A Case For The Expanded Use
Of Mediation In Bankruptcy Cases
By James P. S. Leshaw
“Bankruptcy costs too much, takes too long and involves too many attorneys, accountants and financial advisors. The bankruptcy laws are complicated, difficult to understand and often make no sense.” What bankruptcy professional has not heard this refrain from a client?
The following is a proposal for the expanded use of mediation (also known as “facilitation”) in Chapter 11 cases and complex Chapter 7 cases. First a disclosure – I am now working as a full time mediator and arbitrator. Some might say (to paraphrase an old cowboy adage) that asking a mediator whether the system needs more mediation is like asking a barber if you need a haircut. I do, however, have 25 years of experience working as a bankruptcy lawyer (mostly in complex Chapter 11 cases) and have seen my fair share of cases that have gotten bogged down by warring factions over disputes that should have been resolved quickly or not been disputes at all, and that have had serious adverse consequences to the overall case, on the amount and timing of distributions to innocent creditors and on the ability to maintain a viable enterprise for the benefit of employees and suppliers.
A. “The Courts of this Country Should Not be Places Where Resolution of Disputes Begins. They Should be the Places Where the Disputes End After Alternative Methods of Resolving Disputes Have Been Considered and Tried”1
The reality is that most Chapter 11 cases do not have too many professionals (some might dispute this opinion), but rather that there is no professional who is neutral and whose role is to facilitate resolution of disputes for the benefit of all constituencies. The only “professionals” in a typical Chapter 11 case who are not hired guns for a particular party or constituency are the judge and, to a lesser extent, the US Trustee. It is, however, time consuming and expensive to bring disputes before the judge and it is not the job of the US Trustee to help parties resolve their differences.
It is not uncommon for a debtor to seek court approval of one or more neutral parties (typically called mediators) towards the end of a case to help resolve ongoing or threatened litigation – usually avoidance actions. Wouldn’t it be helpful to have an experienced professional who is knowledgeable about the bankruptcy case and bankruptcy process and whose role it would be to help parties resolve their disputes throughout the case in a neutral, confidential, informal and consensual manner, before parties incurred the time and expense of litigation and the uncertainty of bringing a dispute to the judge for resolution?
B. “An Ounce of Mediation is Worth a Pound of Litigation” or “Conflict is Inevitable But Combat is Optional”2
Few would argue that mediation is a highly effective way to resolve disputes. Mediation is loosely defined as use of a neutral third party to help disputants resolve their differences through a formal or informal process. Earmarks of mediation are that mediation is voluntary, the mediator does not have the power to force a given resolution or even any resolution at all, and mediation is generally confidential. The mediation process is flexible and can be done in person or over the telephone. As a general rule, mediation is far less expensive than litigation.
C. “When Elephants Fight, it is the Grass who Suffers”3
Bankruptcy is, by definition, a collective process and bankruptcy cases are rarely two party disputes. Although a cash collateral or DIP financing motion, employee pay dispute, valuation fight, stay relief matter, discovery issue, plan treatment of a particular creditor or class of creditors, or almost any other “contested matter,” in theory, might involve only two parties (three if a committee has been appointed), one of which will almost certainly be the debtor, the time, expense and outcome of these disputes will often have a far greater effect on the outcome of a case (defined as what assets are available for distribution to creditors, how quickly those assets will be distributed and whether there will be an ongoing business for the benefit of employees, suppliers and other constituencies) than things such as avoidance actions, which typically are threatened or commenced only at the end of the case. In other words, although there are very few true two party disputes in a Chapter 11 case, many disputes will have a substantial impact on multiple constituencies.
D. “You Can Observe a Lot Just by Watching”4
So, why not retain a mediator or facilitator at the commencement of a complex case to help resolve disputes as they arise? Here is a framework for the retention of a neutral problem solver at the commencement of a case.
i. Who would be retained as Facilitator
The facilitator would be a disinterested person (not firm) experienced with all facets of the bankruptcy process, who has the experience, expertise and respect necessary to help the parties work towards practical solutions that could benefit the overall case, while permitting the parties to reach mutually acceptable outcomes of their choosing, without judicial resolution of disputes. An experienced facilitator would also be able to contribute ideas or insights based on his or her experience in other cases. Any agreement would, of course, be subject to approval of the bankruptcy court to the extent otherwise required by the Bankruptcy Code or Bankruptcy Rules.
