A Proposal: Regional Mediation Hubs for Mega-Case Avoidance Actions

My Nebraska client has a problem, and he’s unhappy. He’s an $80,000 preference defendant in Delaware and must travel 1,200 miles (with his attorney) for a mandatory mediation of the disputed preference claim. Although he thinks that the claim is “bogus” (despite explanations to the contrary), he has a what-choice-do-I-have-but-to-capitulate perception of all this. So, here’s a proposal to address this problem: regional mediation hubs.

The proposal comes about like this: I walked into a session of the ABI/St. John’s School of Law Mediation Training Symposium,[1] sat by a distinguished-looking gentleman and started chatting — as if he is one of my peers. As it turned out, he was the luncheon speaker and a bankruptcy judge for many of the mega-cases that we’ve all heard about. During the presentation, he talked about difficulties in mediating cases on the East Coast for far-away defendants. “Like those from Nebraska,” he said with a nod to me (a nice and much-appreciated touch). He expressed openness to suggestions for addressing those difficulties. Unfortunately, I had no suggestions at the time, other than allowing defendants to participate in mediation sessions via Skype. That’s “not acceptable,” the judge said.

The Proposal

Having thought on it further, regional mediation hubs seem to be a good accommodation. Here’s the proposal: Hold mediation sessions in regional hub cities near where multiple defendants reside (instead of Wilmington, Del., or New York) and include trained mediators from those regions on the panel of mediators.

A Fly-Over Example: In re VeraSun Energy Corp.

Avoidance defendants from fly-over country believe that they get a raw deal in mega-case mediations. An example is In re VeraSun Energy Corp., et al., Case No. 08-12606 in the District of Delaware. This case involved 18 ethanol production plants located throughout the corn-producing areas of the U.S. After § 363 sales of the debtors’ assets, 156 transfer-avoidance actions were filed and prosecuted to resolution by settlements, although none were actually tried. Of those 156 actions, 106 (68 percent) were filed against defendants in the following states, none of which were anywhere near Delaware: 25 from Minnesota, 17 from Iowa, 14 from Nebraska, 13 from South Dakota, 12 from Illinois, seven from Indiana, five from North Dakota, five from Kansas, four from Missouri, four from Michigan and four from Wisconsin.

Imagine the total cost of sending all defendants in the 156 VeraSun actions and their attorneys to Delaware for mediations. It has to be a staggering number, and the individual cost for many of the defendants must be prohibitive, especially for defendants in 79 of those actions (51 percent) who faced claim amounts of less than $100,000. With less than $100,000 at stake, mediation sessions occurred in seven of 79 adversaries (9 percent); for those with more than $100,000 at stake, mediation sessions occurred in 28 of 77 adversaries (36 percent).

Granted, Delaware provides a mediation accommodation for defendants in cases of $75,000 or less: A representative with “full authority” (e.g., a defendant’s Delaware attorney) must appear in person, while the defendant and others (e.g., a hometown attorney) may appear “by telephone, video conference or other similar means.”[2] Such a provision, however, (1) does not help my client, who faces an $80,000 claim; (2) adds preparation and attendance costs for the Delaware attorney; and (3) did not increase the number of cases mediated in VeraSun. As the Judge implied, participation by electronic connection is not adequate.

Why not offer a regional mediation hub alternative to these defendants? Why not let them opt to mediate their disputes in one of three locations — Omaha, Neb., Minneapolis or Chicago — instead of Wilmington? The extra cost of regional mediation hubs to the bankruptcy estate should consist of some plane tickets and overnight lodgings for a handful of professionals. If a local mediator is involved, surely that mediator could provide office and conference room space at no (or limited) additional charge. It is probably a little more complicated than that, but you get the picture.

A West Coast Example: In re WL Homes LLC

In comparison, a West Coast example is In re WL Homes LLC, et al., Case No. 09-10571, in the District of Delaware. This case involved a 161-year-old builder of luxury home developments in Southern California (such as a 575-home suburb in Tustin and a 1,000-lot community in San Clemente) that filed for bankruptcy in 2009 amidst the housing market collapse. The vast majority of creditors in the WL Homes case were from California, with others from such western states as Arizona, Colorado, Nevada and Utah; very few were from a state located anywhere near Delaware. The bankruptcy case began in chapter 11 on Feb. 19, 2009, but converted to chapter 7 on June 5, 2009. Thereafter, the chapter 7 trustee filed 388 adversary proceedings to recover preference claims from defendants located in a group of states that mirrored the creditor group (i.e., mostly from California and other western states).

In each WL Homes adversary proceeding, a notice of dispute resolution alternatives was served upon the defendant, along with the complaint and summons, specifically advising the defendant of a mediation alternative. However, of the 388 adversary proceedings filed by the trustee, a mediator was appointed in only 40 of them. Among these 40, a mediation session occured in only six of them. Among these six, five settled during a mediation session, and the other settled later; the amounts at issue were $92,376.37, $118,250.00, $238,403.84, $250,666.89, $314,147.66 and $509,311.87; and five defendants were from California, while one was from Utah.

For the remaining 34 of the 40 WL Homes adversaries in which a mediator was appointed, all settled without a mediation session. Perhaps it is arguable that the appointment of a mediator in those 40 adversaries helped move each of those cases toward settlement — but on the other hand, maybe the appointment merely put more pressure on those defendants to avoid incurring additional costs and troubles.

