Category: Bankruptcy Mediation, Specifically . . .


You should

Mediators are often turned to only during the late stages of a case (i.e. the courthouse steps before trial, when the deal is falling apart), or after negotiations have failed.  But there is great value in getting a mediator involved in the early stages of litigation and transactional matters.  The bankruptcy world is blessed (or burdened!) with both types of matters.  Mediators can assist with focused negotiation sessions, case management and overall case or deal pre-planning.

Here are a few more ideas on how a mediator can help your case or deal run smoothly, sooner rather than later:

  • Plan for and collection of discovery, due diligence and informal exchange of information
  • Negotiation of memorandum of understanding in transactional matters (i.e. M&A, 363 sales, distressed entity deals)
  • Identification of other professionals, including experts (i.e. valuation experts, appraisers, crisis communication/PR firms) and neutrals that will be useful to the deal or future litigation
  • Discussion of procedural needs
  • Drafting boilerplate language for agreements (i.e. asset sale, closing documents, settlement agreements, cash collateral documents)
  • Identifying key disputed issues and witnesses, or stakeholders
  • Assessing strengths and weakness of a deal and case, or the parties interests and positions regarding same
  • Pre-bankruptcy planning
  • Resolving plan and disclosure statement disputes
  • Resolving feasibility or budgeting disputes
  • Management of dissolutions, wind downs and “going-out-of-business sales” (liquidations)
  • Negotiations between the debtor-in-possession (DIP) and secured creditors prior to filing and at the inception of a case
  • Negotiation of key employee retention plans (KERPs) and other compensation issues
  • Identifying (an agreeable) “stalking horse bidder”
  • Preparing for an auction process

So, start thinking outside of the box.  The returns could be invaluable.

Want more information? Go to, http://www.thelegalfreeagent.com.

Post based on ideas expressed in:

Lande, John, Lawyering with Planned Early Negotiation: How You Can Get Good Results for Clients and Make Money, ABA (2011).

“Anderson Christian School and the Lindberg Road Church of Christ have asked for mediation in a complicated bankruptcy case stemming from a failed financing plan, where church leaders took out life insurance policies on 11 of their older members.”

 

Follow this link for the entire story, http://www.wishtv.com/dpp/news/local/north_central/church-school-eye-bankruptcy-mediation.

 

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.

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.

 

“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).

  1. Be selective.  Choose “an effective, knowledgeable and reliable mediator, otherwise all parties involved will suffer.”  For bankruptcy mediation, specifically, it may be necessary to look for experienced bankruptcy attorneys and judges to serve as mediators.  Selection of a bankruptcy practitioner or judge, however, is dependent on the issue at hand.  For example, it is likely more crucial to seek a mediator with background knowledge of plan confirmation matters if that is the basis of the dispute, as opposed to the mediation of mass tort or personal injury claims.
  2. Explain the mediation process to your client prior to your first session. “Attorneys should explain to clients that they are not required to agree to any terms they are not comfortable with and that mediation involves a lot of give and take for all . . . parties involved.”
  3. Know your case, its strengths and weaknesses and explain same to your client.
  4. Familiarize yourself with the applicable law, procedures and local rules, so you “can comfortably resist any effort by a mediator [or the opposing side] to [suggest or] impose unfavorable terms on your client.”
  5. Know your settlement authority before beginning the mediation.  Better yet, bring a client representative with settlement authority.
  6. Know when and when not to use mediation.  Remember, a mediation “cannot establish legal precedent or deter future parties from bringing similar claims. . . .  Mediation may also draw out a process that may have been quickly adjudicated if before a bankruptcy judge.”  Also, if your client truly is not willing to mediate to attempt a settlement, then the process will be futile.

Source:

Quotations and excerpts from, Kim, Ji Hun and Nicholas M. McGrath, Mediation: Can’t We All Just Get Along?, ABI Journal (Sept. 2011), at 52-53, 61 (citations omitted) (some internal quotation marks omitted).

Consider this scenario:

Critical Vendor  (“Critical”) has been doing business with Great Expectations Theater of International Talent  (“GETIT”) for over 20 years.  Actually, Critical has been in the trenches with GETIT since its opening.  Over the years, Critical has supplied dance shoes (i.e. ballet slippers, tap shoes, jazz shoes), leotards, tutus (similar to the multitude of taffeta and mesh skirts trending now), stage make-up, lighting, props and music (on cassette, CD and MP3 formats).  There was never a time when Critical could not meet GETIT’s supply demands.  For the first 15 years of the business relationship, GETIT timely paid every invoice and used Critical for all theater and production-related needs.  GETIT provided Critical with so much business that GETIT was always Critical’s top customer and frequently its only customer.  The owners of each operation also became close friends and often took family vacations together.  Their children were around the same ages and attended the same schools.

