- Debtors and other parties can look to mediation to avoid substantial litigation fees and to mediators for help in crafting solutions to complex bankruptcy-related disputes.
- Consider whether a bankruptcy judge or practitioner is the better fit for your particular situation.
- Walk into the mediation well prepared and aware of the strengths and weaknesses of your case; lack of preparation will hurt your client.
The use of mediation in the bankruptcy context continues to grow, particularly in complex cases. Across the United States, a wide range of bankruptcy-related disputes have been addressed effectively through mediation, including disputes such as avoidance actions, valuation disputes, claim issues, disputes over lien priorities, confirmation issues, post-confirmation litigation, etc. Some bankruptcy courts have required mediation of such matters (such as the U.S. Bankruptcy Court for the District of Delaware), whereas other courts suggest and encourage, but do not require, mediation as a means of resolving particular disputes before a trial is necessary.
So long as the dispute is ripe for mediation (i.e., any necessary discovery or other preparations have been completed) and the practical likelihood of reaching resolution warrants any associated delays or costs, parties to a bankruptcy-related dispute may benefit from taking the time to seek resolution at mediation before extended litigation takes place. However, parties taking the time to think through certain aspects of the mediation and to adequately prepare will be better positioned for success in the process.
Choosing a Mediator
In bankruptcy-related mediation, one of the first significant decisions to be made is the determination of whether to choose a current or former bankruptcy judge or a practitioner as the mediator. Although parties may find it harder to reveal weaknesses in their case to a sitting judge, the chance of later appearing before the judge may encourage admirable behavior. A practitioner may feel more leeway to voice opinions on a party’s position, which may be what a party needs to hear to understand the weaknesses of their position and facilitate resolution. However, a judge’s opinion in mediation, when given, may be significantly compelling to a party stuck in its own mindset. Regardless of whether a judge or practitioner is chosen, it is helpful to have a mediator with experience in bankruptcy-related matters when such matters are at issue, given some of the unique factors present in the bankruptcy context. Finally, when appropriate, allowing the opposing party to choose the mediator can show strength of position and avoid any concerns that party may have about mediator bias.
The Importance of Preparation
Parties participating in mediation can help or hinder their chances of a successful mediation through their preparation efforts. Each party should walk into a mediation knowing its case, goals, and capacity to compromise and prepared to present its case to the mediator thoroughly yet succinctly. This latter goal may be aided by mediation or settlement conference statements presented premediation and/or with PowerPoint or other presentation materials. Walking in with a realistic view of the time it may take to reach a deal can help parties avoid discouragement when resolution is not met earlier in the day(s) of mediation.
Evaluate Strengths and Weaknesses
One of the most important areas of preparation (for both clients and their lawyers) is for a party to develop an understanding of the strengths and weaknesses of its own case. The better a party understands the strengths and weaknesses of its side of the case, the better it will understand its capacity to compromise. Before mediation day, consider what biases, emotions, or unrealistic expectations exist and how to address them. One way to gain a fresh perspective during this process is to consult with someone not involved in the case prior to mediation. Once the mediation begins, mediators may further facilitate this understanding by asking questions to uncover strengths and weaknesses. Having one or more open mediation sessions can ensure that the other party (not just their attorney) has heard any key points another party wants to communicate. If the mediation is taking longer than anticipated, consider what may have been missed in evaluating the other party’s case.
Harm Caused by Lack of Preparation
An advocate will accomplish more for his or her client by being completely prepared for the mediation. It is startling how many attorneys walk into a mediation without any preparation whatsoever. The failure to prepare adequately for the mediation will drive down the value of the unprepared party’s case, leaving the mediator little to work with in attempting to forge a settlement. An advocate who is well prepared will almost always succeed in settling the matter in a favorable manner for his or her client.
Clients should be advised in advance of a mediation that it is their one chance (before trial) to tell their side of the story and that they should prepare in every way possible. A mediation is often the only place (other than in the courtroom) where clients have the opportunity to (1) vent; (2) tell their story; and (3) attempt to reach a satisfactory result.
