Bankruptcy judges juggle people, businesses and creditors in hard times

With unemployment and foreclosures soaring during the recession, bankruptcy judges in Nevada have had to make tough decisions trying to balance the rights of bankrupt people and businesses with the rights of creditors.

One of the state’s five bankruptcy judges, Judge Bruce Markell in Las Vegas, has gained national attention for his bold and creative calls and no-nonsense demeanor with attorneys who don’t meet his standards.

Consider a few of his recent decisions:

Markell took an unusual step in November when he rejected a bankruptcy reorganization plan proposed by the Las Vegas Monorail. Both the monorail and key creditors favored of the plan, but Markell was concerned the monorail would end up insolvent again. (He ultimately approved a revised plan that addressed his concerns.)

In another ruling — which unusually was posted on the court’s website — Markell sanctioned an attorney who showed up 15 minutes late for a hearing and then floundered, apparently ignorant of the issue at hand. “Were there ever a time to use ‘fail,’ as the contemporary vernacular permits, it is now and in reference to this deplorable display of legal representation: it was an epic fail,” Markell wrote in an order reprimanding the attorney and his law firm. Markell referred the matter to the State Bar of Nevada and required the firm to return all client fees.

Then there was the woman who asked Markell for permission to continue making payments on a Sony PlayStation she had bought at Best Buy. “I was about ready to lower the boom because I think, ‘This is ridiculous,’” Markell recalled. “She said, ‘I bought this for my nephew who has terminal leukemia, and it’s the only thing that kind of keeps him going on a day-to-day basis.’” Markell approved the payments.

“We’ll have 20,000 people file (for bankruptcy) in this district this year,” Markell said. “The vast majority are people who maybe overextended themselves. Maybe they moved into a neighborhood because the schools were better than where they came from. It’s hard for me to condemn too hard people who do that because they’re just trying to make a better life for their family.”

Besides serving on the U.S. Bankruptcy Court for Nevada, Markell has served as an appeals court judge on the Ninth Circuit’s Bankruptcy Appellate Panel since 2007. He also is a senior fellow in bankruptcy and commercial law at UNLV’s William S. Boyd School of Law.

Markell recently sat down with VEGAS INC to talk about business bankruptcies, individual bankruptcies and the plight of people struggling in a down economy.

How has the recession affected business bankruptcy filings in Nevada?

There were 58 Chapter 11s filed in 2004 in this district. Last year, there were 355.

What are the most common types of business bankruptcies?

Ninety percent fall into one of three categories. One, the mega-cases (like Lake Las Vegas and Station Casinos). In terms of the number of cases, they are small. In terms of the time they take, they’re big.

Second, about a third of our Chapter 11 filings are individuals. They can’t use Chapter 13 because their secured debt is too high, because these are individuals who during the boom years bought one, two or three — I’ve had as many as eight — rental houses. The secured debt is about a $1 million cutoff and it is too high for them, so they have to come into Chapter 11. That’s someone who decided to become a mini-real estate mogul and didn’t succeed.

The third grouping is real estate cases where it’s either raw land or improved land, usually commercial real estate or strip malls. We’ve also had a few operating companies here and there. You only file Chapter 11 when you really have something to save. Most of the time, that’s going to be real estate because it doesn’t go away.

Does that mean there was a lot of irresponsible real estate speculation and lending during the boom years?

It’s hard to know if there was a lot of irresponsible activity because 2008 was such a sea change. It’s hard to know if that flushed out everything that’s horrible or not. I used to say when I was teaching there was lots of malpractice in the drafted documents that never got caught because people did what they promised they would do and you never had to go to the documents. You never knew if someone drafted a good agreement, because it never got tested.

I think 2008 flushed a lot of things out that you wouldn’t normally see because times were normal and people would honor their agreement. What has happened is, with the double whammy of high unemployment and people with less disposable income to spend, it translated into problems for businesses. I’m not sure if anyone could have anticipated 2008 and the depth to which it would go here.

Sure, there was irresponsible lending. Especially with the individual Chapter 11s, a lot of people got loans and bought houses they couldn’t afford. But it’s not irresponsibility when you measure it on a scale with the economic collapse.

I’m not sure what you can do if you see a coming real estate downturn and you’re a mini mall or a strip mall operator. Tenants can’t pay the rent anymore, and if they can’t pay the rent, the commercial property owner can’t pay the lender.

You are known as a scholar and leader in the bankruptcy field. Why do you enjoy this practice area so much?

