As society pushes toward an “endemic” stage of Covid-19 that can’t come quickly enough, many lenders are seeking updated instructions on handling default accounts in the post-pandemic era. In 2022 and beyond, lenders should (1) be prepared for anything- there may or may not be a default wave, (2) understand how Covid has changed the process of litigating default accounts, (3) expect heavy backlogs in the court system to persist, (4) be smart when selecting a post-Covid litigation attorney, and (5) consider alternate dispute resolution, as discussed below.

1. Be Prepared for Anything – There May or May Not be a Default Wave.

According to Secured Finance Network, the second quarter of 2022 could be when a “default boom” hits. Asset-based lenders, factors, and other secured lenders should be prepared to tackle commercial default accounts post-pandemic. The U.S. economic recovery might look promising overall, but some industries such as hospitality, transportation, and related companies are still seeing impacts from supply chain disruptions, semiconductor shortages, manufacturing delays, and labor shortages. Further, some businesses were able to survive the pandemic due to PPP loans, but the assistance has ended.

Industries and companies that were adversely impacted by the pandemic and relied upon banks to waive or forbear exercising default rights are at risk, along with those that took on the most debt over the last few years. Profits will now be expected to return to pre-pandemic levels or even exceed them to service the additional debt. Plus, if lenders become eager to loosen underwriting guidelines, delinquency and default rates will rise. The bank’s exposure upon default, if underwritten conservatively, should be covered by the value of the collateral.

Experienced banks and sophisticated secured lenders that have seen a past wave of defaults will be proactive with their troubled accounts. They will leverage the situation to better understand the borrower’s business operations and financial condition, get the borrower back to the negotiation table, and improve the legal protections, collateral position, and limit exposure where possible. Lenders who apply a disciplined approach will successfully navigate any possible post-pandemic default wave.

Proactive management to include monitoring and timely action is key. Secured lenders should review portfolios with a focus on the most vulnerable borrowers. If contract terms allow, ask for updated projections and business plans. Focus on troubled assets and communicate with timely and clear messages to borrowers. Deal with problematic loans on a case by case basis.

Review the strength of the relationship with the borrower, the competence of their management team, the viability of the business, and take note of other creditors in the borrower’s capital structure who might be willing to assist the distressed borrower.

According to Daniel F. Fiorillo, chairman of the workout and restructuring department at Otterbourg P.C., “a lender’s decision to forbear from exercising its default rights, or to otherwise agree to ‘amend and extend’ the credit facility with a distressed borrower is heavily influenced by the circumstances and the availability of viable exit strategies from the distressed loan. For example, if the borrower is unable to comply with its lending arrangements but is willing to operate under an agreeable budget and conduct a sale or marketing process, that could result in the business being sold and the proceeds from the transaction used to repay the secured lender’s debt. Then the lender might be willing to enter a forbearance arrangement with the borrower, giving the borrower time to execute on its plan. The secured lender will generally get additional protections and potential credit enhancements in the situation as well.”

2. Understand How COVID has Changed the Process of Litigating Default Accounts.

According to Law360, the pandemic will continue to impact the mechanics of how cases play out throughout 2022. Covid-19 spurred adoption of remote technologies, impacted predictability of outcomes, changed costs, upended timelines, influenced attorney’s decisions about where to file lawsuits, and influenced strategies leading up to trial.

Proceedings such as status conferences, discovery and motion hearings, and depositions will be held on virtual platforms like Microsoft Teams into the future. “I think there will be a significant piece of the traditional litigation appearances that will be remote forever,” said Jack J. Laffey, a partner at Laffey Leitner & Goode LLC. Trials may be an exception. Fully virtual trials aren’t likely to become routine, though hybrid trials in which at least some witnesses testify remotely will likely continue, according to Lisa Wood, co-chair of Foley Hoag LLP’s litigation department. Companies with litigation portfolios should view remote appearances as the accepted new way of approaching the court.

Covid-19 policies and procedures have reduced predictability of outcomes. It is often unclear, for example, whether trials will be in person or remote and how masks, distancing, and virtual case presentations will impact results.

The pandemic has also impacted costs associated with litigation. Use of remote technology means far less time traveling to court which makes litigation more efficient and less expensive. On the other hand, many courts liberally extended deadlines, oftentimes by many months, due to the pandemic. This resulted in a sizable backlog of court dockets for hearings, conferences, and trials. Plus, due to constitutional speedy trial requirements, criminal defendants receive top priority when jury trials are available, which means civil trials are delayed longer. These pandemic-related backlogs tend to drive up litigation costs. As a result, some parties and their lawyers are currently re-evaluating where lawsuits are filed based on how courts have modified their procedures.

