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- 2010 - July - 7th -

Brunell Chapter 11 ‘sign of the times’

by Karen Brune Mathis
Managing Editor

Former Jacksonville Jaguars quarterback Mark Brunell’s Chapter 11 bankruptcy reorganization isn’t the first, and very likely won’t be the last, higher-income person seeking protection from creditors.

Citing business and real estate debts, Brunell filed for protection under bankruptcy laws on June 25 in the U.S. Bankruptcy Court in the Middle District of Florida.

Brunell listed assets of $5.5 million and liabilities of $24.7 million.

“Mark’s filing is an unfortunate sign of the times and just how broad a reach the current economic downturn and collapse in the real estate market have been,” said his attorney, Michael Freed with Brennan, Manna & Diamond.

“Mark is joining the ranks of many who, as a result of the unprecedented decline in the real estate market, have had to resort to financial reorganization under bankruptcy protection.”

Freed said the filing was “not something that Mark undertook lightly. Substantial efforts were made over a period of years to negotiate resolutions with each debtor of the failed real estate venture in which Mark was a passive investor. We were successful in reaching some resolutions,” said Freed.

“Only when it became clear that we would not be able to consensually resolve all of the business debts, did Mark resign himself to this path.”

Brunell joins a growing number of people and organizations filing bankruptcy petitions. All chapter filings are up in the Middle District of Florida, which covers 35 of the state’s 67 counties, including those in North Florida.

Individuals usually have three primary chapters in which to file, which are Chapter 7 liquidation, Chapter 13 individual debt adjustment or Chapter 11 reorganization.

Chapter 11 is typically filed by organizations and higher-income individuals. The debt limits for Chapter 13 eligibility are secured debts of $1,081,500 and unsecured debts of $360,525, said Douglas Neway, Chapter 13 Standing Trustee with the Middle District of Florida and the president of the Jacksonville Bankruptcy Bar Association.

The Daily Record asked officers and directors of the association over the July 4th holiday what they were seeing in their practices.

Those responding included Neway; Jacob A. Brown with Akerman Senterfitt; association secretary Jason Burgess with Crumley, Wolfe & Burgess; Lynn Drysdale with Jacksonville Area Legal Aid; Nina LaFleur with the LaFleur Law Firm in St. Augustine; and Edward Jackson with Edward P. Jackson, P.A.

Are you seeing an increase in higher-income people seeking bankruptcy?

Brown: “Yes. Individual Chapter 11 filings appear to be up.”

Burgess: “I am seeing a huge upswing in higher-income individuals filing bankruptcy. In 2010, I have filed numerous higher-income individuals in Chapter 11 and Chapter 7 bankruptcy. Since the beginning of 2010, we are seeing a different income class of people having to go under bankruptcy protection. It appears most of them have been fighting it for awhile and are finally reaching the end of their savings, which causes them to seek some form of help.”

Drysdale: “Yes, and being sued in foreclosure. The foreclosure issue is a huge problem. We are all hoping the new residential mortgage foreclosure mediation program will help defendants who should be able to save their homes, even if through HAMP (the federal Home Affordable Modification Program) or one of the other programs.”

LaFleur: “I have been a bankruptcy attorney for 20 years. The filings have definitely increased and the real estate situation is certainly a factor.”

Neway: “I just deal with Chapter 13. They propose plans of reorganization as individuals and they make payments and we disburse their payments. There are fewer filings than when I first got here. What I will say is that the revenue that is coming in, while it has dropped, it has not dropped proportionally. Even though I have 25 percent fewer cases, the revenue from those cases has not dropped 25 percent. One of the things that one could derive from that is that payments on these cases are higher, indicating there are higher-income individuals.”

Is it all real-estate oriented? Explain the reasons you see.

Brown: “I believe real estate is a large part of it. That appears to be the case for Mark Brunell and many others that are personally obligated on debts tied to real estate development. However, there are a number of other sectors of the economy that are in distress and individuals deriving their income and financial support from those other distressed areas of the economy are also seeking bankruptcy relief.“

Burgess: “I would say a majority of the individual Chapter 11 cases are related to real estate. A lot of them have multiple rental properties and because the housing and rental market is so low, they cannot afford to rent them out to cover the original mortgage payment. A majority of the higher-income individuals that I am dealing with relate to real-estate problems. Either they are big real-estate investors or they run construction and building companies that have been hit hard because of the economy. However a lot of non real-estate business owners are coming in to go over their options as well. It appears no one is immune from this current economic situation.”

Drysdale: “Loss of income seems to be the biggest problem. Many have jobs that are tied to the financial industry, so their income has decreased or they have lost their jobs altogether. Also, other expenses have become much greater, like health care, so a medical problem has a huge impact.”

LaFleur: “I have many clients who own 20, 30 or even 50 rental houses. The rent is not sufficient to pay the mortgages, the banks will not renegotiate the loans and the properties are not selling. It is interesting to note that the rents never covered the mortgage payments. They never cash-flowed. A couple of years ago, folks would just pull the equity out of one house in order to pay for all the others. They were always counting on property values to continue rising. Now the properties are all under water and many renters are not paying. In many cases, the owners have not made a mortgage payment for over a year, but it is only now that the banks are initiating foreclosure proceedings. That is when they come to see me. Or they wait until they have depleted all their savings and retirement accounts, hoping that things will turn around.”

