More and more, alternative dispute resolution is providing an efficient methodology for reducing the costs of bankruptcy proceedings and bankruptcy litigation. It was not that long ago that bankruptcy lawyers inherently believed that they were capable of settling their own cases and did not need outside help. (The authors were among those people.)
However, as with litigation generally, much has changed in the bankruptcy world. Now, in many bankruptcy courts, alternative dispute resolution, particularly mediation, is an accepted — and sometimes even required — part of the process. Private attorneys have found that mediation provides a mechanism for attempting to resolve disputes that often prove problematic without the help of an independent third party. The obstacles to resolution are often varied. Sometimes, the problem is as simple as a client not wanting to hear what his attorney has to say or an attorney finding it awkward (and bad business) to provide bad news to the client. In another instance, an attorney may feel that his/her adversary has fallen in love with his/her own case and that an objective third party can help shed light on the parties’ relative positions and bring the parties to resolution.
People are often so emotionally invested in a case (whether as 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 may lead to consensual resolution. The authors believe that many — if not most — legal disputes have a strong dose of miscommunication involved, and mediation can effectively cut through that problem. From the court’s perspective, nothing is better than a dispute that has been resolved without the need for prolonged litigation. This frees up court dockets, which is much appreciated by judges who can then devote their time to other matters that require the court’s attention.
The participants in a chapter 11 case often believe that mediation is worth a try because so much money can be saved by avoiding additional litigation. Further, chapter 11 itself has become far too expensive for many debtors and the use of mediation as a tool could significantly reduce the overall cost and increase the likelihood of success of a chapter 11 proceeding.
The growth of mediation as a bankruptcy tool began many years ago when pioneers like Jack Esher (MWI; Boston) first saw its possibilities. Mediation is now being utilized successfully in bankruptcy cases of all sizes. Whether it is reducing the overflow of preference cases brought by a liquidating trust, settling an adversary proceeding or other dispute that is central to the resolution of a proceeding, or helping the parties in plan negotiations, mediation has become a central tool in the bankruptcy process and its role is likely to expand with time.
ABI is always in the forefront of our profession. ABI, in conjunction with St. John’s University School of Law, provides the first and, we believe, only 40-hour mediation training specifically designed for bankruptcy mediation (the “ABI Mediation Program”). In fact, the genesis of the present ABI Mediation Committee began with the members of the initial class of students at the ABI Mediation Program in 2012. Today, the Mediation Committee has grown to 116 members, indicating the substantial interest of the bankruptcy community in mediation, and Robert Fishman serves as the chair. Believing in the benefits of uniform local rules in the mediation process, Mr. Fishman appointed a subcommittee to draft proposed model bankruptcy mediation rules (the “Model Rules” or “Rules”). That subcommittee was chaired by Richard Mikels, and its members included Mr. Escher, Bonnie Glantz Fatell (Blank Rome LLP; Wilmington, Del.), ABI Director Francis A. Monaco, Jr. (Womble Carlyle Sandridge & Rice, LLP; Wilmington, Del.), Hon. Raymond T. Lyons (Fox Rothschild LLP; Lawrenceville, N.J.), Judy W. Weiker (Manewitz Weiker Associates, LLC; Indianapolis) and Past ABI President Reginald W. Jackson (Vorys, Sater, Seymour and Pease LLP; Columbus, Ohio). Many suggestions were provided by Hon. Judith H. Wizmur (U.S. Bankruptcy Court (D.N.J.); Mount Laurel).
Renowned mediation experts such as Elayne E. Greenberg, director of Hugh L. Carey Center at St. John’s, and C. Edward Dobbs (Parker, Hudson, Rainer & Dobbs LLP; Atlanta) were also consulted, and they provided important input and suggestions. The authors are pleased to report that on Feb. 5, 2015, the Model Rules were approved by ABI’s Executive Committee, subject to a comment period for the members of the committee. It is presently anticipated that before ABI’s Annual Spring Meeting in Washington, D.C., the rules will be disseminated as the “ABI Mediation Committee’s Model Guidelines for Mediation in Bankruptcy Cases.” It is the committee’s goal that these model rules will be of benefit to judges and participants in the bankruptcy process around the country.
There are many reasons why the Mediation Committee undertook the Model Rules project. The differences in local rules from jurisdiction to jurisdiction are significant. More than a few jurisdictions do not have local rules governing mediation in bankruptcy cases, and many that do will see their rules evolve as the use of mediation increases. It was the Mediation Committee’s belief that uniformity is a good idea, although the committee understands and respects the local customs and culture that may support different approaches to various mediation topics. While a goal was to provide a template that could be used by various jurisdictions, the Model Rules are intended to be subject to customization depending on the preferences of the judges and participants in the various communities.
