Archive for November, 2012


To follow-up on my October post, “Could the NHL Lockout Benefit from a Mediator?,” as of Monday, November 26th, the parties reported an agreement to mediate.  Three neutrals from Federal Mediation and Conciliation Service have been assigned.  The sides met separately with the mediators on Wednesday, November 28th.

“Hockey players and management have not negotiated since last Wednesday [November 21, 2012]. The NHL has canceled more than one-third of its regular season, including all games through Dec. 14, the New Year’s Day outdoor Winter Classic and the All-Star weekend scheduled for Jan. 26-27 at Columbus, Ohio.”  NHL Lockout 2012: Federal Mediators Set To Join Stalled Labor Talks, The Huffington Post, http://www.huffingtonpost.com/2012/11/26/nhl-lockout-2012-federal-mediators_n_2194463.html#slide=1663482 (Nov. 26, 2012).

Although many may be satisfied with what seems like progress between the parties in agreeing to mediate in the first instance, others note that the mediation may not guarantee a successful end to the lockout.

Gary R. Roberts, dean and professor of law at Indiana University, and sports labor law specialist (and also my former Sports Law professor at Tulane), provides this take:

My guess is just based on past history and the tone of the way things are going right now is that this is probably not going to produce a settlement . . . . This isn’t like a hysterical couple doing divorces or a commercial dispute where one side or the other is just being totally unrealistic. These are two very sophisticated and experienced groups. I just don’t see how much a mediator can bring to the table other than to remind them of what’s at stake periodically. . . . Who knows how many seeds the mediator might plant that could eventually bear fruit . . . . It’s hard to predict. . . . Mediation tends to me a mechanism whereby tempers can be cooled, and people who are operating from unrealistic perspectives can be brought to see what reality is . . . . It sounds like they’re pretty much at an impasse . . . . Both sides have their perspectives and their objectives and neither side can accept a set of proposals that the other side insists is necessary. We really are at sort of a standstill.

Stephen Whyno, NHL lockout 2012: Reality is, mediation might not solve anything, The Washington Times, http://www.washingtontimes.com/news/2012/nov/27/nhl-lockout-2012-reality-mediation-might-not-solve/#ixzz2Dg1aKVWO  (Nov. 27, 2012).
“About $182 million apart on core economic issues, there’s further disagreement on matters such as contract length (players want none while owners want to institute a five-year limit) and arbitration rights.”
-Whyno (article link above).
Can a mediator bring them together?  What’s your take?
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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.

Actually, for me, it was a Suzy Q.  You see, I had a “friend” that I frequently shared lunch with in elementary school.  She bought the school lunch and I packed my lunch (except Thursdays–pizza day!).  My parents filled our lunches with healthy, nutritious foods.  But, occasionally, we received a treat in our lunches as well.  When my mom brought home that Suzy Q, I lost it.  Oh, the decadence.

Well, by “lost it,” I don’t mean that I jumped for joy, or sang my mom’s praises.  I sat down on the steps leading from our kitchen to our family room and burst into tears.  I just couldn’t bare to share my delectable treat.  So, I spilled all the beans.  Finally, my mom understood why I was so hungry after school.  Half of my lunch had been someone else’s midday nourishment.  That stopped the very next day.  MY Suzy Q gave me the power to take back all of my lunch!

Similar to my tale, the current news on the Hostess Brands, Inc. financial demise, mediation and imminent liquidation has sparked up nostalgia.  Across the country (and likely the world), people are remembering their favorite Hostess treats, with several reclaiming them in hoards at local stores last week.  Suzy Qs are even being sold on eBay!  I haven’t had a Hostess treat in years, but I remember the taste well.

It’s been said that Twinkies have a shelf life of 20 years or more–a common urban legend, I suppose.  Our Twinkies survived the days of being tossed in paper sacks or metal lunch boxes with the likes of ET, Care Bears, GI Joe or Barbie gracing the outside.  They were kept in our paper lunch sacks or boxes, with a collection of other lunches, in our classrooms or classroom coat rooms.  There was no refrigeration for our lunches or cold packs to keep them at the right temperature until the school bells signaled the start of the lunch hour.  Indeed, the closest thing we had to a cold pack was a thermos that frequently allowed us to carry warm soup to school for lunch, or better yet, “lukecold” milk.

