Part I of this preference action mini-series discussed preference basics, defining what constitutes a preference and outlining claims and defenses.  This post sets forth tips for mediating preference actions from the standpoints of the mediator and practitioner.

For The Mediator

  • Calculate whether the preference claim was brought within the relevant statute of limitations.  In general, the statute of limitations for preference claims is 2 years from the date the bankruptcy was filed.
  • Submit proposed mediation procedures to the bankruptcy court for approval, if necessary in your jurisdiction.
  • Notice the mediation between 35 and 40 days before the hearing date:

“[T]he mere noticing of a case for hearing can cause parties to settle in advance in order to avoid the time and expense of attending the hearing.” -Interview with Lester J. Levy, Esq., ABI Journal, Vol. XXII, No. 3 (April 2003), http://www.jamsadr.com/faq-on-bankruptcy-mediation-04-01-2003/.

  • Hold a pre-mediation conference and encourage the parties to exchange key pieces of discovery.
  • Familiarize yourself with the claims and potential defenses available to the plaintiff and defendant, respectfully.  Understand options for the settlement of preference claims (See example settlement options in Practitioner section below).
  • Understand what transactions constitute a preference.  If a transfer constitutes a preference, it is always a preference subject only to the establishment of certain defenses.
  • Request that the parties submit claims analyses (if completed), including any ordinary course or new value analyses.  This will help you assist the parties in whittling down preference exposure to establish an agreed upon preference amount and move toward settlement.
  • Request copies of any stipulations to which the parties have agreed.  For example, if the parties have agreed that 5 of 10 transactions are subject to the new value defense, that is significant to the mediation process.  You can then help them focus on resolving the dispute surrounding the remaining 5 transactions instead of starting from all 10.
  • During the mediation, use caucusing to address the strengths and weaknesses of plaintiff’s preference claims and defendant’s potential defenses.
  • During the mediation, address and work through the relationship of the parties from inception through the date of the preference claim, including:
    • Payment terms (i.e. was payment expected 30 days or 90 days from each invoice);
    • The actual payment history (i.e. the payment terms may have been 30 days from invoicing, but debtor always actually paid 45 days from invoicing); and
    • Any changed payment terms (i.e. the creditor implemented prepayment or cash-on-delivery terms, which are additional defenses to preference claims).
    • If not already addressed and stipulated by the parties, assist them with establishing a timeline regarding key dates surrounding the subject transfers.  Two pertinent standards relevant to timing issues follow:
        1. Generally, the date of the transfer is the standard for determination of whether the subject payment constitutes a preference.
        2. When the transfer is made by check, the date the check clears, rather than the date that the check is delivered to the creditor, is considered to be the transfer date.  Barnhill v. Johnson, 503 U.S. 393, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992).

For The Practitioner

  • Seek agreement on the use of a neutral or mediator early in the litigation process:

Use of a neutral in the early phases (when the claim is first asserted by a trustee or debtor-in-possession) has many advantages. A respected neutral can be an agent of reality. Necessary discovery can be accomplished in an effective, less costly manner. Preparing for the session can cause the parties to focus on the likelihood of prevailing as weighed against the cost of trial sooner than court adjudication would promote. Costs and delay are factored into any mediated settlement. Mediation may bring a quick end to the dispute. Even when used at a later date, mediation may help to avoid the delay and expense of a trial or to minimize the disputed issues to be tried.

MWI, Bankruptcy & Finance FAQs, http://www.mwi.org/bankruptcy-faqs.html#1 (citing to ABI Guide to Bankruptcy Mediation, Second Edition (ABI, 2009), written by Jack Esher, Lisa Fenning and Erwin Katz).

  • Understand what transactions constitute a preference.  If a transfer constitutes a preference, it is always a preference subject only to the establishment of certain defenses.
  • Complete and know your client’s and the opposing party’s defenses and positions.  For example, it is important to know whether additional discovery will be necessary.  If the exchange of an additional canceled check or wire transfer would help to narrow the disputed amounts or your client’s preference exposure, this could likely positively impact the mediation process.
  • Understand your client’s ordinary course and new value analyses, and then analyze the opposing party’s responses.   You do not want to be caught off guard with new information presented by the other side during the mediation that your client had not factored into its analysis.
  • Request that a default provision be included in any order establishing mediation procedures, which will detail how the parties and bankruptcy court will proceed if a party does not appear for the mediation.
  • Attempt to negotiate stipulations with the opposing party, regarding timing issues (i.e. relevant transfer dates), ordinary course of business issues (including standards for industry and relationship between the parties), key transfer dates, amount of new value provided (i.e. contemporaneous exchanges and subsequent new value), and any remaining preference exposure.
  • Know whether the parties agreed to any new terms at any point in the payment relationship.  For example, if the alleged preferential transfers were made on a prepayment or cash-on-delivery basis that is an additional defense to a preference claim.
  • Know your settlement options and authority.  The following are options:
  • Dismissal with prejudice based on establishment of reduced or no remaining preference exposure;
  • Payment of portion of alleged preference at outset (i.e. 30-50% of claim);
  • Negotiation for payment of portion of remaining preference exposure after performing ordinary course or new value analysis;
  • Offering waiver of prior filed proof of claim or claim for settlement amount for dismissal of preference claim; and
  • Including proof of claim for any settlement amount as required settlement term in exchange for higher payment on alleged claim.

Although not exhaustive, I hope these tips are helpful to the mediation of your next preference action.  Please share your thoughts or favorite tips for settling preference actions.