KEY POINTS
- From the court's perspective, nothing is better than having a dispute resolved without the need for litigation.
- I always tell the parties to each mediation that I conduct that no one "wins" a mediation. It is the mutual commitment to a self-determined, voluntary resolution that leads to a successful mediation outcome.
- In my view, a successful mediation is one that provides an appropriate environment and structure to maximize the parties' opportunity to reach a consensual resolution.
Boiled down to its essence, mediation is a voluntary process1 of party self-determination, with the assistance of a third-party neutral, the mediator, that is informal, non-binding and free of the burdens of the litigation process and procedures. Mediation is not a "winner take all" process, as is most litigation. The parties to a mediation can craft a resolution that includes things that no court could consider or utilize (as those things are not within the boundaries of the litigation). And maybe most importantly, mediation can be efficient, quick and cost effective.
Alternative dispute resolution, and mediation in particular, provides an efficient method of resolving disputes while reducing the costs of bankruptcy proceedings and accompanying bankruptcy litigation. Mediation has ascended to a position of significance in the bankruptcy world, especially in certain jurisdictions where it is now a fundamental part of the culture. Places like Florida, New York and Delaware have made mediation the norm in their respective bankruptcy litigation processes. Many other jurisdictions do not seem to have a mediation culture, and unless the parties affirmatively seek mediation, it is not a "go to" process.
Attorneys and their clients have found that mediation sometimes provides a mechanism for attempting to resolve disputes that have proven to be problematic in the absence of an independent third-party, the mediator. The obstacles to resolution are varied. The problem might be that the client does not want to hear what his attorney has to say, or an attorney may find it awkward (and bad business) to provide bad news to the client. Occasionally, an attorney may feel that his adversary has fallen in love with his own case, and that an objective third-party can help shed light on the parties' relative positions and allow the parties to find a path to resolution. Some people are so emotionally invested in their case (whether client or counsel) that they are unable to hear the other side's point of view. Having an independent person explain the other side's point of view, without the emotional component, might make it easier to digest and might lead to consensual resolution. From the court's perspective, nothing is better than having a dispute resolved without the need for litigation. Whether it is reducing the overflow of preference cases brought by a liquidating trust, settling an adversary proceeding or other dispute central to the resolution of a proceeding, or helping the parities in plan negotiations, mediation has become a central tool in the bankruptcy process and its role is likely to expand with time.
What Kinds of Disputes Should You Consider Mediating?
So what set of circumstances gives rise to an appropriate mediation opportunity? The answer to that question is quite broad. During the entire course of a bankruptcy case, matters arise that may be appropriate for mediation. Certain typical disputes exist in numerous bankruptcy cases, such as automatic stay issues, plan confirmation litigation, claims disputes and various adversary proceedings. Many of these typical situations give rise to an opportunity for a mediated resolution.
Traditional plaintiff/defendant disputes are often appropriate for mediation. In particular, adversary proceedings are often ripe for resolution through mediation, because many adversary proceedings are just disputes about money. One party (usually the Trustee or the Debtor in Possession) claims that the defendant owes the estate money under one of many possible theories. The controversy might be about an alleged preferential transfer2, a fraudulent conveyance3 , or the simple recovery of an obligation owed to the estate. These disputes can range from the very straight forward to the highly complex. The controversies might be about the facts, the applicable law or both. Or maybe the defendant just doesn't want to pay.
Mediation can be a useful tool when parties want to get to a resolution more quickly and less expensively than can be provided by the litigation track. Certain types of causes of action, such as the avoidance of alleged preferential transfers, are often more susceptible to resolution by mediation, because (i) the elements of the claim are generally straight-forward, (ii) the defenses are limited by the statute and (iii) the parameters of the facts necessary to support those defenses are relatively well-understood by experienced practitioners. In chapter 11 cases, there are often mediation opportunities for broader, more global topics, such as plan mediations that attempt to address the ultimate disposition of the case and the claims. Multi-party mediations are clearly more complex and difficult, due to the large number of moving parts.
In most bankruptcy cases, there are early, middle and late case opportunities for mediation. At the commencement of a bankruptcy case, particularly a Chapter 11 case, there are certain issues that often give rise to disputes between the debtor in possession/trustee and certain creditors (usually secured creditors). Among the most likely issues that might arise early in a case are disputes surrounding the use of cash collateral4 , the continuation or modification of the automatic stay5 and the necessity and nature of the provision of adequate protection6 (as it relates to either the use of cash collateral or the continuation of the automatic stay). These issues usually require prompt attention and can lead to extensive litigation and discovery. Valuation and financial performance can be significant factual issues in such matters. To the extent that parties are comfortable in using mediation to address these issues, mediation may be able to provide a more prompt and less expensive resolution, allowing the case to proceed toward its ultimate resolution.