There are clearly local views that may differ by district. We have taken the view in drafting the Model Rules that mediation is a facilitative process, and we have avoided provisions that might make the dividing line between litigation and mediation more blurred. The Model Rules view a mediator as a facilitator rather than a court officer, an approach that was designed to foster the feeling among participants that they are in control of the process and are not giving up their autonomy in order to participate. Self-determination is the backbone of effective mediation, and the Model Rules attempt to support that concept. The Model Rules and the time frames therein are flexible and, in many respects, depend on the views and goals of the parties to a particular mediation. In this way, mediation will provide an opportunity for the parties to come to their own resolution rather than one imposed by a court or a court officer.
The Mediation Committee spent more than two years developing the Model Rules. Committee members contacted several current and former bankruptcy judges to solicit their views on such rules and the most helpful way to present them. Every subcommittee member participated in numerous meetings and provided important contributions to the Model Rules. Subcommittee members considered the local rules in effect in various jurisdictions and the work done by other organizations (one of the members had recently completed work on the Delaware Local Rules on Mediation and suggested that we commence with those rules, and many ideas from other local rules were considered and incorporated). The subcommittee attempted to tailor the Model Rules to the needs of the bankruptcy community with a view toward producing an end result that could be beneficial either as a template for local rules or at least to help local rules committees and judges with suggestions on the various issues dealt with in mediation rules. Finally, when the draft Model Rules were submitted to the Mediation Committee and were ultimately forwarded to ABI’s Executive Committee, those bodies also considered the Model Rules extensively before approving them.
It is the purpose of the Model Rules to support and even enhance the continuing trend toward the extensive use of mediation in resolving disputes in bankruptcy cases, or even the underlying cases themselves. For example, many commentators believe that the chapter 11 process has become too expensive and time-consuming to be effective, except as a sale process or as the tail end of a pre-pack negotiated pre-petition. One of the great hallmarks of the growing U.S. economy during the period of the Bankruptcy Act, and during the years after the passage of the Bankruptcy Code, was the availability of a process wherein disputes could be resolved and debtors were provided with an accessible alternative to liquidation.
The Model Rules should help provide a speedier and less-expensive method by which courts and parties can realize the goals and aspirations of the bankruptcy system. The use of mediation can be an effective aid in making the chapter 11 process speedier, less expensive and more user-friendly. It could also increase the success rates of chapter 13 cases and make chapter 7 cases more effective by providing a streamlined method of resolution that could often expedite the parties’ realization of their rights and avoid the additional delay and expense of litigation.
Two Model Rules have been drafted. The first set deals with the procedures governing the mediation itself. Rule 2 governs the process of appointing a mediator. An explanation of some of the key elements of the Model Rules follows:
• Rule 1(a) provides that any dispute may be assigned by the bankruptcy judge to mediation. This would include adversary proceedings, contested matters and disputes that are not yet before the court, such as plan negotiations.
• Pursuant to Rule 1(b), the assignment of a dispute to mediation does not automatically produce a delay or stay with respect to discovery, pretrial hearing dates or trial schedules. However, any party may seek such relief from the bankruptcy court.
• Rule 1(c) provides for flexibility and party involvement in the conduct of the mediation process. The Mediation Committee tried to balance the need for efficiency with the need for parties to be in control of their own process. The need for efficiency is clear. The need for party control is an important element in making parties feel more invested in the process, thereby making a favorable outcome much more likely. Rule 1(c)(i) recognizes the benefit of the mediator discussing the matter with the parties prior to the actual mediation session, and allows that to occur. Rule 1(c)(ii) requires a discussion among the mediator and the parties with respect to setting the date for the mediation conference, but absent an agreement, the date will be set by the mediator. Therefore, in the first instance, party control is respected, and it is only when no agreement can be reached on this basic point that the mediator acts unilaterally. Under Rule 1(c)(iii), the scope of the mediation submissions by the parties is also determined during this consultation with the participants. Further, it is left for discussion among the mediator and the participants as to what submissions or portions of submissions are to be delivered to opposing parties. In fact, no submission, or portion thereof, may be delivered to opposing parties without the consent of the participant providing the materials. This rule also provides a suggestion as to what should be included in the submission materials, but allows the mediator and parties to determine what will actually be required. The suggested contents include an overview of the facts and law, a narrative of the strengths and weaknesses of the party’s case, the anticipated cost of litigation, the status of any settlement discussions and the perceived barriers to a negotiated settlement.
