On The Case

Bankruptcy judge rejects early COVID-19 argument: A cautionary tale?

(Reuters) - I have to give credit to lawyers for the Connecticut limited liability corporation LH VT their prescient recognition that COVID-19 would impact businesses large and small. All the way back on March 18, nearly a week before East Coast states began issuing stay-at-home orders, LH VT counsel Scott Rosen of Cohn Birnbaum & Shea and Theodore Orson of Orson and Brusini argued in a brief in federal bankruptcy court in Hartford, Connecticut that the outbreak of the novel coronavirus presented “unprecedented circumstances” for multimillion-dollar transactions.

Their arguments failed. U.S. Bankruptcy Judge James Tancredi of Hartford, Connecticut, ruled against LH VT last week, in one of the first federal judicial decisions to consider the fallout from COVID-19. But I’m telling you about the dispute because I suspect it’s a portent – both of arguments based on the stunning impact of the coronavirus and of the hard work judges will have to do to isolate that impact from other factors affecting business disputes. COVID-19 is going to be a feature of commercial litigation for the foreseeable future. Judge Tancredi’s ruling is an early guidepost on what will be a long road.

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LH VT counsel Rosen declined to comment. Orson did not respond to my email.

LH VT’s March 18 motion asked Judge Tancredi to deny approval of the $10.4 million sale of a super-swanky home in Watch Hill, Rhode Island. In March 2019, with the house on the verge of foreclosure, co-owner Donna Barnes filed for Chapter 11, arguing that the best way to pay off the various tax debts, mortgages and liens on the property would be to sell the house before foreclosure. In October, Donna Barnes brought an adversary proceeding against LH VT - which holds a judgment lien of nearly $1.2 million from a debt incurred by Barnes’ husband – and another creditor, asking Judge Tancredi to allow her to proceed with the sale process. In January, after the judge denied motions by LH VT and the other creditor to dismiss Barnes’ adversary proceeding, Barnes brought in a real estate firm that spent $10,000 marketing the property, which was most recently assessed for tax purposes by the village of Westerly at $9.9 million.

The real estate firm ended up conducting an auction for the house, held at the property, on March 7, “a bright and clear day during the early stages of the COVID-19 pandemic in the Northeast,” as Judge Tancredi described it in his opinion last week. The auction attracted multiple, qualified bidders, many from outside of Rhode Island. After several rounds of bids, the sale price was ultimately set at $10.4 million.

LH VT argued in its brief in March that COVID-19 had tainted the sale and driven down the auction price to an unacceptable level. “When the court approved the bidding procedures for the Rhode Island property, it could not have anticipated the seismic effects that the coronavirus would have on the stock market and the U.S. economy,” the brief said. “Re-opening … the bidding process would improve the shockingly low sales price obtained … while the United States was teetering on the verge of a public health crisis and extreme economic uncertainty.”

The LLC contended that the house was actually worth $14 million, in part because trophy properties like the Watch Hill estate hold their value when the economy is uncertain. Judge Tancredi, quite admirably, acted quickly to hear LH VT’s arguments. He held a phone hearing on March 30 and a trial in early April, complete with video testimony from the LLC’s marketing expert, who contended that he could beat the $10.4 million sale price by reaching out to international bidders.

Last week, the judge rejected LH VT’s COVID-19 arguments and approved the sale. Yes, Judge Tancredi said, the virus has upended the economy. But the March 7 auction, he said, took place “before business closings, significant stock market declines and the cessation of travel, business and regional commerce. If anything, the judge said, subsequent turmoil in the economy only reinforces the risk of ditching a $10.4 million bid.

“In the face of COVID-19 lockdowns, the subsequent financial volatility of the stock market and the uncertain depths of the resultant national financial crisis, a remarketing and resale of the Property, logically and foreseeably, is merely an invitation to assure a lost sale … and an uncertain outcome,” he wrote.

Barnes’ lawyer Jon Newton of Reid & Riege did not respond to my email.

Obviously, every case presents idiosyncratic facts. The key fact in this dispute was the auction date of March 7, when most of us were blissfully ignorant about the depth of the disruption COVID-19 would eventually wreak. It may well be that if the auction had been held two weeks later, fewer bidders would have shown up and LH VT’s argument would have prevailed. Like I said, I was impressed with the foresight of the company’s lawyers in highlighting the impact of the virus.

But I also credit Judge Tancredi. He gave LH VT’s COVID-19 arguments fair consideration but refused to be unduly influenced by the pandemic. That’s a good example.