03/17/08 South Florida bankruptcy lawyers' work grows
Miami lawyer John Schulte stood before U.S. Bankruptcy Court Judge Raymond B. Ray in January, not quite sure how to proceed on the court's orders in the case of a collapsed Pembroke Pines real estate company.
"I haven't practiced in the bankruptcy court in 10 years," Schulte told the judge apologetically. He added, "It's amazing what the economy will do."
The economy's tailspin, the result of ballooning consumer debt levels, shrinking property values and tighter credit markets, means a lot more South Florida consumers and companies -- lawyers in tow -- will sink into bankruptcy over the next year, bankruptcy trustees and attorneys predict.
The procession already has begun. Last year, nearly 11,000 South Floridians filed for personal bankruptcy. That's far below the record -- nearly 36,000 in 2005 -- when filers flooded the court to beat changes in the bankruptcy laws. Yet many observers anticipate this year will mark a return to pre-2005 levels, when consumer filings numbered in the high 20,000s to low 30,000s.
The outlook is just as gloomy for companies. The number of businesses going bankrupt more than doubled in South Florida in 2007. And last year's Chapter 11 filings exceeded the previous two years combined.
While business bankruptcy filings haven't reached the peaks of the early '90s, some veteran barristers who have experienced past downturns in the local economy say this one has the makings of being worse than the others.
"Even as a bankruptcy lawyer, it scares me to see how many problems there are," said Michael I. Goldberg with Akerman Senterfitt in Fort Lauderdale. "It's just really, really ugly. Personally, I've never been so depressed as a bankruptcy lawyer. I'd rather have the economy be better and be a little less busy."
The financial trouble for consumers and businesses is rooted in the turmoil in South Florida's property markets.
Many homeowners are seeking refuge in bankruptcy court because they can't keep up with rising mortgage payments on their adjustable-rate loans and escalating insurance and property taxes.
Developers and home builders have been socked by falling real estate prices, a sharp drop in demand from home buyers and a clamp-down in lending.
"Most of the filings we have seen are resulting from a very significant drop in asset values," said Arthur H. Rice, a business bankruptcy lawyer with Rice Pugatch Robinson & Schiller in Fort Lauderdale.
The dramatic drop in the value of builders' inventory means they can't sell at a profit. And with sales few and far between, repaying debt has become more difficult.
Among the casualties to land in Chapter 11, where companies get protection from creditors while reorganizing debts: Miami condo converter Puig Inc.; Hollywood's Tousa, parent of Engle Homes; venerable Fort Lauderdale home builder Levitt and Sons; condo developers Surfside's Beach House Property and Strada 315 LLC of Delray Beach.
"The [Chapter] 11s really turn on the availability of credit," said Kenneth Welt, a bankruptcy trustee, who oversees the payout of assets to creditors. "When credit was easier to get, they could always go to their friendly banker to get an increase in their lines of credit. Now they are maxed out and the banks have said no more."
Take Strada 315, builder of a 117-unit condo project in downturn Fort Lauderdale. Concerned that many condo buyers would walk away from their purchases, the project's lender chose not to extend a $34.8 million construction loan and kept the "excess proceeds" from sales that had closed, the builder said. Unable to pay subcontractors, Strada filed for Chapter 11.
Just because businesses file Chapter 11 aiming to reorganize, they might still end up shutting down or emerging a much smaller company.
Puig Inc., though it filed Chapter 11, is liquidating. Levitt and Sons isn't expected to remain in the homebuilding business. If Tousa's bankruptcy is successful, senior debt holders will receive substantially all of the common stock in the reorganized company. The nation's 13th-largest home builder likely could become smaller.
For real estate companies, in particular, the drop values and tightening lending markets have hurt their prospects for recovery. That's because the real estate, the collateral, is worth less than what they owe.
Companies can't come out of Chapter 11 in many cases because financing isn't available, said Patricia Redmond, a bankruptcy lawyer with Stearns Weavers in Miami.
"Our goal is to try to fix things," Redmond said. "With the convergence of the lack of capital and the bottom falling out of real estate, there's not really an answer."
With the overbuilding in South Florida's condominium market, more developers are expected to wind up in bankruptcy. Miami bankruptcy lawyer John Genovese of Genovese, Joblove & Battista said it's working on "five significant developer cases that have not filed [bankruptcy] but may file," he said. "We are awash in work." The firm just added five lawyers to its bankruptcy practice.
