Chapter 9 Mediation: Can't We All Just Get Along?

• Jurisdiction: United States

9. Mediation: Can't We All Just Get Along?

Written by:

Ji Hun Kim

U.S. Bankruptcy Court (S.D.N.Y.); White Plains

Nicholas M. McGrath

K&L Gates LLP; Boston

The last will and testament of George Washington contained an arbitration clause to resolve disputes among his heirs.¹ Abraham Lincoln "arbitrated a boundary dispute between two farmers."² From squabbling neighbors to corporate partners, people are more satisfied when they are actively involved in determining the outcome of their affairs.³

The U.S. economic downturn has brought about an increase in both large and small bankruptcy filings, with numerous opportunities for bankruptcy practitioners to utilize the benefits of mediation to maximize time, money and value to the estate. With the economy far from stabilized, increased bankruptcy filings, overwhelmed dockets and unpredictable results, bankruptcy mediation provides an expeditious and cost-effective way to avoid some of the typical pitfalls of bankruptcy.⁴

A. Authority for Mediation

Bankruptcy courts have both statutory and rule-based authority to employ mediation and settlement conferences.⁵ Originally, bankruptcy judges relied on their inherent powers under § 105 of the Bankruptcy Code to appoint mediators.⁶ However, in 2009, Congress passed the Authorization of Alternative Dispute Resolution, which allows "the use of alternative dispute resolution processes in all civil actions, including adversary proceedings in bankruptcy."⁷ Furthermore, bankruptcy courts frequently implement Federal Rule of Bankruptcy Procedure 7016(a)(5) to order pretrial settlement conferences that encourage settlements in the pretrial stages of a case.⁸

While many bankruptcy attorneys are experts in negotiating certain aspects of a bankruptcy case, there is a misconception that mediation in other parts of the case are ill-advised, since doing so would "cede control of a case to the mediator" or that the "process [would be] binding."⁹ However, these assumptions are unfounded as mediation is typically a voluntary process and is not binding unless the parties involved agree to execute a settlement agreement.¹⁰ While mediation encourages open dialogue among the parties, all matters discussed in mediation are confidential and inadmissible in any future court proceedings.¹¹ These rules are in place to protect the goal that Congress had in mind when implementing mediation policies: "to promote a completely candid and open exchange between the parties with the idea that the matter be settled without the necessity of protracted litigation."¹²

B. Use of Mediation in Bankruptcy

Mediation is used in many different ways in bankruptcy. In the recent recession, mediation and settlement conferences were often utilized and particularly effective in the "mega-bankruptcy" cases.¹³ Preference litigation is often the most common part of a bankruptcy case where mediation is implemented. Mediating preference claims may result in more favorable terms for the parties while at the same time providing a more streamlined and controlled process than litigation in bankruptcy court. Additionally, parties can take advantage of mediation to resolve "fraudulent-conveyance actions and plan disputes, such as classification issues, as well as other adversary proceedings and contested matters like disputes where executory contracts could be reworked to the satisfaction of both the debtor and the other parties to the case."¹⁴ Interestingly, while mediation and structured negotiations have proven to be useful for the resolution of large groups of claims, in practice the mediation aspect of the procedure is infrequently used.

Mediation can also serve an integral role in plan negotiations. It is becoming more and more common for bankruptcy courts to appoint mediators to serve as facilitators for plan negotiations in bankruptcy.¹⁵ In the past, bankruptcy courts would rely on the power of appointment of an examiner for this aspect of a case. However, the duties and requirements of an examiner inherently contradicted that of an impartial mediator.¹⁶

For bankruptcy judges, mediation is a useful tool to resolve large bankruptcy claims, particularly in mass tort litigation.¹⁷ Tort claims are a thorn in the side of many bankruptcy judges since bankruptcy courts are unable to hear personal-injury claims,¹⁸ which may require "each tort claim or class action to be independently tried all across the country."¹⁹ As such, mediation has been an efficient way for bankruptcy judges to resolve mass tort or personal-injury claims within...