Like any other mediation, in a bankruptcy-related mediation parties should consider discussing larger concepts before getting into details and finding points of agreement (even if on smaller and/or side issues) early in the process to encourage progress and facilitate movement on the larger issues. Avoiding unrealistic initial demands and offers can discourage the other party from beginning in that fashion and can disarm parties walking in with a “dig in your heels” approach. Instead, consider giving the other party an offer they are tempted to “think about” under the circumstances of the case. Identify reasons that parties may be motivated to settle, even if those are not related to the key issues in the case.
Each mediation scenario is different and requires attention to the particular circumstances of the case and the temperaments and priorities of the parties. Ask questions to uncover underlying motivations and help parties identify different views of their bargaining position and consider providing opportunities for “venting” and airing grievances where emotions are involved. Although each party is concerned with the presentation of its own case, listening to the other party’s case is also key to determining areas of possible compromise and underlying issues hindering resolution. An attorney should beware of taking on a client’s impatience or stubbornness or projecting his or her own personal impatience or stubbornness into the process.
When parties are not moving from their position, consider seeking a mediator proposal from the mediator to flush out a party’s willingness to adjust its position and consider options without the risks of a formal offer/counteroffer. Where overall resolution is not possible, consider reaching consensus on damages tied to a court ruling (i.e., if the court rules X, then we agree to pay Y). Taking steps toward resolution, even if merely fulfilling the minimum involvement requirements of a court-ordered mediation, can help avoid possible sanctions for lack of “good-faith” participation. See In re A.T. Reynolds & Sons, Inc., 424 B.R. 76 (Bankr. S.D.N.Y. 2010), rev’d, 452 B.R. 374, 383 (S.D.N.Y. 2011) (imposing sanctions and holding that creditor and its counsel were in contempt of mediation order for lack of good-faith participation); Spradlin v. Richard, 572 F. App’x 420 (6th Cir. 2014) (affirming a bankruptcy court’s award and district court’s affirmance of sanctions for participants failing to have full settlement authority and participate in good faith); Corp. for Character v. FTC, 2016 U.S. Dist. LEXIS 194752, at *18–*33 (D. Utah Apr. 22, 2016) (providing discussion of good-faith mediation cases and imposing sanctions for party’s failure to have all key parties at mediation, to provide opening statement, and to be prepared with respect to financial aspects of the matter).
Mediation has been used successfully in many complex bankruptcy cases involving numerous parties and significant disputes. See, e.g., Lehman Brothers Holdings, Inc., No 08-13555 (Bankr. S.D.N.Y.) (debtors engaged in hundreds of mediations under court-ordered ADR procedures in place to avoid litigation in every individual case, recovering over $2 billion in proceeds for distribution to creditors); In re Tribune Co., No. 08-13141 (Bankr. D. Del.) (several-month mediation resulted in a plan with broad support that was ultimately confirmed); Cengage Learning, Inc., No. 13-44106 (Bankr. E.D.N.Y.) (mediation resulted in global settlement with main stakeholders and led to confirmed plan); In re City of Detroit, Michigan, No. 13-53846 (Bankr. E.D. Mich.) (thousands of hours of negotiations with the main parties to the case, including the state, city, and related counties, resulted in agreements to address virtually all of the claims involving the city). A mediation team was appointed to resolve disputes in the Commonwealth of Puerto Rico’s bankruptcy (D.P.R., Case No. 17-BK-3283), and numerous cases have moved forward to confirmation through the mediation of disputes impeding key chapter 11 transactions. See, e.g., In re The Rockport Company, LLC, No. 18-50636 (Bankr. D. Del.) (successful mediation of dispute with former owners of debtor over outstanding liabilities resulted in plan support).
Not all bankruptcy mediation efforts have resulted in success, however, highlighting how the initial assessment of the case and parties involved is essential in determining whether mediation is the appropriate next step. See, e.g., Nortel Networks Inc., No. 09-10138 (Bankr. D. Del.) (debtors engaged in numerous rounds of mediation, but ultimately the court had to resolve dispute); Old HB, Inc. (fka Hostess Brands, Inc.), No. 12-22052 (Bankr. S.D.N.Y.) (debtors’ issues with labor unions remained unresolved after mediation and case resulted in liquidation).