The last five years, however, have not been as copacetic.  You see, with the combination of in-home entertainment, the nearly bottomed-out economy and sundry reality TV options, audiences were no longer flocking to GETIT’s productions.  Sales receipts and annual memberships were down.  GETIT went from nightly shows and matinees on each weekend day to three shows per week.  Then, eventually, one show per week.  During that phase, Critical’s owner donated supplies, heavily discounted bills and offered to invest in GETIT, all to save the company she essentially helped to build for 15-20 years.  Plus, she wanted to help her friend, to whom she attributed much faith and loyalty, and could not bare to see GETIT collapse.  Even in light of her willingness to help, Critical’s owner was still a “savvy” businesswoman and often felt foolish for financially helping a friend’s company.  She knew that could be a significant mistake and could negatively impact Critical.  But she did it anyway, while periodically asking GETIT’s owner if she was contemplating bankruptcy.  GETIT’s owner always shrugged off such inquiries, but offered a trifling bit of reassurance, saying, “If I do decide to file, you’ll be the first to know.”

Turns out, Critical’s owner was not the first to know.  Indeed, she did not learn of GETIT’s Chapter 11 filing until she received a copy of GETIT’s petition and schedules in the mail.  Critical was listed in GETIT’s schedules and a related motion as a critical vendor with a sizable prepetition unsecured claim.  Although the practical benefits of retaining a critical vendor in restructuring and reorganization proceedings is to avoid the disruption of the debtor’s business, Critical wanted out.  Critical’s owner knew that her prepetition unsecured claim could be zeroed out, or at best, receive only pennies on the dollar.  If GETIT’s motion was granted, Critical would have to continue to meet GETIT’s supply demands.

Therein lied the dispute.  Critical heavily objected to GETIT’s motion to approve its proposed critical vendor status, which led to thousands of dollars of motions practice and litigation.  Prideful and equally humiliated, the parties refused to speak during the contentious time, but eventually agreed to mediation.

The bankruptcy court-approved mediator worked diligently with the parties to guide them to a resolution.  Upon the parties’ impasse on several occasions, the mediator continued the mediation and followed up with the parties after the failed sessions, which brought the parties back to the table each time.  Frustrations, anger and even rising prejudices by Critical’s and GETIT’s counsel, stalled each attempted mediation session.  Not to be deterred, the mediator took one last shot at getting the parties to a potential resolution and pondered what method or tactic might work best.  Finally, she believed she knew the true basis of the contention.

She went into a caucus, or private meeting, with each party.  In the caucus with Critical’s owner and counsel, she looked Critical’s owner squarely in the eyes and said, “I think what you are seeking from this is something deeper yet more basic and personal than all of the legal issues you all have tossed back and forth for months.  Tell me what that is.”  Critical’s owner peered back at the mediator; her eyes revealed the competing emotions of perplexity, anger and relief.  Finally, she said, “All this time, I just wanted GETIT’s owner to apologize.  She never said, I’m sorry.  She drug me into this.  I asked many times if she was planning on a bankruptcy and she gave me no heads up.  She told me she would.  I took her word.  Now, my business is on the brink of collapse, and she never even said, ‘I’m sorry.'”

At the end of the day, GETIT’s owner delivered the long-awaited words, “I’m sorry,” and the parties moved forward to an agreement.
So, what’s the moral of the story?  Sometimes, the legalities, the substantive law, bankruptcy code and rules are not enough.  Often, the “Golden Rule” wins out.  When faced with these types of circumstances as a mediator, or practitioner representing emotionally torn, humiliated and embattled parties, start with that rule first.  You’re likely to avoid the complexities of pride and prejudice.  Get it?

Let me know how you would you have handled this situation.

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.

Reading the new reports, it strikes me as ironic that this attempt at resolution and restoring peace among the parties, failed in a bankruptcy where the principal party involved is one that is frequently called as a mediator, or neutral.

What are your thoughts on why and how this attempted settlement and mediation failed?

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).