The distance between Los Angeles and Wilmington, Del., is approximately 2,700 miles. Travel costs and troubles for a round-trip between those two cities are commensurately high. For example, one round-trip airplane ticket between Los Angeles and Philadelphia costs hundreds of dollars, airport parking in Los Angeles and rental car costs in Philadelphia are substantial, and hotel costs are required because the trip plus mediation session cannot be accomplished in a single day; (2) one-way flight and layover time is roughly equivalent to a full work day, before adding in the hours required getting to and from the airport and then factoring in the possibility of delays and cancellations; and (3) train and automobile alternatives are, let’s just say, “not viable.” Perhaps such costs and troubles explain (at least in part) why only six mediation sessions occurred out of 388 preference adversarial proceedings in WL Homes? The fact that all six mediation sessions occurred in cases having more than $90,000 at issue suggests that such an explanation is correct.

Regardless, six mediation sessions out of 388 preference adversarial proceedings is “not good” under any standard of measurement. Perhaps by offering regional mediation hubs in southern California and other locations, the rate of mediation use in WL Homes could have been substantially improved. Heck, even the one-in-11 VeraSun experience for under-$100,000 claims would have been a vast improvement over the entire WL Homes experience. Surely we can do better than that.

An Identified Need

The judge’s expression of concern in that session during the ABI/St. John’s Mediation Training Symposium about East Coast preference mediations for far-away defendants is consistent with a general discomfort in the bankruptcy community over preference claims in general. For example, the ABI Commission to Study the Reform of Chapter 11 explains as follows: “[F]rom the unsecured creditor’s perspective, preference law appears unfair and potentially increases the losses” for preference defendants.[3] The ABI Commission finds “strong frustrations” with preference law among bankruptcy constituencies and identifies a need to find “different options” for “addressing concerns” and “enhancing the efficiency of the preference process.”[4]

One witness expressed frustration at a Commission hearing in this manner: “The trustee knows [that a preference defense] is going to get expensive [for] me to continue to defend and is counting on a monetary settlement just to get rid of them.”[5] Such testimony articulates the strong frustrations held by many fly-over and West Coast defendants who are required to mediate their preference defenses on the East Coast. These defendants view the entire process as a shakedown, forcing them into a what-choice-do-I-have-but-to-capitulate situation. The ABI Commission has acknowledged the legitimacy of this shakedown view via these observations: (1) “trustees may pursue preference claims in situations in which a cost-benefit analysis indicates little value for the estate, but significant cost and burden for the targeted creditors,” and (2) “the creditors settle for nuisance value just to avoid the costs of litigation. This practice imposes costs on creditors vastly disproportionate to the gain to estates.”[6] Again, surely we can do better than that.

A Value Judgment

An assumption behind all of the foregoing is that the use of mediation in resolving bankruptcy disputes is a good thing. Some bankruptcy professionals (perhaps many) might debate the value of this assumption. However, here is something that we can all probably agree upon: Because a mediation system is already established for mega-case preference litigation, we should be evaluating and adjusting the system to ensure that it is accessible and usable for everyone and that it does not create, in actuality, another impediment of inefficiency for far-away litigants.

A Disclaimer

Now for a disclaimer: There is undoubtedly more to the foregoing cause-and-effect analysis than merely travel costs and troubles regarding (1) six mediations out of 388 adversaries in the WL Homes experience, and (2) the difference between 9 percent smaller-case mediations and 36 percent larger-case mediations in the VeraSun experience. The reality is that mediation has not yet been established as a standard practice tool for most bankruptcy professionals and is undoubtedly a partial cause of low mediation usage in any bankruptcy case.

By contrast, my experience from nonbankruptcy civil litigation, both state and federal, is that attorneys in such cases commonly insert mediation into their strategies and plans for each case: They count on using mediation as a tool toward achieving a nonjudicial resolution of the case. In such nonbankruptcy cases, it is a foregone conclusion that a mediation session will occur before the case goes to trial. Such plans and strategies seem to also be effective in achieving nonjudicial resolutions.

On the other hand, mediation of bankruptcy disputes is a relatively new phenomenon. Mediation has been slow to catch on as a tool in bankruptcy, and attempts to introduce mediation processes into the bankruptcy world are often met with disinterest and even resistance from bankruptcy professionals, especially from those who have been practicing in bankruptcy for decades without it.[7]

Regarding disinterest, the VeraSun experience shows, with its 35 mediations out of 156 adversaries, that progress is being made among bankruptcy professionals toward utilizing mediation as a tool for settling bankruptcy disputes. Yet the WL Homes experience of six mediations out of 388 adversarial proceedings may show that we are still in an uphill battle to gain general acceptance of mediation as a standard tool for resolving bankruptcy disputes.

Conclusion

Despite this cause-and-effect disclaimer, this fact is undeniable: Travel costs and troubles are a major impediment to East Coast mediations as a viable option for far-away defendants. The regional mediation hubs proposal identified herein could (1) mitigate many of the concerns of far-away defendants, (2) enhance the efficiency of preference processes, and (3) increase the number of cases actually mediated.