3. Expect Heavy Backlogs in the Court System. 

Those seeking to resolve disputes in a courtroom can expect to wait in a long line. Covid related backlogs continue to pile up as new variants cause additional delays when any judge, juror, witness, attorney, or party tests positive, and as the crisis leads to increased court filings due to supply chain disruptions, breach of contract suits, bankruptcy, and real estate litigation all coming to a head. As suggested by Judge Jennifer Bailey, Administrative Judge, 11th Judicial Circuit of Florida, Circuit Civil Division, “we can’t judge our way out of this backlog.”

Variants continue to disrupt air travel, schools, and other enterprises, and it is similarly difficult to plan a multi-week trial when a sick participant can halt proceedings. If someone has been exposed, is symptomatic, or is covid positive, the start of the case will be delayed based on public health guidance and courthouse guidelines. According to uscourts.gov, the Southern District of NY recently delayed a libel trial involving Sarah Palin and the NYTimes, after learning that Palin tested positive for Covid. Many courts across the country are dealing with the challenge of last-minute Covid diagnoses as they work to resume or sustain trials. The decision courts are making is “between access to justice and public safety,” said David A Carrillo, executive director of the California Constitution Center. John M. Monterosso, presiding judge of Riverside County Superior Court, told CalMatters it was becoming impossible to continue jury trials as Covid broke out. “We’re not dispensing with process, we’re not dispensing with justice. It just may be slowed down a little bit.”

According to the ABA Journal, about ⅓  of U.S. courts saw their case backlogs increase by more than 5% due to the pandemic. Another 23% saw their backlogs increase by 1% to 5%, a report by Thomson Reuters found. About 42% reported that they expect a decrease in their backlog in the next year, while 32% don’t anticipate any changes. The Washington Post shared that legal officials from coast to coast say Covid induced delays in justice will continue to be an issue for several years to come. “This is a three-year project to get the number of pending cases back to what it was. And I’m an optimist,” said Dan Satterberg, prosecuting attorney in Kind County, Washington, which includes Seattle. “It’s a historic challenge that we’re facing right now.” The consensus among legal professionals is that it is very unlikely that the court’s backlog will be cleared anytime in the foreseeable future. “This is a system issue right now, and it’s only going to get worse,” Milwaukee District Attorney John Chisholm told reporters this month. “These backlogs aren’t going to magically disappear.” According to ejudicate.com, New Jersey now has a civil court backlog that is twice what it was before the pandemic and Epstein Law Firm projects that this figure could double again. Georgia estimates that it will take 3 years and a staggering $60M to dig through the current backlog.

Challenges are unique to each district and are driven by physical and economic limitations. While certain areas report lengthy delays, others say their backlogs are gone. In 2021, CA Governor Gavin Newsom signed a budget that includes $1.2 billion in funding for the judicial branch, including restoring $200 million in previous cuts and making major investments in judicial branch programs in an effort to address court backlogs in CA.

Meanwhile, according to the Louisiana Supreme Court and Louisiana Judicial Partners, the courts should be prepared for a potential surge in new filings as pandemic interruptions begin to lift. The backlog of cases will only grow with an expected tidal wave of new litigation seeking to resolve problems created or exposed by the crisis. Researchers anticipate a surge in civil filings that will challenge state courts across the U.S. In 2022, pandemic related litigation will likely continue “at a strong clip” said Michele D. Johnson, global chair of the litigation and trial department at Latham & Watkins LLP. We can expect to see business interruption-related and breach of contract suits across industries, with many of those disputes tied to the cascading impact of supply chain disruptions.

For the foreseeable future, case and trial backlogs and delays are likely to remain an issue. Civil court backlogs are not going away any time soon and things may never return to pre-covid functionality.

4. Be Smart When Selecting a Post-COVID Litigation Attorney.

In 2022 and beyond, results driven lawyering demands a different skill set than what worked well pre-pandemic. Modern litigation attorneys must be flexible, tech savvy, maintain broader legal competencies, excel with soft skills such as proactive communication and creative case resolution, and be informed of global commercial trends.

Tech Savvy: For virtual depositions and hearings, litigators will need to consider their video settings, background, lighting, sound quality, camera angles, and maintain a reliable internet connection. “There’s going to be a huge premium on counsel who are a little bit more adroit at the use of technology and aware of the pitfalls,” said Rebecca Woods, a partner in Seyfarth Shaw LLP’s commercial and construction litigation practice.

Soft Skills: Pre-pandemic litigators simply needed to know the law quite well. In today’s fast-paced, ever-changing legal environment, attorneys must also be well equipped with emotional intelligence and soft skills to help clients engage in proactive outreach to get matters settled outside of the courtroom. Pre-pandemic, many cases settled on the day of trial, when lawyers and parties encountered each other in person, often while walking up the courthouse steps. Similar dynamics also occurred before in-person hearings. In today’s world, where court backlogs rule the day, parties can no longer rely upon a trial date or hearing as a catalyst for settlement.

