The Coronavirus and Electronic Mediation: Suggestions for Things to Come

In January 1918, a soldier stationed at Fort Riley, Kan., reported to the base hospital suffering from flu-like symptoms: a sore throat, fever and chest pain. By lunchtime that day, more than 100 soldiers had come down with the same mysterious malady. This was the beginning of the influenza pandemic that struck the U.S., and later the world, a century ago.

It did not take long for the virus, commonly labeled the “Spanish Flu,” to spread to other military bases and rapidly around the world, as U.S. military personnel went overseas to fight in World War I.[1] Eventually, 500 million people worldwide would be afflicted, and at least 50 million would ultimately die before the virus ran its course, with at least 675,000 dying in the U.S.[2]

If all this sounds painfully familiar, that’s because it is. COVID-19 is this era’s Spanish Flu. While it has sickened less people than the 1918 pandemic and there have been fewer deaths, the effects are no less devastating to those who fall ill. In the U.S. alone, more than 7 million have contracted the virus, and while experts may differ, at least one respected authority has projected that more than 400,000 people will die of the illness by the end of 2020.[3]

In addition to these overwhelming circumstances, there have been catastrophic effects on the U.S. economy. As of April 2020, more than 40 million individuals had filed for unemployment compensation and Congress had appropriated more than $3 trillion in COVID-19 relief funds, with perhaps more on the way.

Despite these reports, the economy has gained a number of these jobs back over the past several months. The Bureau of Labor Statistics reported that in August 2020, the national unemployment rate dipped to 8.4 percent from 10.2 percent in July.[4] Nearly 1.4 million jobs were gained, although the U.S. is still in a deficit, since more than 22 million jobs were lost at the peak of the labor crisis in March and April.[5] Many experts state that the full economic effects of the pandemic have yet to play out.[6]

No one knows how long the downturn will last, as all 50 states had begun some phase of “opening up” their economies. The loosening of restrictions began in the spring of 2020, and some states began allowing bars, restaurants, golf courses and other entertainment and recreation businesses to cater to patrons, while other states proceeded at a much slower pace. In addition, as has been widely reported, several universities opened up their campuses to allow students to attend class for the coming semester, only to close down after outbreaks of the virus occurred. Added to these factors are the mass protests, rallies and other gatherings in recent weeks, which have seen thousands of people in crowded situations, some wearing protective masks, others not. All of these events portend that additional cases of the virus will appear.[7] The effect of the relaxation of confinement orders and the civil demonstrations upon the pace of virus transmission has caused concern among medical experts, not to mention friction between those experts and certain governmental officials, both state and federal.

Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, has been particularly outspoken, voicing his concern that if standards were relaxed at too great of an extent, the U.S. could be in for a “very bad fall” flu season.[8] Dr. Rick Bright, former head of the Biomedical Advanced Research and Development Authority (a federal agency tasked with developing vaccines and responses to pandemics), was even more dire in his predictions. “Our window of opportunity is closing,” he said on “60 Minutes” on May 14, 2020. “I fear [that] the pandemic will get far worse and be prolonged, causing unprecedented illness and fatalities” without better planning. The latter comments came in his testimony before a House committee last May.

While the experts debate the future effects of COVID-19 afflictions, one thing seems plain. Many businesses, both large and small, will find it impossible to maintain their present operations, and it is predicted that many will also fail, leading to an historic number of personal and business bankruptcy filings in the months to come.

