Biloxi, Miss. Most banks granted three-month moratoriums on mortgage payments, but by De- cember some were starting to ask for payments again.
“I met with a couple who were very distraught that their lender was going to foreclose on them,” he says. “We can get an injunction for up to a year to prevent banks from foreclosing, but that’s a last resort.”
Communicating with the lender is crucial, says Denton, who has been living in his office after losing his own home to Katrina. “I try to get owners to contact their lender and inform them of the situation. Usually, the mortgage holder has been willing to work with us. A lot of times, you have to inform them that we appreciate the moratorium, but it’s too early to require payment because these folks are still waiting to hear how the insurance will come out.”
In some cases, mortgage payments are kicking in again while homeowners still are haggling with their insurance carriers over repair or replacement coverage.
Normally, Denton says, “I contact the mortgage holder and inform them, ‘Listen, we’re handling a case against the insurance company for denial of the claim. We’ll keep you informed and protect your lien, and in return we ask that you continue the moratorium.’ Most, if not all, of the mortgage holders are going to be receptive to that. You can’t get blood out of a turnip, and I don’t think they want the bad publicity of going after people who can’t pay them because their insurance won’t pay.”
When insurance claims settle, a mortgage lender will sometimes require that it be listed as an additional payee under the insurance policy, says Joel Lutz, an attorney in Lake Charles, La. Then, when homeowners receive the insurance check, “they can’t cash it until they get the mortgage company to endorse it,” he says. In the case of a large check, “mortgage companies have asked homeowners to endorse it and send it to them. They put the money in escrow, and they’ll pay as homeowners farm out the work. That’s created problems with contractors wanting to get paid and in dealing with mortgage companies to get the funds released.”
The situation has been a little easier for homeowners with mortgages insured by the Federal Housing Administration. The FHA’s moratorium on foreclosures in areas affected by hurricanes Katrina and Rita doesn’t end until Feb. 28, and the FHA recently announced plans to cover mortgage payments for up to a year for as many as 20,000 families whose homes were damaged by Katrina, Rita or Wilma.
Similar to homeowners, renters face the dilemma of what to do about payments on uninhabitable properties. “We ended up with emergency situations where tenants had been displaced from the storm and had process served on them for eviction hearings,” says Matt Jones, a Gulfport, Miss., attorney. “There was really no leeway in the law. Judges were sympathetic, but they felt their hands were tied. They tried to give people additional time to go in and get their possessions. That was where judges thought they had a little bit of leeway, so instead of signing a lockout order on the day of the hearing, they’d give tenants a week or so to get their possessions.”
The Circumstances of Damage from Katrina Give Rise to Disagreements Over Coverage
Their homes were destroyed. their businesses were wrecked. And now, many victims of Hurricane Katrina in New Orleans and other parts of the Gulf Coast are looking to their insurance companies to make things right. But getting that help won’t be easy.
“It will be a long time coming before people down here will be paid significant amounts of money for anything besides flood damage,” says Mark Daniel Mese, an attorney in Baton Rouge, La., who is a vice-chair of the Insurance Coverage Litigation Committee in the ABA’s Tort Trial & Insurance Practice Section.
The main reason is that insurers and policyholders disagree about what caused the losses, lawyers in the area say. “The primary issue is what damages were caused by a flood as opposed to a storm,” says Valerie Briggs Bargas, another Baton Rouge attorney. While homeowners and property insurance policies will pay for damages caused by the wind and the rain of hurricanes, these policies usually exclude damages caused by floods. That is covered only by flood insurance, which many homeowners and businesses didn’t have.
This puts many insureds in a bind, especially in New Orleans, where much of the city was inundated by water that flowed in from Lake Pontchartrain through breaks in the city’s levee system. After all, if a house or business suffered severe water damage, how can the owner show that certain damages were caused by hurricane winds and rain rather than the subsequent flood?
“There’s not much negotiating you can do if your insurance company takes the view that the majority of the water damage was caused by the flood,” Bargas says. “I understand that most insurance companies are taking this view.”
Many insureds thus stand to recover relatively little unless they sue their insurance companies. “You can argue about whether a storm surge is a flood,” says Kirk Pasich, a Los Angeles attorney who specializes in insurance matters. “If it is not, then the flood exclusion does not apply. I don’t think storm surge is a flood, but there will certainly be arguments about that.”
Some are taking another line of attack.
“In New Orleans, people are starting to argue that the cause of harm was not the flood, but the design and maintenance of the levees,” Mese says. He notes that some insureds in California cases have had success with this argument. “It has worked on at least a settlement level,” he says.
Down to Business
Another major issue concerns business interruption insurance. This type of insurance protects a company against a shortfall in profits that is caused by a covered event, such as a hurricane that knocks out the insured’s manufacturing plant for several months. The insurance also can cover profits that are lost because a covered event has harmed an insured’s suppliers and customers.
But in the case of Hurricane Katrina, where a whole region has been devastated, an insured business may take quite a long time, if ever, to return to its prestorm levels of profitability. It is thus unclear what lost profits will be covered by this type of insurance, and for how long.
Insureds who find themselves disappointed with the payments on their claims should not simply give up, experts advise.
“You can’t accept at face value what the insurance company says,” Pasich maintains. “They may be right, but they may not be.”
If there is a disagreement with the insurer, the insured may not want to race to the courthouse. “Don’t be in a hurry,” Mese says. “Wait and let someone else with big dollars behind them litigate the issues.”
And it is essential to carefully review the insurance policy. “Reading the policy word by word is critical, and you should compare it with similar policies,” Pasich says. “Nuances can be worth millions.”