The most effective attorneys utilize creative strategies to ensure efficient case progression. For example, attorneys can schedule mediation with trained court staff, volunteer mediators, and tap into their own mediation skills, to include excellent listening and verbal communications, which are vital for efficient case resolution. When engaging in discussions with clients to better understand goals, or reaching out to defendants or opposing counsel to discuss getting a matter settled outside of court, an emotionally intelligent attorney will practice openness in order to move the conversation forward, avoid making assumptions, ask clarifying questions, listen to understand, avoid interrupting, avoid distractions, use positive non-verbal cues like leaning in, and allow for moments of silence which can result in settlement breakthroughs. According to the National Center for State Courts, lawyers and parties should communicate with each other proactively to narrow down issues without formal court involvement, in addition to attempting to get matters fully resolved outside of court.

Increased Competence: According to the Colorado Bar Association, the surge of trials due to the pandemic will likely give rise to competence and other ethical issues as litigators are pressed to address novel post-Covid issues and meet deadlines. Competent representation requires legal knowledge, skill, thoroughness, and preparation. To ensure competence in a post-Covid virtual environment, attorneys should be fluent with web based court proceedings, well studied and connected regarding novel legal issues, have procedures in place to maintain confidentiality in virtual environments, and ensure they appropriately supervise subordinates. Also, lawyers should actively work to enhance their industry knowledge and develop commercial awareness to better understand global trends.

5. Consider Alternate Dispute Resolution.

Businesses faced with the choice of spending years and thousands of dollars litigating disputes often either abandon the effort or compromise their position to make it all end. According to Best Lawyers, when stuck in the Covid backlog, however, arbitration may be the best solution. Many companies, particularly those that do business with other businesses, typically don’t look to arbitration because there’s an attitude that “litigation is the way we’ve always done it.” Both parties must agree to submit a dispute to arbitration. Once agreed upon, however, arbitration can provide a fast track to resolving many issues that will be delayed or complicated by Covid backlogs.

Arbitration initial filing fees are comparable to court filing fees. Typically, costs to prepare for the arbitration are lower than those associated with preparing for a trial. Arbitration may be used to resolve specific key or immediate procedural or substantive issues while the courts are unavailable due to delays, and parties can later return to litigation as necessary. According to ADR.org, dispute resolution by arbitration is on average more than 12 months quicker than litigation. Generally, arbitrations are resolved within a year of the matter being filed. Nearly ⅔ of disputes filed with the AAA settle prior to the first hearing, and many of those accrue no arbitrator fees. Compared with possible multiple year delays due to Covid backlogs, this is a huge benefit. From January 1 to February 22, 2022 alone, the AAA resolved 73,740 cases.

Parties may specifically choose arbitrators who have expertise in the industry to move the process along more efficiently. There is an enhanced selection process available for complex cases, which allows counsel to pre-screen candidates for an even more precise selection. Further, if a judge is needed, the AAA Judicial Panel is composed of high level, diverse former federal and state judges, including trial and appellate jurists, from 44 states plus the District of Columbia and Puerto Rico. Previous rulings from the members of the AAA Judicial Panel are publicly available.

Some examples of cases that the AAA has received this past year include a $100 million dollar commercial dispute between a contractor and manufacturer; a multi million dollar commercial dispute between an individual and software company; and a dispute arising out of a charter and rental agreement involving less than $25,000.

To get started with arbitration, submit a Submission to Arbitration form. Alternate dispute resolution mechanisms like expedited arbitration will likely become a common and attractive choice for time sensitive conflicts post-pandemic. American courts are overburdened, but arbitration can help.

In conclusion, in 2022 and beyond, in order to effectively resolve commercial finance default disputes, lenders should (1) be prepared for anything- there may or may not be a default wave, (2) understand how Covid has changed the process of litigating default accounts, (3) expect heavy backlogs in the court system to persist, (4) be smart when selecting a post-Covid litigation attorney, and (5) consider alternate dispute resolution for time sensitive matters.

The author, Harmony Oswald, is a veteran of the U.S. Army First Infantry Division and an experienced CA finance enforcement litigator. She boasts an undefeated trial record. During the pandemic, she made virtual appearances in court, winning 16 trials. Her practice focuses on pre-judgment recovery of collateral, litigating deficiency balances to judgment, and enforcement actions to collect on wages, bank accounts, vehicles, and real estate. Harmony has been married for over 18 years, and she’s the mother of two amazing young adults- a daughter who is in pre-vet studies at UC Davis and a son who will be attending law school in fall 2022. Outside of her work as a litigator, Harmony enjoys entrepreneurship, travel, art, books, autumn, the beach, and spending time with family.​

The above article does not create an attorney client relationship. It provides information only and should not and cannot be construed as legal advice. For more information, contact [email protected].