EVAPORATING WEALTH
"I am meeting with clients,... multigenerational clients whose wealth has evaporated," Miami bankruptcy lawyer Paul S. Singerman of Miami's Berger Singerman said. "Honest, hardworking people... who have taken profits out of deal after deal for decades and put it into future projects that are now imperiled."
The financial troubles of builders and developers likely will reverberate through the business community, Singerman predicted. Realty firms, mortgage brokerages, condo associations, title firms, architects, roofers, plumbers, landscapers and other subcontractors are just some of the likely victims that will either end up in bankruptcy or simply close their doors.
"I don't even know how to describe the magnitude of this issue, and we aren't anywhere near done with it," Singerman said.
By the end of the year, the fallout will spread beyond real estate to operating companies involved in sales and service, Rice predicted.
"It's like a slow-motion train wreck with a new car falling off the rail every day," Rice said.
Business failures, in turn, will produce more personal bankruptcies because many business owners personally guaranteed loans from banks, Welt said. That means if a business can't repay, the lender can pursue personal assets to recover the debt.
For now, personal bankruptcies are far from the record high in 2005, when consumers rushed to beat sweeping changes in U.S. bankruptcy law. Banks and credit-card firms pushed for the changes, claiming debtors piled up debt only to avoid repaying it by filing for bankruptcy. Among the changes: Debtors who can repay part of their debts are no longer allowed to simply wipe the slate clean.
Under the law, a single person in Florida earning more than about $40,000 who files Chapter 7 will have his finances examined to determine if he can afford to pay creditors. If he can, the case would be dismissed or converted to a Chapter 13 reorganization. For a family of four in Florida, the figure is just under $67,000.
A CLOSER LOOK
The expectation was the means-testing would force more people to reorganize their debts in Chapter 13 rather than liquidate in a Chapter 7. But has it? Of the nearly 11,000 personal bankruptcies in South Florida last year, 31 percent were Chapter 13s. That's up from about 22 percent in 2004, the year before the law changed, but barely up from the approximately 29 percent from 2000 to 2003.
Banks and credit-card firms contend the reduced number of people filing for bankruptcy proves changes in the law are working.
Besides the common reasons for filing bankruptcy -- job loss, lack of health insurance to cover a major medical problem and divorce, U.S. Bankruptcy Judge A. Jay Cristol said he's seeing more people in financial distress because of higher home-loan payments on variable-rate mortgages.
While bankruptcy has been a tool for struggling homeowners to save their homes, now owners simply want to turn over the keys to lenders. "They can't afford" their houses, said Michael Brooks, a Miami bankruptcy lawyer.
A homeowner who is behind 10 months on his $2,000 monthly mortgage payment would have to resume making the monthly payment under a Chapter 13 personal reorganization, said Timothy Kingcade, a Miami bankruptcy lawyer. The homeowner also would have up to five years to pay the $20,000 in arrears, hiking the monthly payment by more than $300 a month.
"Unless they have a better paying job, it doesn't work," Kingcade said. So many are opting to let the lender take back the property in a Chapter 7 bankruptcy proceeding.
Robin Weiner, a longtime Chapter 13 trustee, said prior to the real estate boom she was disbursing about $5 million a month to creditors because debtors could tap the equity in their homes for funds. Now, though, with the refinancing market dried up, she's paying out from $2 million to $2.4 million a month.
HOME LOSS GROWS
"I very rarely saw properties being surrendered," Weiner said. "Now, the volume of people who can't keep their homes is dramatic."
Both Kingcade and Brooks said they have seen a number of debtors who bought multiple properties they can no longer afford.
"They are just overwhelmed," Brooks said. "Young people, in their 20s and 30s with five, six, seven properties. They got in at the wrong time."
Others, rather than filing for bankruptcy, are walking away from their property because it's worth less than they owe. But they aren't necessarily off the hook: Lenders still may be owed for the difference between what they loaned on the property and what they recovered from a foreclosure sale.
"There is this huge backlog for all of these deficiency claims by these mortgage companies that haven't been pursued yet," said Miami bankruptcy trustee Joel Tabas said. At some point, lenders will start garnishing wages and bank accounts.
"Those are the things that drive people into bankruptcy," Tabas said.
BY PATRICK DANNER - Miami Herald - Posted on Mon, Mar. 17, 2008
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