Several authors support this prediction.[9] In particular, Julia Zhu (The Brattle Group; New York) points to four factors that substantially increase the risk of mass corporate bankruptcies: (1) supply chain disruptions; (2) dropping demand; (3) operational changes; and (4) turmoil in the financial markets. She points specifically to the troubles experienced by cruise lines, movie theaters, and other companies in the travel and leisure industries as catalysts for steep declines in demand. Further, she notes the reluctance, even after states begin to relax their stay-at-home orders, of consumers to leave their homes and frequent retail and leisure establishments.[10]

Even though we have seen some return to what passes for normal, a question remains: Are Americans willing to jump-start the economy in the absence of a vaccine and effective treatment for those already afflicted? According to Harvard economist Kenneth Rogoff, “[E]verything depends on how long [the financial downturn] lasts, but if this goes on for a long time, it’s certainly going to be the mother of all financial crises.”[11]

Bankruptcy Filings Will Rise

How does all of this doom and gloom translate to the practice of bankruptcy law? It would appear that these forecasts foreshadow that bankruptcy courts will see a dramatic rise in case filings in the months (if not years) to come, perhaps overwhelming dockets coast to coast. While recent trends in financial markets, combined with the massive aid doled out by Congress, imply that the economy might not suffer as severely as the foregoing experts predict, it is not macabre to say that the toll of human suffering will engender tremendous — perhaps historic — activity in the bankruptcy courts, especially if the relaxation of home confinements and the defiance of some to adhere to cautionary measures add to the increase in COVID-19 outbreaks.

The irony in all of these dire outcomes is that the coronavirus caused an economic cataclysm in the midst of one the better economic strains in U.S. history, beginning with the recovery after the Great Recession of 2009-10 and continuing until early in 2020. That being said, the comparison of the last few years of strong economic activity with what may come about in 2020 and 2021 could be stark. If this chilling result ensues and courts are overwhelmed, mediation of bankruptcy disputes will be an effective method to alleviate the burden on bankruptcy judges and smooth the path to resolution of proceedings.

Comparison of Bankruptcy Filings

What a difference we have seen from just about one year ago, when the economy was racing along at a growth rate of between 3 and 4 percent. This is especially true when compared with total bankruptcy filings subsequent to the Great Recession of 2008-09. As might be expected, there was a slight lag in filings resulting from the economic travail of that period, so when comparing total filings in 2010 with total filings in 2019, we see a decrease of 51 percent.[12] Indeed, every state in the nation saw a decrease in total filings, some as much as 60 percent or more.

For example, total cases in Massachusetts dropped from 23,618 in 2010 to 7,622 in 2019. Chapter 11 cases in the Commonwealth sunk to 92 from 241. Illinois went from 82,669 in 2010 to 48,673 in 2019, still a large number of cases but nevertheless a decrease of 41 percent. Chapter 11 filings decreased from 342 to 145. Filings in Florida went from 113,066 in 2010 to 46,777 in 2019, with chapter 11 filings falling to 629 from 1,201, or about 50 percent.[13]

It is also of note that the decrease in filings tracked the drop in the national unemployment rate. In January 2010, 9.6 percent of the American workforce was unemployed, compared with 3.6 percent in January 2019.[14] While it is plain from these statistics that the overwhelming number of filings were consumer in nature, the conclusion to be drawn overall is that while some still suffer financial hardship, a strong economy greatly decreases activity in the bankruptcy courts.

What Does 2020 Portend?

Nationwide, chapter 11 cases have seen a big spike in activity. ABI reported that 4,780 chapter 11 cases were filed in all bankruptcy courts through August 2020, compared with 3,780 cases through the same period in 2019 — a 28 percent increase.[15] Certain industries have been particularly hard-hit. The retail, travel and energy sectors have seen the most activity, with Nieman Marcus, J. Crew, JCPenney, Gold’s Gym, Hertz, Brooks Brothers and Diamond Energy comprising some of the more notable filings. While many of these chapter 11 filings were pre-packaged with plans already in place for settlements with creditors and post-plan financing arranged, that still leaves many aspects of these cases to be adjudicated, particularly for a large debtor with many creditors and claims.

