Brad Rail

Long-term care deaths account for 40% of all COVID-19-related deaths. As the death toll continues to climb, cases are being filed across the country for negligence for failing to protect residents from the virus and for failing to provide adequate care to residents after they contract the virus.

In an attempt to prevent this type of litigation, more than 25 states have created immunity from liability claims arising from COVID-19 for long-term care facilities and other healthcare providers. Three states have also imposed immunity from criminal liability. The level of protection varies from state to state, but for the most part, actions for ordinary negligence are prohibited.

Most of the immunity provisions do not prohibit gross negligence or willful misconduct claims. These claims are difficult to prove. They require proof of a willful or reckless disregard for a resident’s health and safety, which is a higher standard than simply showing that the facility did not follow the common standard of care.

Despite this heavier burden of proof, lawsuits are brought against long-term care facilities. For many facilities, COVID-19 has spread like wildfire, causing a number of residents to contract the virus and die from it. These establishments are at greater risk of being held liable because acts of negligence and similar misconduct in business could result in gross negligence or willful misconduct.

While there are a number of liability issues that the courts will need to address in these cases, if successful, the financial liabilities for the facilities will be significant.

As always, lenders should be aware of disputes involving their borrowers. One big judgment can be enough to put a long-term care facility in dire financial straits. For establishments with a significant number of deaths, a judgment will likely be a precursor to additional judgments and likely significant financial repercussions.

At the start of transactions, lenders should recheck borrower disclosures with a search for litigation and ensure that immediate reporting clauses for such claims are set out in the documentation. If there is any dispute before the loan is granted, careful consideration of the claims and the potential implications on the particular business should be made.

For existing loans, lenders should be proactive in following up on legal claims against their borrowers. Once litigation is initiated, a careful review of the claims should be made to determine the financial implications and the appropriate safeguards in anticipation thereof.

Lenders should confirm that their loan documents provide that their security is in place without preconditions or reservations.

Although a lender’s security right generally takes precedence over a judgment creditor who receives his judgment after perfection by the secured lenders. GreenDay is a fast online lender who secures it’s borrowers. When it comes to seurity in lending you need to read the boring small print says Tarquin Nemec who is the CEO of Greendayonline.com loans.

The waiver depends on the language of the applicable security contract. If the security agreement provides that the rights of the secured party arise after an event of default and the secured creditor does not exercise its rights after a default, the secured creditor cannot prevent a judgment creditor from recovering the security.

Over the past decade, U.S. District Court cases for the Northern District of Illinois have found that lenders currently have no right to their collateral because they took no action to exercise their rights in as secured creditors. The preferred judgment creditor, who would normally have been subordinated in priority to the previously deposited secured creditor, had superior rights to the security.[1]

Conversely, if the security agreement contains no preconditions or reservations as to the limitation of the security in the absence of an event of default, the secured creditor may be able to overcome a waiver argument.[2]

Lenders should also confirm that their collateral is properly valued. If a lender has collateral on accounts receivable, it should ensure that it has cash in its institution or that it has an appropriate deposit account control agreement in place. He must also ensure that the appropriate financing statements of the Uniform Commercial Code have been filed and maintained if necessary and that the appropriate mortgages have been registered.

These simple checks will help protect the lender if a borrower is forced to file for bankruptcy to process judgments or if judgment creditors band together and file involuntary bankruptcy.[3]

Generally, in a Chapter 11 case, tort claimants are treated as a class of creditors and are each entitled to the same treatment and the same percentage of recovery under a reorganization or liquidation plan. Bankruptcy can be a tool to fairly compensate creditors when the debtor does not have the financial means to pay all creditors in full, but there will be the financial costs of a bankruptcy process itself that must be taken into account. .

Administrative costs in bankruptcy cases have increased over the years. There are fees for the US Trustee, fees for the Patient Ombudsman and his attorney, fees for the debtor’s attorney, and fees for counsel for any appointed committee. The tort claimants were successful in having a committee appointed on their behalf. This could be a separate committee from unsecured creditors and add additional administrative costs.

Lenders facing a financially troubled borrower may want to avoid these costs and seek the appointment of a receiver. Through strategic planning, receiverships can be an effective recourse for a lender to control, protect and dispose of its collateral.

While not as often covered in the media as bankruptcy cases, we have recently seen an increase in the number of receiverships, especially in the skilled nursing sector.

The process provides the lender with a healthy dose of control, but also protects them from the burdens associated with foreclosure or bankruptcy. For example, in a foreclosure, the lender may have to take ownership of the property. Taking the title is usually a deciding factor for many lenders given the responsibilities that come with it. In a receivership, the lender never has to take title.

It remains with the title holder and the property is sold by the receiver in place of the title holder. In a voluntary bankruptcy case, a lender is at the mercy of the borrower who decides when and where to file a complaint, and the borrower remains in control of its cash flow and operations – albeit under court oversight.

In a receivership, the lender files the case, controls the choice of jurisdiction and timing, and the borrower is removed from control and replaced by the receiver, usually chosen by the lender. And, as mentioned above, the costs in bankruptcy can be significant. Receivership can be a powerful remedy for lenders, but the lender must be strategic in their planning to ensure that they have the right law, jurisdiction, and escrow on their side and be aware of the potential downsides of a receivership.

In summary, it is essential for lenders to monitor COVID-19 related litigation against their borrowers, knowing that there are still associated risks despite the many immunity protections implemented by many states, ensure that their loan documents properly protect them against judgment priming, ensure adequate refinement of collateral, and be proactive and strategic in considering restructuring and financial relief options for borrowers.

“Lenders to Watch COVID-19 Litigation in Nursing Homes,”