Once a case advances through the initial stages, the issues most likely to arise also change. The middle stages of a case often see adversary proceedings filed, including disputes over the nature and amount of claims against the estate. In addition, the estate begins to consider and commence actions against third-parties to collect claims of the estate and attempt to obtain turnover of assets in the hands of third-parties that the trustee/ debtor in possession believes rightfully belong to the estate.
The latter stages of a bankruptcy case are often about how to wrap things up. With respect to chapter 11 cases, there are only three ways to bring the case to conclusion, i.e. dismissal, conversion to Chapter 7 or confirmation of a plan. These plan mediations are potentially a powerful tool. They present a wonderful opportunity to navigate the plan process, address plan objections, consider competing plans and overcome other confirmation obstacles. The context of the mediation might be confirmation of a plan, the sale of significant assets, substantial financing commitments, or a combination of one or more of the above. The logistics of such a mediation are much more cumbersome and complex than most typical mediations. Plan mediations can be a bit unwieldy, due to the potential number of participants, the fact intensive nature of many of the issues and the "bet the ranch" consequences of the resolution of the issues. However, the litigation of these types of disputes can be extremely expensive, and because the determination of them can be very time sensitive, mediation may be the most efficient path to reach a consensual resolution. Sometimes, in the plan confirmation context, an attempt at mediation can lead to constructive conversation, moderation of positions and eventual consensual resolution.
Currently, the bankruptcy community is just beginning to resort to plan mediation in these types of scenarios. However, plan mediation can be a very effective tool to find common ground and breaking log jams that allow for the resolution of "Case Outcome" disputes.
The dischargeability7 of a particular debt in the case of an individual debtor can be the most important issue of the entire case. The notion of the "fresh start" in bankruptcy is directly at odds with the claim that a particular debt is non-dischargeable. Because these disputes are two party disputes (the debtor and a particular creditor), the mediation of these disputes is really not particularly different than is the mediation of any other type of adversary proceeding. As is so often the case, mediation may allow the creditor an outlet for its anger and frustration, without the need for the cost and expense of full blown dischargeability litigation.
Mediation Considerations in Addition to the Case Itself
The players (parties and counsel) in each situation also factor into the mediation decision. Sometimes a reticent client needs to hear the other side of the story from either the opposing party or the mediator or both. Sometimes it is a party's counsel that needs that type of education. Exposure to others' perspective may not be readily available outside of the mediation process. While a mediator should not be advocating any party's position, the mediator can (and often should) ask questions which cause/ allow a party to consider the relative strengths and weaknesses of both its and the opponent's positions.
Successful mediation requires that both parties to the mediation actually want to reach a consensual resolution. No party should feel compelled to reach a resolution in a mediation. I always tell the parties to each mediation that I conduct that no one "wins" a mediation. It is the mutual commitment to a self-determined, voluntary resolution that leads to a successful mediation outcome.
When is the Right Time to Mediate?
Of course, there is no one answer or even a correct answer to this question. Many factors should be considered in determining whether mediation is an appropriate process for the parties to undertake. The nature of the dispute(s), the procedural posture of the matter and the interests of the parties are among the variables that potentially have a significant impact on this decision. However, one issue ultimately determines if it is the right time to mediate: Are the parties ready to both engage in the self-determination process and reach a consensual resolution?
The success or failure of most mediation is directly tied to the acceptance by the decision-makers that "now" is the time to attempt to solve the problem. This is so because mediation is a self-determination process. There is no court to impose an outcome on the parties. The mediator cannot "make" any party agree to anything. No party should feel compelled to reach a resolution in mediation. Without the decision-makers coming to the realization that the time is ripe for resolution, it is difficult, if not impossible, for the mediation process to result in a successful outcome, that being the consensual resolution of the dispute(s). It is the mutual commitment to a self-determined resolution that leads to a successful mediation outcome.
Sometimes, especially in the context of court ordered mediation, the decision-makers come to the mediation process begrudgingly. They are not optimistic about the chances of success and they are not committed to the process. In that situation, it is incumbent on the mediator to provide a process that allows the parties to see the benefits of a self-determined, consensual outcome. Often times, the decision-maker gets to the right frame of mind during the mediation, rather than in advance of it.
