CHAPTER 6, A. Bankruptcy Court's Authority to Mandate Mediation and Scope of Good-Faith Participation

• Jurisdiction: United States

A. Bankruptcy Court's Authority to Mandate Mediation and Scope of Good-Faith Participation

Annual Spring Meeting

Washington, D.C.

April 2019

Adrienne K. Walker¹

Mintz Levin Cohn Ferris Glovsky and Popeo, PC

Boston

" While the possibility that parties will fail to reach agreement remains ever present, the boon of settlement can be worth the risk."²

Mandatory, or court-ordered, mediation is often criticized as an oxymoron because it is asserted that the very nature of a mediation requires the voluntary participation of the parties in a collaborative process. Critics often bristle at the idea of court-ordered mediation as being a waste of time and resources, reflecting on the old adage that "you can lead a horse to water, but you can't make him drink." Yet, the use of court-ordered mediation is becoming increasingly common in bankruptcy cases. The trend of establishing mandatory mediation procedures is now relatively commonplace as part of an estate's preference litigation strategy; however, the use of mandatory mediation as part of pre-plan negotiations and other case-dispositive issues has also increased in frequency. Given the increasing use of mediation, including mandatory mediation involving dispositive case matters, these materials will consider the extent and source of a bankruptcy court's authority to compel compulsory mediation. In addition, the materials will explore the scope of "good faith" participation in mandatory mediation and challenges to the bankruptcy court's jurisdiction to compel mediation.

1. A Bankruptcy Court's Power to Compel Mediation

Historically, the bankruptcy court's authority to compel parties to mediate was rooted in the court's inherent powers. Prior to 1998, courts compelling mediation often cited Link v. Wabash R. Co.³ as recognizing courts' "inherent power" to control their docket and manage their own affairs. Other sources of authority included Bankruptcy Code § 105, and even the use of examiners under Bankruptcy Code §§ 1104 and 1106 to facilitate plan negotiations.⁴ In 1998, Congress enacted the Alternative Dispute Resolution Act (ADR Act), which requires district courts to adopt rules for the "use of alternative dispute resolution processes in all civil actions, including adversary proceedings in bankruptcy...."⁵ Subsequent to the passage of the ADR Act, the strongest source of authority for mandatory mediation appears to be a court's local rules, to the extent they exist and include appropriate compulsory language. However, to the extent the scope of the proposed mediation falls outside of the court's local rules, bankruptcy courts continue to routinely exercise their authority to compel mediation through their inherent powers, as well as rely on specific sections in the Bankruptcy Code, the Federal Rules of Civil Procedure, and/or the Federal Rules of Bankruptcy Procedure.⁶

a. ADR Act and Proliferation of Local Rules

The ADR Act provides that "each United States district court shall devise and implement its own alternative dispute resolution program ... to encourage and promote the use of alternative dispute resolution in its district."⁷ The ADR Act recognizes the use of compulsory mediation under 28 U.S.C. § 652, which provides that "any district court that elects to require the use of alternative dispute resolution in certain cases may do so only with respect to mediation, early neutral evaluation, and, if the parties consent, arbitration."⁸ In addition, the ADR Act requires that the alternative dispute resolution process involve a "neutral third party [that] participates to assist in the resolution of issues in controversy, through processes such as early neutral evaluation, mediation, minitrial and arbitration...."⁹ As part of the establishment of such an ADR process, the district courts are required to develop local rules to regulate the use and function of "alternative dispute resolution processes in all civil cases, including adversary proceedings in bankruptcy[.]"¹⁰

Subsequent to the passage of the ADR Act, local rules were enacted or were modified to provide for alternative dispute resolution processes.¹¹ Currently, 76 of 94 districts (80.85 percent) have adopted some type of local rule for mediation, while the remainder (18, or 19.15 percent) have not.¹²

By way of example, the following is a sampling of districts and the corresponding local rule(s) governing mediation:

District	Rule(s)
District of Delaware	Del. Bankr. L.R. 9019-2, 9019-3, 9019-5, 9019-6, 9019-7
Northern District of California	B.L.R. 9040-1-9050-1 (Bankruptcy Dispute Resolution Program)
Southern District of California	LBR, Appendix III (Adoption of Mediation Program for Bankruptcy Cases and Adversary Proceedings)
Northern District of Illinois	Local Bankruptcy Rule 9060-1 (two-sentence rule)
Southern District of New York	S.D.N.Y. LBR 9019-1; General Order M-452 (Procedures Governing Mediation of Matters and the Use of Early Neutral Evaluation and Mediation/Voluntary Arbitration in Bankruptcy Cases and Adversary Proceedings)
Northern District of Texas	N.D. Tex. L.B.R. 9019-2 (one-sentence rule)
Eastern District of Virginia	LBR 9019-1
District of Maine	D. Me. LBR 9019-2

In the U.S. Bankruptcy Court for the District of Delaware, the authority to direct matters to mediation is established by Del. Bankr. L.R. 9019-3 and 9019-5, which apply to "any dispute arising in an adversary proceeding, contested matter or otherwise in a bankruptcy case."¹³ While matters involving the U.S. Trustee, a pro se party, or injunctive relief are generally beyond the scope of what can be ordered to mediation, Delaware's local rules specifically authorize the bankruptcy court to order such matters to be mediated.¹⁴

In the Southern District of New York, the ADR process for bankruptcy courts is governed by S.D.N.Y. LBR 9019-1 and General Order M-452. Notably, the very first provision in General Order M-452 provides that the court is authorized to "order assignment of a matter to mediation upon its own motion, or upon a motion by any party in interest or the U.S. Trustee."¹⁵ In addition, unless ordered otherwise, "any proceeding, contested matter or other dispute may be referred by the Court to mediation."¹⁶

Finally, in the Northern District of California, the local rule governing alternative dispute resolution provides that "while participation in the [alternative dispute resolution process] is intended to be voluntary, any Judge, acting sua sponte or on the request of a party, may designate specific Matters for inclusion in the program."¹⁷ The alternative dispute resolution program in the Northern District of California includes all controversies and disputes in a bankruptcy case, except "(a) employment and compensation of professionals; (b) compensation of trustee and examiners; (c) objections to discharge under 11 U.S.C. § 727, except where such objections are joined with disputes of debts under 11 U.S.C. § 523; and (d) matters involving contempt or other types of sanctions."¹⁸

b. Statutory Authority for Mandatory Mediation

Bankruptcy courts have also relied on Bankruptcy Code § 105 as statutory authority for ordering parties to mediation. While the general powers granted by § 105 may be characterized as encapsulating a bankruptcy court's "inherent powers," courts have analyzed both § 105(a) and (d) as providing an independent statutory authority for bankruptcy courts to order parties to mediation.¹⁹ In the Chemtura case, Judge Gerber reasoned that his authority to compel mediation derived not from § 105(a), but rather from § 105(d), which "grants authority to take such steps as are necessary or appropriate to achieve the expeditious and economical resolution of disputes before it."²⁰

c. The Bankruptcy Court's Inherent Power

When there are no applicable local rules, bankruptcy courts routinely rely on their...