So, if our Twinkies could survive all of that, I am certain they will survive this.

What was your favorite Hostess treat?

A) Twinkies

B) Ding Dongs

C) Crumb Cakes

D) Ho-Hos

E) Other

Be sure to follow current events on the Hostess Brands, Inc. bankruptcy under the Roll Call tab.

My definition of bankruptcy mediation is below.  What’s yours?

The process by which a neutral third-party facilitator assists parties in the negotiation and resolution of bankruptcy-related disputes that can be available at any point during a commercial or consumer bankruptcy proceeding when: (1) the parties and their legal counsel agree to participate in the mediation process, and (2) the process is approved by the bankruptcy court.

 

Below is an outline of the basic mediation process and the potential order of events during mediation:
•Beginning the Mediation
• Mediator allows for introductions and sets forth ground rules for the mediation
•Opening Statements by Parties (“Stories”)
•Mediator reviews process of mediation, strengths-weaknesses/cost-benefit analyses for each party
•Caucusing— a useful tool to allow:
• The parties to tell their stories with assumed confidentiality
• The mediator to play the “Devil’s Advocate”
• The mediator to understand party positions and interests
• The mediator to address uneven bargaining positions
•Process/Actual Mediation (“Getting to Yes”)
•Separating the people from the problem
•Focusing on interests, not positions
•Inventing options for mutual gain
•Insisting on using objective criteria
•Resolution/Agreement
•Impasse
•More Caucusing
•Continued Mediation
•Stop Mediation

Picture this . . .Widget Factory has been providing widgets to Small Business for 5 years.  In those 5 years, Small Business paid each invoice within 30 days of receipt.  The past 6 months of payments, however, have been a bit more suspect.  Small Business began making payments over 30 days past the date of invoicing and missed a few payments here and there.  But, Small Business doubled up on a couple of invoices in the last 90 days to catch up.  After struggling financially to keep up with creditors and the demand of its customers, Small Business filed for bankruptcy protection.  Upon review of Small Business’s schedules and questioning during the meeting of creditors, the trustee filed an adversary proceeding to recover the payments made to Widget Factory in the 90 days before the bankruptcy filing.  This is what the bankruptcy world affectionately refers to as a preference action.

The focus of this post, which is Part I of II in a mini-series on mediating preference actions, is to generally (very generally!) define and outline the elements of a preference action.

Preference claims customarily arrive as a demand to repay amounts the creditor received from its customer in the 90 days before the customer’s bankruptcy case . . . . To many creditors, preference claims come as surprises.  After all, there is no dispute that the customer owed the debt and the creditor earned the payment.”  Often, creditors view preference claims as unfair, asking why they should be required to repay monies that were legitimately due and owing to them. Under ordinary business circumstances, this position in well-taken.  But,”[t]he primary underlying principle supporting the return of preferential payments is the fair and equal treatment of all unsecured creditors.  Disgorging payments made is intended to redistribute the bankruptcy estate’s assets equitably among all of the unsecured creditors. . . . [C]reditors who repay preferences will hopefully recover at least a part of what they returned by participating pro rata in distributions with other unsecured creditors. . . . Section 547 does not require ‘intent‘ to receive a preference, notice of insolvency, fraud or any other subjective element.  Because the policy behind the preference statutes is equal distribution, intent or notice is irrelevant.”

So, how do we know if a payment is a preference?  Preferences are defined under Section 547 of the Bankruptcy Code by the following five elements:

  1. A transfer of an interest of the debtor in property to or for the benefit of a creditor;
  2. A transfer for or on account of antecedent debt owed by the debtor before such transfer was made;
  3. A transfer made while the debtor was insolvent;
  4. A transfer made during the preference period (the Bankruptcy Code presumes that a debtor was insolvent in the 90 days before the petition date and the reach-back period is extended to one year for insiders—family members, business partners, etc.); and
  5. The transfer enables the creditor to receive more than if the case preceded under chapter 7.