Has the litigation already commenced, or are the claims at issue still in the "threatened" stage? Often, until a complaint has been filed and an answer prepared and filed, the parties are not able (or willing) to sufficiently and clearly focus on the claims and the defenses. Likely, at the pre-filing stage, everyone is operating under their own view of the facts, and without a general agreement on the relevant facts, the parties won't be able to focus their attention on the resolution side of the equation. In many circumstances, at this early stage in the dispute, it is premature for the parties to engage in mediation. While there are cases that are capable of being successfully mediated prior to the initial pleading stage, it is the exception and not the rule.
Once the complaint and answer is filed, then discovery becomes the variable that impacts the timing of a decision to mediate. Because many cases involve disputed (or at least misunderstood) facts, it is often necessary for at least some discovery to take place in order for the parties to understand the situation well enough to engage in meaningful resolution discussions. One way or another, the parties likely need a relatively well-developed understanding of the facts and legal theories in order to be ready to mediate.
A successful mediation almost always involves a metamorphosis of sorts for the parties and/or their counsel. The mediation process should help stop parties from focusing on their respective legal/factual positions (positions are the essence of litigation, not mediation) and instead allow their actual interests to govern their decision making. A party's actual interest might be to stop spending time and money on a dispute, to resolve a dispute that allows a project or transaction to be completed, or to mend fences with a current or former business associate. Often times, the realization and acceptance of this "interest" can lead to a prompt and satisfying resolution. And, when the parties' goals change, the obstacles to a successful resolution become easier to overcome.
To the extent that parties come to the realization, prior to the commencement of mediation, that the pursuit of their respective positions is leading them to time consuming and expensive litigation, and a transition to the pursuit of their respective interests has a greater likelihood of leading to an acceptable consensual outcome, then those parties are well-positioned to successfully engage in mediation. Often, this so-called metamorphosis is not attainable prior to the mediation. It may need to occur during the mediation, allowing for a breakthrough in the negotiation process.
How do I Select a Mediator?
One of the most important decisions that parties to a mediation face is deciding on who to retain as the mediator. The marketplace is filled with people who proclaim themselves to be mediators. Being a good mediator is not as easy as it may look. How does one tell which proclaimed mediator is skillful in the role and which are just pretenders?
The best place to start is by examining the qualifications of the proposed mediator. Mediation training is one of the best credentials (although there are good mediators out there who have not had formal training). Actual mediation experience is invaluable, and mediators who have conducted multiple (maybe even numerous) mediations are often the best choice. Many mediators laud their "success" rate, the number of mediations that they have conducted that result in a resolution. I am not a fan of that metric, because it purports to give the mediator credit for the successful outcome, when it is parties that reach successful outcomes. In my view, a successful mediation is one that provides an appropriate environment and structure to maximize the parties' opportunity to reach a consensual resolution.
Word of mouth is a valuable tool in selecting a mediator. While it isn't always true, usually if a mediator does a good job in prior mediations, and the parties (or professionals) recognize that fact, it is not unreasonable to assume that the mediator will once again do a good job. Recognize that every mediation is different, with different dynamics and different personalities. And those differences do matter. A skillful mediator will recognize the differences and adapt the session to account for them.
There are two styles of mediation, evaluative and facilitative. Evaluative mediation involves the mediator expressing his or her own views about the positions of the parties and the potential outcomes that may be obtained (including predicting likely outcomes). Facilitative mediation is a process where the mediator relies on the parties to stake out their positions and the mediator facilitates a discussion of potential outcomes and solutions with the parties to allow them to attempt to reach a self-determined agreement. There are arguments (strategic and ethical) about which method is the most appropriate and which is the most helpful. While I personally am a proponent of the facilitative style, it is fair to say that both styles exist and the style utilized by the mediator you are considering is very important to understand.
Mediators should be selected by matching their style, experience and personality to the parties and the situation. The most successful mediations occur when all of the parties are comfortable with the mediator, understand the approach that is going to be taken in the mediation and, most importantly, trust that the mediator is neutral in his approach and has the trust of everyone in the room.
Footnotes
1. Some courts actually order or mandate mediation, thereby making it less than fully voluntary.
2. 11 U.S.C. § 547.
3. 11 U.S.C. § 548.
4. 11 U.S.C. § 363.
5. 11 U.S.C. § 362.
6. 11 U.S.C. § 361.
7. 11 U.S.C. § 523.
Originally Published by American Bankruptcy Trustee Journal.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
