Bankruptcy mediation on the rise

A decade ago, only a handful of bankruptcy courts around the country had mediation programs. But that’s changing.
Long associated with family law disputes and litigation generally, mediation programs were slow to catch on in complex business cases, including those in bankruptcy matters.
But now more than two-thirds of the 90 federal bankruptcy courts have mediation available, according to Robert Niemic, senior attorney at the Federal Judicial Center. Even more offer some other form of alternative dispute resolution, such as judicial settlement conferences.
Niemic said mediation is well-suited to bankruptcy cases, which typically involve financial disputes between creditors and debtors.
“When you’re dealing just with money it’s easier to come to a resolution because there are not miscellaneous issues that can cause problems,” he said.
In the U.S. Bankruptcy Court for the Central District of California, more than 3,800 cases have been referred to mediation since 1995. About 64 percent of those cases were resolved through settlements.
To keep costs down, the first day of mediation is free. Parties choose from a list of 200 attorneys and non-attorneys, such as accountants and financial experts, who volunteer as mediators.
Chief Bankruptcy Court Judge Barry Russell, who launched the mediation program in 1995, said that most cases settle in a day, producing major cost savings for both the court and the parties involved.
Veteran mediator Jacob Esher from Cambridge, Mass., said mediation programs have also been successful in bankruptcy courts in Delaware and the Southern District of New York, both of which have a large volume of cases.

Resistance among attorneys

In some states, however, bankruptcy mediation programs have been less successful.
Maryland, for example, has had a program for six years. But so far, only a few cases have been referred to mediation.
“It’s not been a big, overwhelming success,” said Baltimore Bankruptcy Court Judge James F. Schneider.
Although the state’s bankruptcy bar requested the mediation program, not many attorneys use it, according to Schneider.
Marc Scurti, an attorney with Hodes, Pessin & Katz in Towson, Md. and a volunteer mediator, has mediated two bankruptcy cases. One involved a Chapter 13 mortgage claim in which the debtor alleged the mortgage company charged inappropriate fees. The other involved domestic support obligations in a personal bankruptcy case.
“I didn’t think it was any different than other types of mediation,” Scurti said. “You apply the same rules, same procedures. All the parties had attorneys, and each party felt like they were on a level playing field.”
Several experts said both judges and attorneys need to be better educated about the value of mediation in bankruptcy cases.
“Some of it is not being cognizant of how the mediator teams up with attorneys in a case to produce a working effort toward settlement,” Esher said. “Once a proceeding shows that it’s going forward with litigation and settlement prospects have been tried and are not going to happen, then there is no reason not to try mediation because there’s very little to lose and not a lot of time to be invested.
“Bringing a neutral person in to act as a settlement broker in the process can very much avoid a lot of the reasons why settlements fail,” he said.
Russell said the 21 judges in the Central California bankruptcy courts have the option of ordering cases to mediation, but that the vast majority of mediations are voluntary.
When the program first started, certain cases, such as objections to discharge or fee disputes, were excluded. But the judges have since agreed that mediation can be used in all bankruptcy disputes.
“I decided there was really nothing that couldn’t be resolved through mediation,” Russell said.

‘Shuttle diplomacy’

Bankruptcy mediation is essentially the same as mediation in other types of cases.
A neutral person acts as the mediator. Everything that’s said in the session is confidential. Sometimes, there is an exchange of mediation statements, either to the mediator exclusively or to all parties.
The mediator typically talks to each side separately. Then the parties and the mediator meet together, and the mediator asks each side to tell its story.
“It’s best if the client tells the story rather than the lawyer, because then it’s less legalistic in its form,” Niemic said. “And [what] the mediator will encourage and the wise attorney representing someone in mediation will encourage is that the parties not talk about the law and positions, but interests – what they really care about and what they want out of the mediation.”
After hearing from both sides, the mediator splits the parties up and meets with each side separately.
“Then there’s generally a shuttle diplomacy, where the mediator continues those caucuses and tries to bring the parties to settlement,” Niemic explained
If it appears the parties are going to settle, the mediator brings them back together and drafts an agreement that will be submitted to the judge.
Russell said mediation helps diffuse much of the emotional angst involved in litigation.
“When you are part of the solution, rather than being opposed, you’re going to be much happier, much more satisfied with the legal system,” he said. “And at the end of the day, if people are happy, they’re much more likely to live up to whatever the agreement was.”