June 01, 2016 Articles

Mediation Plays an Important Role in Resolving Bankruptcy Cases

Chapter 11 works best and most efficiently when the restructuring is consensual.

By Daniel J. DeFranceschi

Chapter 11 works best and most efficiently when the restructuring is consensual. Typically, this requires a great deal of negotiation and compromise before and after the Chapter 11 petition is filed. Bankruptcy professionals must know when to compromise and take the best deal possible, and when to “fight the good fight.” Where the parties are unable to reach a consensus on important issues despite their best negotiating efforts and where traditional litigation tactics have not resulted in either side seeing the error of its ways, mediation may provide a viable path forward to a case-saving deal.

Many practitioners are familiar with mediation to resolve actual litigation, such as preference actions. These cases often involve defendants who were creditors of the debtor, who often already suffered the reality of a “cents on the dollar” distribution on their unsecured claims, and who do not want to incur litigation expenses and face losing more money. The plaintiffs in these cases are often thinly funded litigation trusts looking for quick settlements to make distributions to creditors, without having to spend too much on litigation. Some bankruptcy courts, such as the Delaware Bankruptcy Court, have mandatory mediation procedures for such preference cases. See Bankr. D. Del. R. 9015-5.

Beyond such litigation, mediation increasingly has been used in complex bankruptcy areas. For example, it is becoming more common for a bankruptcy judge to push a case toward mediation to resolve disputes involving complex Chapter 11 plan issues. The hope is mediation will allow the parties to avoid what could be a very costly and heavily contested Chapter 11 plan confirmation process. Several recent high-profile Chapter 11 cases have involved plan mediations—Energy Future Holding, Caesars Entertainment, Molycorp, and Washington Mutual, to name but a few.

For bankruptcy practitioners faced with advising clients on whether mediation should be implemented to help resolve complex issues that otherwise would require a costly and prolonged courtroom battle, there are several considerations. Every case presents its own unique issues and challenges in determining whether mediation will be useful, but you may want to consider the following:

1. Have you given negotiation among the parties a fair chance to work?

2. Why have the parties been unable to negotiate a resolution? Can this be “fixed” with a third-party mediator entering the process?

3. Is the matter in litigation? If so, should you wait for discovery or motion practice to flesh out the facts and issues before mediating? Would waiting for this to develop help or hinder achieving a mediated result?

4. What are the open issues and can they be mediated? Are the issues binary, with no room to move on either side?

5. Is the dispute about money? If so, how far apart are the parties?

6. If the dispute is not about money, are the issues ones that are a “matter of principle” or of the type that a party insists on holding its ground and will require a judge to decide? In this instance, mediation by a sitting or retired bankruptcy judge might be the best option.

7. Who are the parties to the controversy and which of those parties should be involved in the mediation?

8. Is your client capable of compromise at mediation? Are the other mediation parties capable of mediating in good faith toward a consensual resolution?

9. What are the timing constraints in the case? Are there milestones imposed by the debtor in possession financing or by a restructuring support agreement?

10. Would mediation run in tandem with a litigation track, or would active litigation of the dispute be stayed pending mediation?

11. What kind of a mediator would be best for your case, and is such a mediator available? Often parties want a sitting bankruptcy judge to mediate, but that is not always an option and may not be the best option.

While these and many other factors should be considered when deciding on whether to mediate a complex dispute in a Chapter 11 case, the bottom-line question a practitioner needs to ask is whether the client’s interests will be best served by mediating. And that decision requires a comprehensive understanding of the issues involved in the dispute as well as of the client’s temperament and willingness to try mediation to settle the dispute. You should keep mediation in mind as an option for resolving complex issues in Chapter 11 cases.

Keywords: bankruptcy and insolvency litigation, mediation

Daniel J. DeFranceschi is a director at Richards, Layton & Finger, P.A., in Wilmington, Delaware.

Daniel J. DeFranceschi – June 1, 2016