Every day is something different. You see the human parade, and I love it. The ways in which people can screw up and the ways in which people can resolve things are limitless.

The extent to which you can help people in bankruptcy is palpable, more so than in other areas. If you can help a business turn around, it’s not just about the business. It’s about the people who extend credit to the business and the employees of the business. It’s the sense of accomplishment. It’s the most wonderful blending of practicality and intellectuality there is.

You require attorneys that appear before you to maintain high standards. What are your impressions about the general level of expertise among bankruptcy lawyers in Las Vegas?

I really do think the bar here is pretty good. It’s a really good core. I just wish we had more expertise, especially on the consumer side. I think consumers deserve better.

Lawyers here have a way to go. Part of that is to be expected, since we didn’t have a law school until 1998. The core senior people here got their start when it was a much different and smaller legal community than it is now. I think it’s a legal community in transition.

On the business side, I don’t see the problems I see on the consumer side. Consumer lawyers get paid in bulk; it’s a volume practice. They have different considerations. I see lots of people who are unprepared.

You have a national reputation for calling out attorneys who aren’t following the rules or keeping up with their responsibilities. Are you unique in doing this?

I feel more strongly about it than many judges, probably. I want things to be done right. But I would never want to be thought of as someone who unnecessarily picks on people. I try to choose the things I write about carefully because I think that either they’re egregious or it’s a common fact pattern that people ought to learn from.

Sometimes you have to say, “This was not done right,” and you have to name names. If I don’t have to do that, I won’t do that. If there was a general perception that I’m unduly mean, I’d change. But I see lots of things that shouldn’t happen.

What are some of the areas in which attorneys can improve?

I still have cases in which lawyers and I do not share the same views as to what their ethical duties are; especially in real estate and other related cases. It’s easy just to file for bankruptcy because someone told you to file, and that stays everybody from continuing with collection actions. It slows it down. There probably should be some more talking — tough talking by lawyers.

There’s a lot, for example, you can do without ever filing. Sometimes it’s called “bargaining in the shadow of the law.” You know what someone can do in a cramdown (when loan principal is crammed down to the asset value) or in a Chapter 11 reorganization, and so you bargain with them outside. I think there should be more of that kind of activity. They should know what the outcome will be before they ever show up in court.

One of the big problems here has been the lack of response from lenders. The amount of REO (foreclosed or real-estate owned properties) is so large they’re overwhelmed by it. And that gums up the out-of-court process.

Some of this stuff is securitized (because the debt has been sold to investors) and when it’s securitized, it’s hard to find someone who can make a decision. I’ve had cases where people filed for bankruptcy and crammed down the secured creditor because they couldn’t get an answer pre-petition (before filing for bankruptcy). I’ve actually had two cases where, even in this economy, the debtor had equity in the property — in one case, a couple million dollars — and the lender still wouldn’t settle. That’s probably because who shows up are the loan servicers.

All the time, I get people standing up and saying, “He promised he’d pay me the money back.” My somewhat ironic line is, “Welcome to the land of broken promises.” That’s what bankruptcy is. The debtor promised everyone he would do things and the reason this court exists is, you can’t enforce all those promises. We have to figure out how we’re going to take care of something where this debtor didn’t necessarily lie to everybody, he just can’t do what he said he’d do.

Do people generally have realistic expectations about the end result of a bankruptcy?

Usually the ones who have the better lawyers have the more realistic expectations. I don’t think a lawyer sells time. I don’t think a lawyer sells knowledge. I think a lawyer sells judgment.

A good lawyer will tell somebody, “This isn’t worth it. Take your losses now. Work with a business professional.” A not-so-good lawyer will say, “You want to keep the business going? Here’s what you do to keep the business going.” I sometimes call the latter the “butler-style of lawyering,” which I don’t like. It’s “tell me what you want, and I’ll do it and I’ll have no responsibility for the consequences.” I don’t think that’s the way lawyers should work.

I think there should be a broader spread between lawyer fees. I think some of the lawyer fees at our higher end of practice probably aren’t charging enough. I think some of the lawyers who aren’t so good are charging too much.

A debtor’s lawyer who can help a company navigate its way through financial distress and keep the business going is incredibly worthwhile. I’m not opposed to seeing $1,000 per hour for that. Because outside of bankruptcy, that’s what people will pay for the same skills. I don’t think people in bankruptcy should pay any more or less than what you pay for legal work generally.