• Rule 1(c)(iv) requires that the parties attend the mediation conference. While much is left to the parties, the rules provide no party with discretion as to whether to attend court-ordered mediation. Here, the need for efficiency is paramount, and if the court orders mediation, the rules require attendance. This rule also allows interested third parties, such as creditors’ committees, to become participants in some or all aspects of the mediation, but only with the consent of the mediator and the mediation participants. Finally, this rule, in subsection (C), reflects the strongly held view of the Mediation Committee that the mediator should not be a whistle-blower. That would create adversity with a party, and any further mediation would be less likely to succeed. Therefore, a party is given the right to notify the court of a material violation of the rules, but the mediator is not authorized to do so.
• Rule 1(d) provides extensive protection for information disclosed at the mediation. Mediation is unlikely to be effective if the views expressed during the mediation can be used against the party expressing such views. Information disclosed in the mediation, which is exempt from discovery, remains exempt from discovery and inadmissible. Further, the rules require strict confidentiality and bar discovery from the mediator. Items discussed between the mediator and a particular party may not be disclosed by the mediator to the other participants without the express permission of such party. Rule 1(j) also provides broad immunity for a mediator who does not engage in actual fraud or willful misconduct. This is consistent with the philosophy underlying the rules that mediation is more likely to be successful when all of the participants, including the mediator, are as protected as possible from adverse results that could flow from participating in the mediation process.
• While the Model Rules seek to balance party control with efficiency, Rule 1(i) gives the bankruptcy court broad discretion to alter the rules for a particular case. For example, a court may set time requirements notwithstanding the flexibility otherwise provided by the rules. However, the court may not alter the confidentiality provisions or the immunity provisions of the rules.
• Pursuant to Rule 1(h), the mediation may be terminated in one of two ways. An order of the court may terminate the mediation. Likewise, the filing of a mediator’s certificate of completion will terminate the mediation. This is important because otherwise it is not clear when the mediation ends. Sometimes, the parties will leave the mediation room thinking that the mediation is over only to discover that there are points that still need to be mediated. Therefore, the mediator is provided some flexibility in determining when the mediation will end, but the point of termination will be clear and unequivocal. If the mediation has not led to a resolution, then the matter proceeds to litigation before the court. However, the court is provided with the discretion to reinstate the mediation process if the court determines that such action is appropriate under the circumstances The rules make it clear that a reinstated mediation is treated in all respects as if it were a new mediation, and all of the rules apply as if such were the case. This avoids uncertainty as to what rules or procedures are applicable to a reopened mediation.
• Rule 2 provides for the establishment of a Register of Mediators (the “register”) in each district. It provides for the efficient administration of the register and provides rules setting forth the standards required for inclusion in the register.
• Rule 2(e) governs the appointment of mediators. The default rule is that the parties select the mediator, unless the court determines that special circumstances exist that support the court making the appointment. If the parties fail to select a mediator, the court makes the appointment. The chosen mediator must be listed in the register unless the parties all agree to a mediator that is not listed on the register.
• Rule 2(g)[B] and [C] deals with a mediator’s conflicts. The mediator is required to file with the court and provide to the parties a statement of all of the mediator’s connections with the parties and their professionals, and either a statement of why the mediator has no actual or potential conflicts of interest, or a notice of withdrawal. In the event that a party believes that the mediator has a conflict of interest, the party must timely notify the proposed mediator. The mediator is required to discuss the issue with the complaining party and the other parties, but if the matter is not consensually resolved, the mediator must withdraw. The Mediation Committee concluded that if a party is uncomfortable with the mediator’s independence, this would be detrimental to the mediation. Therefore, the mediator is obligated to resign without the need for a court order.
Conclusion
Mediation will continue to expand as a resource in all types of bankruptcy cases. It is our hope, and the hope of the Mediation Committee, that these Model Rules will become a valuable resource for judges, local rules committees, professionals and parties, and that the rules will help facilitate the growth and accessibility of bankruptcy mediation to the entire bankruptcy community.
Reprinted with permission from the ABI Journal, Vol. XXXIV, No. 4, April 2015. The American Bankruptcy Institute is a multi-disciplinary, nonpartisan organization devoted to bankruptcy issues. ABI has more than 12,000 members, representing all facets of the insolvency field. For more information, visit abi.org.