Mediation in Consumer Bankruptcy Cases: Practical & Ethical Considerations

Let’s face it: Effective consumer bankruptcy lawyers eschew litigation. Bankruptcy procedures promote compromise, and bankruptcy judges favor settlement. Many bankruptcy lawyers develop good settlement skills without ever participating in formal dispute-resolution processes. But occasionally, even effective lawyers can’t settle a case on their own. In those cases, lawyers need to know when to request the assistance of a mediator and how to successfully participate in a mediation.

The Basics

Bankruptcy courts have authority to order mediation.[1] Mediation is a collaborative process in which a “neutral” guides the parties toward voluntary resolution.[2] The neutral may either be another bankruptcy judge or a trained mediator. The parties in a mediation may craft a resolution on terms a judge could never order. The process is confidential; the mediator may not reveal details of the mediation to the trial judge, and a party may not use information obtained through mediation against the other party at trial.[3]

Practical Considerations

• Local Rules and Practices: These vary widely by district and by judge. You should familiarize yourself with local rules and practices before requesting mediation in a consumer case.
• Types of Disputes: If the facts and the law are difficult or unsettled, or if the parties are highly emotional, parties have more difficulty assessing the risks of going to trial. A mediator can help parties understand those risks and overcome emotional obstacles. Family feuds, divorce-related disputes, stay and discharge violations and determinations of dischargeability are good examples, as are cases with pro se parties or parties unfamiliar with bankruptcy. Multi-party disputes with competing interests may also benefit from mediation (e.g., a trustee with an interest in the property that is also the subject of a dispute between a debtor and a creditor). On the other hand, don’t mediate a case if trying it will take less time. Also, objections to discharge are difficult to mediate successfully. A § 727 complaint cannot be dismissed without notice and court approval, meaning another creditor or party in interest has the right to pursue the complaint the settling party otherwise agreed to dismiss.[4]
• Timing: Mediation offers the advantage of settling without the expense of discovery and trial preparation, but this advantage is wasted if you wait until the eve of trial to request it. Plus, the trial judge may see it as a tactic and deny the request. But for a mediation to be productive, the parties must have shared a certain minimum amount of information needed to understand the claims and defenses. For example, a mediation involving emotional distress damages for a stay violation will likely not succeed unless the medical bills have been produced; the mediator and the parties will not be able to assess the trial risks. It is typically better, however, to let the judge know you are considering mediation earlier rather than later. Once each party has enough information to mediate meaningfully, ask the judge to abate other formal discovery and deadlines pending the outcome of the mediation to hold down litigation costs.
• Judge vs. Private Mediator: Many bankruptcy judges are willing to mediate for each other, even across district lines, and many are exceptionally skilled mediators. A judge mediator doesn’t charge mediation fees, an important consideration in consumer cases. Some emotional or unsophisticated parties are more willing to listen to a judge, and a judge may offer helpful guidance about the likely legal result if the matter does not settle (known as “evaluative” mediation). Bankruptcy judges cannot, however, mediate purely state court matters[5] and may not have authority to compel necessary state court parties to participate. Some parties prefer just “to tell their story” (the “facilitative” method) rather than be told the likely result. If you choose a private mediator, prepare your client for the likely costs, although often a mediated settlement will include a provision requiring one side to pay the mediator fees.

Ethical Considerations

• Preparing for Mediation: If ordered to mediate, you have a duty to prepare and to prepare your client.[6] Bankruptcy courts have authority to sanction parties for “bad faith” participation in mediation.[7] A party’s failure to settle is not necessarily bad faith. But you may be sanctioned for failure to comply with court-ordered deadlines,[8] failure to cooperate or to appear,[9] attendance without a representative with sufficient settlement authority[10] or for otherwise sabotaging the mediation.[11] It is also bad faith for a debtor to propose a chapter 13 plan reneging on a settlement agreed to in a previous mediation.[12]
• Documenting the Settlement: You have an ethical duty to abide by your client’s settlement decisions.[13] But if your client agrees to settle, you must be sure to document it carefully and fully. Don’t allow your clients to leave the mediation until the settlement has been reduced to writing signed by all parties or put on the record. Remember to include all key terms and all contingencies, such as if the settlement is contingent on court approval[14] or is subject to being reduced to a formal settlement agreement. Unlike in mediated commercial disputes, many consumer settlements may not need a formal settlement agreement and can be effectively implemented with an agreed order of dismissal with prejudice, but be sure to specify who will prepare the order and the deadline to submit it. If the settlement requires payment of money, the agreement should address when and how the money will be paid, including whether there are liens against the settlement funds to be satisfied. Bring the taxpayer ID and wire instructions for the account to which the funds will be paid. The last thing anyone wants after a settlement has been reached is further litigation about settlement terms.

Conclusion

Mediation can help parties craft a creative, win-win resolution without the expense of going to trial. This is as true in consumer cases as it is in commercial ones. The next time you can’t settle a consumer dispute on your own, consider asking your bankruptcy judge to order mediation.