Furthermore, CNBC commentators have predicted that the retail sector will be further impacted, in large part because of the reluctance of consumers to congregate at shopping malls, preferring instead to shop online.[16] These factors will undoubtedly affect the ability of landlords to collect rents from their retail and other tenants, such as those renting office space. Many retailers will utilize § 365 of the Bankruptcy Code to reject their leases, causing a chain reaction whereby landlords might be unable to sustain the heavy burden of their mortgage debts.

As reported recently in the Boston Globe, as many as 25,000 retail outlets could close by the end of 2020. Closures are “just the tip of the iceberg,” said Garrick Brown, head of retail research for Cushman and Wakefield. He predicted that over the next two years, as much as 1.2 billion square feet of retail space will go vacant, and in the worst case, “that could double.”[17] All in all, while no one can predict what will ensue when 2020 turns into 2021, it is sure that the trend is toward increased bankruptcy activity for some time to come.

The Show Must Go On: Video Mediation Is an Answer

As court dockets become more crowded and the pandemic restricts access to courthouses, matters that are most convenient to mediated outcomes also will increase. Actions for relief from stay, preference disputes, disputed claims and, not surprisingly, matters involving state litigation pending prior to a filing that a judge might have ordinarily sent to state courts for adjudication — all are candidates for mediated solutions.

This list is not exclusive, but it does provide a window into how a court can efficiently deal with a spate of actions brought about by a virtual tsunami of filings, no matter under what chapter they are brought. Experienced bankruptcy mediators have long dealt with resolving controversies among debtors and creditors, and trustees and creditors, and even tripartite disputes among different constituencies.

Several judges are keen to this process, and more are becoming believers. Many jurisdictions have established standing orders governing mediation programs and have instituted panels of qualified mediators to undertake the facilitation of disputes. However, it would seem logical to predict that if case filings increase as predicted, judges will either mandate that certain types of disputes go to mediation or will be inclined to order a referral to mediation as the need arises.

It is further suggested that counsel will need to be cognizant of this need. There is nothing to prohibit two, or even three or more, sides of a dispute to come together to seek an order from the court to refer an individual matter or many cases of a certain stripe to mediation. However, if mediation is to be an effective tool, its use conjures another problem that is a product of COVID-19: How does a mediation proceed during a pandemic that imposes social distancing and is unlikely to allow gatherings that would ordinarily ensue in a conventional mediation setting?

The solution, while perhaps not universal, lies in the use of videoconferencing. One author has suggested that this might be the “new normal.”[18] Electronic mediations are already being conducted via many different platforms that allow for parties to view each other and, at the same time, permit private caucuses among the parties and private meetings with the mediator. Added to this is the cost-saving feature that parties from far-flung jurisdictions might be brought together electronically without anyone incurring the cost of travel and lodging.

The pre-mediation process can still allow for the exchange of documents by email or Dropbox; pre-mediation conferences to set dates and agendas can still be carried out via conference calls. However, the major advantage to videoconferencing is the ability of the parties to view each other, state their positions, and break into separate caucuses when necessary to discuss issues with the mediator and amongst themselves.

Stay-at-home orders, travel restrictions and other confining measures to contain the virus might still be in force or they might be relaxed. No one can predict what may ensue, since no one knows whether the virus will abate due to preventive measures or will escalate. This is especially cogent, since a number of states have relaxed their restrictions and the wave of protests and gatherings in all 50 states over the summer brought people together in close quarters, some of whom were not taking protective measures such as wearing masks. In addition, despite the foregoing circumstances, polls conducted as of September 2020 show that a majority of Americans are reluctant to venture out as they did only a number of months ago. These may be our circumstances for the foreseeable future.

Consequently, it is suggested that even if bankruptcy filings do not increase because governmental measures have saved a number of individuals and businesses from financial disaster, access to the courthouse and in-person conferences will still be limited by the lingering effects of the pandemic. Thus, the call for effective resolution of disputes by mediation through remote means most likely will increase. Moreover, as the technology improves and participants become more familiar with the process, the logistics of videoconferencing should become more popular, and the “new normal” will become the new normal.