No, no you say, that isn’t right.  Shouldn’t the creditors have some defense?  Well, of course.  There are 10 of them:

  1. The transfer was made in a contemporaneous exchange of new value to the debtor;
  2. The transfer was made in the ordinary course of business;
  3. The transfer was a security interest in property securing a new value to the debtor;
  4. The transfer was made after the creditor provided new value;
  5. The transfer was a security interest in inventory or a receivable;
  6. The transfer was the fixing of a statutory lien;
  7. The transfer was of an alimony or child support payment;
  8. The transfer was of property with an aggregate value less than $600 in a case involving primarily consumer debt;
  9. The transfer was of property with an aggregate value of less that $5,475 in a case not involving consumer debt; or
  10. The transfer was pursuant to an alternative repayment schedule.

There are also several other defenses that are specific to particular industries, such as grain producers, fishermen and warehousemen.

As you would imagine, the assertion of preference claims and affirmative defenses, lead to a flurry of negotiations, charts, documents, calculations and other supporting evidence to whittle down what amount of the questioned payments are actual preferences, if anything.  This is why preference actions are often the subject of mediation.

Stay tuned for Part II on how mediation can be used in preference actions.

Sources:

Quotations and excerpts from Wheeler, David B., ABI Preference Handbook, American Bankruptcy Institute (2d ed. 2008), at 1, 3, 8–21, 29, 36–38.

11 U.S.C. § 547(b) (Elements of Preference Claim).

11 U.S.C. § 547(c) (Affirmative Defenses).

“A federal judge on Monday handed partial victories to both the Archdiocese of Milwaukee and the sex abuse victims who make up the vast majority of creditors in its bankruptcy.  The ruling, by U.S. District Judge Rudolph Randa, lets stand a February decision by U.S. Bankruptcy Judge Susan V. Kelley dismissing one victim’s claim and allowing two others to move forward, at least for now.”

Annysa Johnson, Judge lets archdiocese bankruptcy abuse ruling stand, http://www.jsonline.com/features/religion/judge-lets-archdiocese-bankruptcy-abuse-ruling-stand-1l7d86f-176360111.html (Oct. 29, 2012) (emphasis added).

_________

Post History

Archdiocese of Milwaukee Chapter 11 Mediation

  • UPDATE- As of Monday, October 15, 2012, it was reported that the mediation in the Archdiocese of Milwaukee Chapter 11 has failed.  Apparently, the estimated 570 victims and archdiocese were unable to reach a settlement.  The parties, however, have not provided any additional details regarding the reasons for the impasse.  As a result, the parties continue to pursue several pieces of litigation related to: (1) reduction of the number of eligible claims, (2) increasing the assets available to pay creditors, (3) the recovery of funds related to a certain cemetery trust created by the archdiocese in 2007, and (4) procedural claims–some of which are on appeal–regarding alleged venue shopping and to make public various discovery, which is currently subject to a protective order.

Sources:

Annysa Johnson, Milwaukee Archdiocese victims fail to reach bankruptcy settlement, Journal Sentinel, http://www.jsonline.com/features/religion/milwaukee-archdiocese-victims-fail-to-reach-bankruptcy-settlement-ii77put-174278861.html (Oct. 15, 2012).

  • The Archdiocese of Milwaukee, which faces more than a dozen civil fraud lawsuits over its handling of clergy known or alleged sex abuse cases, filed for Chapter 11 bankruptcy protection in January 2011.  Currently pending before the mediator, retired U.S. Bankruptcy Judge Randall J. Newsome, is the issue of whether an estimated 570 victims should be compensated, and if so, the extent of such compensation.  As of October 3, 2012, Judge Susan V. Kelley, who has raised concerns over increasing legal fees, granted a second mediation deadline extension to October 12, 2012.

Sources:

Annysa Johnson, Archdiocese bankruptcy mediation extended, Journal Sentinel, http://www.jsonline.com/blogs/news/172543611.html (Oct. 3, 2012).

Milwaukee Archdiocese, bankruptcy creditors to enter mediation, Journal Sentinel, http://www.jsonline.com/news/milwaukee/milwaukee-archdiocese-bankruptcy-creditors-to-enter-mediation-r960mvk-161244745.html (July 3, 2012).

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