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According to the Kentucky Department of Agriculture, hundreds of claimants in the Eastern Livestock Co., LLC, involuntary Chapter 11 bankruptcy proceeding will have the opportunity to participate in a global mediation on October 9-10, 2012 in Louisville, Kentucky.  On December 6, 2010, certain creditors commenced an involuntary Chapter 11 proceeding against Eastern Livestock, a cattle brokerage, related to a so-called check-kiting scheme.  The petition came on the heels of Fifth Third Bank’s freezing the company assets and those of its primary owner, which resulted in a subsequent receivership and the filing of the involuntary petition.  In early 2012, Eastern Livestock executives admitted to “falsely inflating the balances of bank accounts held by the company between 2009 and 2010, essentially allowing company officials to buy cattle from producers with nonexistent funds.”  Eastern Livestock’s creditors include cattle farmers, markets, truckers and veterinarians, with claims totaling in the millions.  At least four former Eastern Livestock executives, including the owner, were indicted and eventually sentenced to prison terms (with three sentences withheld on the condition that the individuals would pay restitution) for their actions related to the scheme.  On September 24, 2012, Robert M. Fishman was appointed as mediator by the U.S. Bankruptcy Court for the Southern District of Indiana.

Sources:

Quotation from Justin Story, Farmers will get restitution checks, The Daily News, http://www.bgdailynews.com/news/local/farmers-will-get-restitution-checks/article_b36019d0-99f8-11e1-ad66-0019bb2963f4.html (May 9, 2012).

Janet Patton, Cattle farmers get mediation in Eastern Livestock bankruptcy, http://www.kentucky.com/2012/10/07/2363832/cattle-farmers-get-mediation-in.html (Oct. 7, 2012).

Kevin Eigelbach, Eastern Livestock founder sentenced in fraud case, Business First, http://www.bizjournals.com/louisville/news/2012/06/26/eastern-livestock-founder-sentenced-in.html (June 26, 2012).

Eastern Livestock Bankruptcy (website and trustee’s blog), http://www.easternlivestockbkinfo.com/index.html.

Now that you know that bankruptcy and mediation can and do coexist, you may be wondering what benefits bankruptcy mediation yields.  Although not limited to just the following, I have identified six of the top benefits of bankruptcy mediation:

  1. Confidentiality Protected– “A firewall to protect confidentiality can be raised by the specific terms of a court order or by mediation rules under which it is agreed that the procedure is conducted.  If confidentiality is so protected, then the particular terms of the order, or specifics in the rules, govern the degree to which communications are privileged and not discoverable.”
  2. Cost Reduction– Reduces discovery, transactional and litigation costs.
  3. Efficiency– Bankruptcy cases are typically on a faster track than proceedings in other courts due to the necessity of streamlined estate administration to move the debtors closer to plan confirmation and/or discharge.  The use of mediation or other forms of alternative dispute resolution in adversary proceedings or contested matters may shorten the amount of time the bankruptcy estate is open.
  4. Judicial Econony– Mediation can reduce the number of pending matters in any given bankruptcy proceeding.  For example, in bankruptcy proceedings with multiple preference actions, a mediator can work with the court to approve the implementation of procedures allowing for mediation of pending preference actions on a rolling basis to resolve the more complex issues that the parties could not settle through negotiations by cousel.  Mediation has been used in bankruptcy cases involving anywhere from 250 to 1,500 preference actions.  Additionally, “[m]ediation in large bankruptcy cases may resolve disputes which otherwise would block confirmation (e.g., disputes resolving claims or plan negotiations). . . . Mediation can be employed in Chapter 11 plans where parties are at an impasse.”
  5. Settlement– Mediation allows parties to “retain control over the method of dispute resolution and the outcome.”   Because mediation is voluntary, the affected parties decide how their disagreement will be settled.
  6. Utility– For example, significant portions of discovery, or at a minimum, key documents will generally be exchanged in advance of the mediation.  Through mediation, the parties can determine what documents will provide information necessary to make informed decisions regarding settlement.  Mediators can also assist with the resolution of discovery disputes, guide the parties toward stipulations of fact, or point to additional documents for production prior to a trial or hearings on contested matters.

What are your top three benefits of using mediation in bankruptcy proceedings?

Sources:

Quotations from Thomas H. Oehmke, J.D. and Joan M. Brovins, J.D., Arbitration and Mediation of Bankruptcy Disputes, 105 Am. Jur. Trials 125 (2007).

Interview with Lester J. Levy, Esq., ABI Journal, Vol. XXII, No. 3 (April 2003).

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