iI. Would parties be required to mediate
Absolutely not – the parties would not be required to mediate unless the court directed facilitation for a particular dispute. The facilitator would, however, be available as a tool to help parties resolve disputes consensually before the parties spend valuable resources (time and money) preparing an issue for presentation and resolution to the court. Facilitators would get involved only where requested and would not be a mandatory stop on the way to the courthouse.
iII. Would facilitation communications be confidential
Yes, facilitation communications would be confidential. While the bankruptcy judge may (or may not) be informed that the parties mediated their dispute (successfully or unsuccessfully), all facilitation communications would be privileged as settlement communications pursuant to Federal Rule of Evidence 408 and local rules enacted in most jurisdictions Including Southern District of Florida Local Bankruptcy Rule 9019-2(F). It would not be the role of a facilitator to inform the judge who has been naughty or nice, thereby encouraging the use of the facilitator and preserving confidentiality.
iv. Would facilitation be a formal or informal process
Facilitation of contested matters or other disputes within bankruptcy cases could be formal or informal, depending on the particular circumstance and the desire of the parties. For example, facilitation of a discovery dispute might involve no more than a review of a discovery request and a series of telephone calls with counsel. Facilitation of a perfection or priority issue might involve a slightly more formal process in which counsel provided written documentation and applicable case law to the facilitator, which was followed up by a series of phone calls or meetings. Facilitation of a plan of reorganization might require a more formal process whereas facilitation of the plan treatment of a particular creditor or class of creditors might be less formal. In other words, the facilitation process would be flexible to fit the magnitude and type of dispute at issue. The goal of the facilitation process would always be to help the parties reach a negotiated resolution of the dispute which is acceptable to them and which contains a high likelihood of obtaining bankruptcy court approval to the extent approval is otherwise required, or which will be instrumental in moving the overall case to a successful resolution.
v. When would a facilitator be retained
A facilitator would ideally be retained at the commencement of a bankruptcy case so that the facilitator’s service is available from the outset to help, where requested, resolve issues surrounding first day motions and second day motions such as employee pay and benefit issues, professional retention issues, cash collateral issues and DIP financing matters, as well as other appropriate issues that arise throughout the bankruptcy case. The facilitator would not replace the role of the US Trustee but would certainly consider the views and policies of the US Trustee in helping parties reach consensual resolution.
Parties might find it helpful to retain the services of a facilitator before the commencement of the case to help resolve pre-filing or first day issues with major constituencies, including secured lenders. The facilitator’s retention through the bankruptcy case could then be sanctioned and formalized through appropriate court orders.
vi. Wouldn’t a facilitator add cost to the bankruptcy process
An effective facilitator will reduce the overall cost of a complex bankruptcy case, not only for the debtor but for all constituencies. At the same time, an effective facilitator will help to make the bankruptcy process less contentious, reducing the number of disputed matters that need to be resolved by the bankruptcy court, will reduce the uncertainty of outcome that is present whenever a matter is presented to a judge or other person with authority to make a binding decision, and will likely speed up the ultimate resolution of a bankruptcy case while improving outcomes for creditors and other constituencies. Absent extraordinary circumstances, a facilitator will not retain professionals, including his or her own firm.
vii. Why Call This Person a Facilitator Rather than a Mediator
I have chosen to refer to this person as a facilitator rather than a mediator because that is the role of the person – to facilitate positive resolutions between parties. Additionally, while mediation can refer to a formal or informal process, most bankruptcy practitioners and judges think of mediation as a more formal process used to resolve adversary proceedings and other distinct pieces of litigation. The facilitation process can be as formal or informal as the parties desire and, as a practical matter, will likely be far less formal than a typical mediation in most instances.
viii. Would Use of a Facilitator Require Modification of the Local Rules
No, use of a facilitator would not require any modifications to the Local Rules, though if use of facilitators becomes wide-spread within the District, the court might consider amending Local Rules, as appropriate. Retention and payment of facilitators would be subject to court oversight and approval like retention of any other court-approved professional in a bankruptcy case.
E. “Behold the Turtle. He Makes Progress Only When he Sticks his Neck Out”5
Most experienced bankruptcy professionals will agree that bankruptcy is a highly effective process for reorganizing or liquidating a business, but that disagreements among parties and resulting litigation will often add unnecessarily to the cost of the overall process while reducing the speed, efficiency and desirability of outcome. Use of a facilitator throughout the case could have the effect of improving the process for the benefit of all constituencies. Try it and see if you agree.
Attributed to Justice Sandra Day O’Connor.
3 African proverb.
4 Attributed to Yogi Berra.
5 My father.