Jackson: “Most of the higher income bankruptcies I see are real-estate related. A few developers, a lot of real estate investors. A surprising number are able to successfully file a Chapter 7 because they have very few assets left. The abuse of bankruptcy rules that normally inhibit a higher-income person from filing a Chapter 7 do not apply to non-consumer debtors. Unfortunately, for many of the real estate developers, their current income is often so small that they would qualify for a Chapter 7, even if the abuse of bankruptcy rules applied to them. Many of the real estate investors with a high current income are forced to default on the mortgages on their investment and rental properties because they can’t sell the investment properties and the rental rates have dropped significantly. The government programs encouraging mortgage modifications only apply to a home, not a rental or investment property, so many clients are unable to reduce the mortgage payments on their investment and rental property.”

How difficult is it for individuals to make the decision to file bankruptcy?

Brown: “This is a question that is hard to answer in just a few sentences. From my experience, most people would prefer not to file for bankruptcy. This is regardless of their prior financial success or the circumstances in which they face the decision whether to seek bankruptcy relief. In terms of reaching the decision to file for bankruptcy, I often see people having waited until it is too late to do something and ultimately being forced to seek bankruptcy protection. Like with most things, advanced planning in a bankruptcy context can be helpful and can often help a person or business to avoid bankruptcy altogether or, if they chose to file, make their chances for a successful reorganization better.”

Burgess: “It has been my experience that they are on both extremes. Some of them have hit the end of their rope and are ready to file as soon as they walk in the door, but others are still undecided because they look at filing bankruptcy as giving up.”

Drysdale: “It is very difficult. Most people - low, middle or high income - are devastated by the thought of having to file. They are responsible people who have lost their job because of the recession, had unexpected health issues or accidents (themselves or someone in their family) or changes in marital status or death of a spouse. Filing a bankruptcy case is something they never thought they would find themselves doing and they have a lot of unwarranted guilt.”

LaFleur: “Initially, they are reluctant to consider bankruptcy. They are stressed and uncertain of the consequences of filing. Among high-income clients, there is also more of a stigma regarding a filing. Also, there is much misinformation out there about how difficult it is to file bankruptcy, particularly after the laws changed in October of 2005. That is not true. After going through the bankruptcy process, my clients always say, ‘I wish I had done this sooner.’”

Do you see them filing Chapter 7, 13 or 11? What are the basic factors in choosing which chapter?

Brown: “This is another question that is hard to answer in just a few sentences. A high net-worth person would generally be restricted to Chapter 7 (for liquidation) or Chapter 11 (generally for reorganization). Chapter 13 is for reorganization for individuals that have regular income. ... Many higher-income people are not eligible for Chapter 13 because of the debt limits. There are a number of factors in choosing between a Chapter 7 and Chapter 11 and which chapter is best for a particular person is done on a case-by-case basis and can often require fairly detailed analysis. Some factors are whether you have primarily business or consumer debts (because) if you have primarily consumer debts, you may not be eligible to file for Chapter 7 and thus a Chapter 11 could be your only option; the nature of your assets and what is exempt from claims of creditors; and the nature of your debts. There are many other (factors).”

Burgess: “I have actually refined my practice to cater more toward higher-income Chapter 11 cases. At this point, those types of cases take up a majority of my time. I have mainly been seeing a rise in Chapter 7 and Chapter 11 cases as it relates to higher-income individuals. When choosing between the chapters, it really depends on what they want to accomplish. If they own a construction business or a rental business and want to just walk away and have a fresh start, then they usually choose a Chapter 7. If they have a substantial amount of assets or wish to unload certain properties that are non-income producing, they usually choose a Chapter 11. The chapters really offer two different kinds of relief.”

Drysdale: “The difference would be how they come out with the means test, whether they were trying to save secured debt or discharged unsecured debt or both or the size and amount of the debt. Corporations file Chapter 11, but so do some individuals (with) a large amount of debt.”

How long do you see this continuing?

Brown: “Based on what I hear, I believe at least another year or so. Many people think the economy is not poised to recover for some time and that there are areas where there will be further fallout.”

Burgess: “Unfortunately, it appears this crisis is really just beginning. There is still a huge amount of higher-income individuals out there that are fighting the inevitable. At some point, their cash reserves are going to run out and they will have to make a very difficult choice. The creditors these days really are forcing the issue. Because so many people are in default, creditors have started to be really aggressive, especially with individuals that may have assets. Because of the creditors being so aggressive, it really forces higher-income individuals’ hands because they have so much to potentially lose.”

Drysdale: “I do not think we will see a big change for another five years.”

LaFleur: “I anticipate that the decrease in property values in certain neighborhoods and the increase in bankruptcy filings will continue for at least two years. Our local courts are still backed up with foreclosure cases, the banks are still holding lots of properties that have yet to hit the market and unemployment will continue to be an issue. Another reason for the increased filings is the increase in fraud and Ponzi schemes.”

kmathis@baileypub.com

356-2466

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