December 26, 2013 Articles

Mediation as an Effective Alternative in Bankruptcy Litigation, Part I

Mediation? I don't need no stinkin' mediation!

By Leif M. Clark

I heard it said many years ago that Chapter 11 is an invitation to negotiation. It could be said that the invitation is hardly limited to that chapter, frankly, though the reorganization process most heavily relies on negotiated solutions for its effectiveness. Yet, parties seem surprisingly reluctant to make use of mediation as a mechanism to achieve negotiated solutions. This series of articles is devoted to the subject of mediation in bankruptcy—why people may not be using it, how it can used effectively, pitfalls to avoid, and ethical issues that can arise.

Lawyers are a proud group, and they pride themselves on their skill sets. Many lawyers believe they are excellent negotiators, though that, of course, is not always true, as most of my readers can attest from frustrating personal experiences. All of us have, at one time or another, been engaged in a struggle with a bully or with a naysayer or with a ditherer. And there other types out there as well. They try our patience, and they cost our clients time and money. Despite our best persuasive efforts, the matter frustratingly fails to settle.

We need not be too hard on ourselves. The truth of the matter, of course, is that we as lawyers are trained as advocates, not necessarily as problem solvers. Effective advocacy, of course, has its place. When the matter needs to be resolved by a third party—a judge, an arbitrator, or a jury—that skill matters vitally. Being respected as a capable litigator is also valuable in negotiations, for the obvious reason that the lawyer’s willingness to go to trial is a credible threat.

But those very same skills tend to work against us and our clients in the settlement context. We lay out our best case, yet the other side fails to budge. We present our most credible threat, yet the other side seems frustratingly oblivious to how badly they are going to lose. And the bills climb. The client is frustrated. Will the client run out of money or patience before we get our day in court?

And it’s not just a matter of skill sets, either. The adversarial process, by its nature, makes settlement a tricky business, because even the settlement has to be perceived as a “win” by the client—and often by the lawyer too. Little wonder that lawyers worry about things like bidding against themselves, making greater concessions than are mirrored by the other side, and settling for less than a position is worth. These concepts are rooted in the underlying notion that the settlement should not appear to be an admission of defeat.

Then there is the problem of unreasonable client expectations, a problem that every lawyer has probably had to try to manage—try, that is, because few can succeed. Unreasonable expectations do not respond easily to reasoned argument. If the expectations are engendered by a false sense of invulnerability (as can often be the case with a large corporate client), there is the added pressure of keeping the client, lest they seek out a “tougher” law firm. If the expectations have an emotional underpinning, the lawyer may end up a prisoner of his or her own client.

The lawyer is expected to be not only attorney but also counselor, but in the highly competitive legal market we all now inhabit, that is proving to be an increasingly difficult role to play. Certainly, we try to counsel our clients to avoid disastrous courses of action (and lucky is the lawyer who has a client that will listen), and lawyers will often counsel clients not even to commence unwise litigation. Too, lawyers will invariably draw the line at following a course of conduct that is unethical for the lawyer or that would subject the lawyer or the client to sanctions. Fortunate are the lawyers who can and do still effectively fulfill the task of counseling their clients to stay their hand not because it’s the most effective legal strategy but because it is the most efficacious business strategy. And fortunate are their clients as well. This aspect of our profession deserves closer attention in law schools—and better training on an ongoing basis. Sadly, it does not receive either.

Then there are the special difficulties posed for lawyers in the insolvency context—whether inside or outside formal bankruptcy proceedings. All too often, the frustration is that a dispute with roots well outside of bankruptcy finds itself shoehorned into a zero-sum game, driving up frustration while driving down options. Personal injury actions, patent disputes, regulatory matters—all take on a very different color when bankruptcy looms. Moreover, bankruptcy adds unexpected new parties to the dispute, and so changes the calculus of outcomes. Trustees exert control over assets that were, just before bankruptcy, within reach of a creditor. They grab hold of privileges that were once the prized possession of the attorney and the attorney’s client. And they assert new causes of action that can dramatically alter the landscape of recovery (for good or ill, depending on one’s position). Of course, there are still creditors’ committees, senior lenders, debtor-in-possession financers, critical vendors, and all manner of other special claimants who were hitherto mere background noise.

There are many wonderful lawyers who are capable of mastering all of these forces and engineering creative solutions in bankruptcy. And, yes, there are some bulldozers out there who can ram through resolutions, amid much wailing and gnashing of teeth. We are blessed by the one and cursed by the other. In between, there is a vast variety of disputes that frustrate us and our clients and that could really use that special skill set that an experienced mediator can bring to the table.

Mediators are certainly not miracle workers. There are some disputes that simply will not settle short of an adverse judgment. But mediators are not saddled with the baggage of advocacy or client representation. Their obligation is to promoting the possibility of settlement, when circumstances are such that the parties, overall, are better off with an agreed rather than an imposed resolution. They are thus not so likely to be saddled with the bane of tunnel vision. In fact, one of the assets that mediators bring to a complicated dispute is a view of the whole dispute.

Certainly, mediators help parties face reality by engaging them in honest evaluation of the risks associated with their positions. But a good mediator brings much more than that. There needs to be a place where parties can actually hear one another in a direct fashion, rather than as translated through pleadings, transcripts, and attorney descriptions. Mediation can provide that forum, a safe place for everyone to express how the matter looks from their point of view. The value of that simple exercise should not be underestimated. Mediation also provides a safe environment for parties to share their underlying interests, an important step in achieving a settlement that is more likely to be perceived as a win for everyone (or at least a mitigation of loss).

Mediators who are doing their job are facilitators. They listen carefully and do what they can to help the parties hear one another more honestly. In an adversarial context, parties inevitably demonize each other. That is human nature. And once demonized, an opposing party is usually suspected of the most devious conduct and the most nefarious motives. In truth, the parties are simply trying to advance their own interests as they perceive them to be, and to defend themselves from what they invariably perceive as attacks. What else does an adversary do, after all, but attack? Mediators help the parties to change that dynamic and to enter into a different kind of dialogue, one premised on finding common solutions.

Fortunately for mediators, lawyers are also natural problem solvers. They love puzzles, and they love solving them. Mediators tap into this reservoir of talent in seeking out a solution because, at the end of the day, a settlement to be successful can never be imposed. It must be arrived at by consensus. In so many mediations, lawyers do some of their best work, helping their clients work toward a sensible resolution.

And bankruptcy lawyers, of all breeds, are some of the best (in this author’s opinion anyway) at focusing on solutions that have a probability of working with a minimum of cost. After all, bankruptcy is a bottom-line business, focused less on the perfect and more on the possible. Bankruptcy lawyers, more than most, are superb problem solvers. Mediation gives them the perfect environment in which to allow that skill to flourish. In a practice that is increasingly vulnerable to excessive costs, mediation may even prove to be the essential ingredient to allowing bankruptcy lawyers to efficiently do what they do best—settle.

Leif M. Clark – December 26, 2013