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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).

  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).

Don’t give up on a case too early.

If the parties have not reached an agreement, stick with them after the mediation session ends.  Offer to follow-up and seek updates from the parties regarding any new information discovered and exchanged, and any changes in the parties’ positions.  Follow-up on prior matters you have mediated at least one hour every day.  This could lead to a secondary mediation.

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.

Did you know the following politicians, celebrities and athletes have filed bankruptcy?

  • Abraham Lincoln
  • PT Barnum
  • Buffalo Bill
  • Rembrandt
  • Samuel L. Clemens (“Mark Twain”)
  • Milton Hershey
  • Walt Disney
  • Toni Braxton
  • Lawrence Taylor (“LT”)
  • Dorothy Hamill
  • Tony Gwynn
  • Sheryl Swoopes
  • Marion Jones
  • Gaylord Perry
  • Gary Coleman
  • Corey Haim
  • Cyndi Lauper
  • Larry King
  • Mike Tyson
  • Benedict Arnold
  • Kim Basinger
  • George Best
  • George Clinton
  • Francis Ford Coppola
  • Jim Dooley
  • MC Hammer
  • Wayne Newton
  • Burt Reynolds
  • Henry Ford
  • H.J. Heinz
  • Michael Vick
  • Sinbad

This list is by no means exhaustive or in any particular order.  Looking at this list, it is apparent that some never recovered from their bankruptcies while others had major success after filing.  So, what is a “fresh start,” you ask?  It is one of the purposes of bankruptcy.  Rather than holding on to the medieval debtors’ prison for those unable to pay their debts, the modern Bankruptcy Act and Code, and more recently BAPCPA, embrace the idea of permitting individuals and entities to resolve serious financial troubles and disputes (i.e. become free of most debts as some cannot be discharged) in a forum where creditors can be repaid (although not always in an ideal amount or at all).

This prompts a couple questions:
What does a “fresh start” mean to you?

What have we learned from the foregoing list of celebrities who sought a “fresh start” through a bankruptcy?

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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Even in light of the litigious and adversarial nature of some matters nowadays, many parties are willing to engage in mediation to attempt to resolve matters or various sub-issues.  I have heard from several practitioners, however, that while the mediation process allowed their clients to tell their stories through caucusing and/or facilitative discussions with the other side, the mediation did not yield any significant movement in their interests.  As a result, they left the mediation table still touting their positions and had not moved closer to settlement.  In fact, a few practitioners have stated that they wished the mediator was more helpful in getting their client to understand the weaknesses in their position.  Well, the parties and the mediators in those situations were likely approaching the mediation from different perspectives; perhaps they were respectively viewing the process through evaluative and facilitative lenses (or some other lens).

There are several forms of mediation.  For an effective mediation process, it is important for practitioners to understand each method, agree on an approach for the mediation and communicate the same to the mediator.  So, what types of mediation exist?  There are four widely recognized approaches, although the methods and approaches are not just limited to the following.

First, Evaluative Mediation “is generally understood to be a process which may include an assessment by the mediator of the strengths and weaknesses of the parties’ cases and a prediction of the likely outcome of the case. . . .  Some parties wish to retain an evaluative mediator to help them get an objective view of their case and to prod the parties to reach a reasonable settlement based upon the merits of their case.”  Although every circumstance should be evaluated differently, it is likely that parties mediating bankruptcy-related issues may be seeking more of an evaluative mediation process, because of the need to resolve such matters on a “faster track.”  Further, evaluative mediators are more likely to be chosen for their subject matter expertise, which may be beneficial in the bankruptcy context.  After all, under this approach it would be important for the mediator to know the difference between valuation issues, contested confirmation hearings and preference actions.  Evaluative mediation, however, should not be confused with neutral evaluation, or a neutral evaluator’s approach.  “Neutral evaluation is a disciplined and principled process.  The neutral is chosen for knowledge and experience and listens to the arguments of both sides, researches the matter and comes up with an opinion.”  An evaluative mediator, on the other hand, may or may not give an opinion and/or a proposal for settlement.

Second, Facilitative Mediation is probably the most common approach people think of when they hear the word mediation.  Facilitative mediation is the process by which the mediator “helps parties think about how to work through difficulties and toward a resolution of their own making [if so desired] without outside pressure.”  Under this approach, “[t]he mediator asks questions; validates and normalizes parties’ points of view; searches for interests underneath the positions taken by parties; and assists the parties in finding and analyzing options for resolution.  The facilitative mediator does not make recommendations to the parties, give his or her own advice or opinion as to the outcome of the case, or predict what a court would do in the case.  The mediator is in charge of the process, while the parties are in charge of the outcome.”

Third, Transformative Mediation,  in some respects, appears to be a hybrid of the common approaches.  The distinguishing factor is that the ultimate goal is for the parties to leave the mediation with an improved relationship.  “The parties . . . work with the mediator to determine the appropriate resolution process for their situation. . . . Recognition is generally considered to be an important part of transformative mediation, so that each party can understand how the other one defines the problem.”  This approach is often used to resolve workplace conflicts, because the conflicting parties typically continue to work together.  Transformative mediation, however, could easily be extended to bankruptcy cases where parties such as lenders and debtors, debtors and creditor-suppliers and debtors and landlords need to maintain a continuing relationship during and after the bankruptcy case is closed.

Fourth, “Narrative Mediation builds on the storytelling metaphor.  It is both an approach and a methodology, providing mediators with a way of incorporating stories into the very fabric of mediation.”  This allows parties to move from positions of “victimized and protagonist” and “victimizer and antagonist,” to a shared story without pinning the responsibility for the conflict on any one side.  “This leaves conflict parties with a previously ‘closed’ interpretation (their story) open to new possibilities and interpretations.”  The ultimate goal is that through storytelling, the parties move toward a “new climate of openness [leading] to the genesis of  a new account [story] and mutually satisfying interpretations and outcomes.”

While there are several approaches to mediation, the takeaway here is that the parties should work together to agree on a method, communicate that approach to the mediator and re-evaluate where necessary to change methods given the particulars of their individualized situations and any changed dynamics over time.  Mediators should also be clear to communicate their methods to the parties (whether it be one method or a combination of methods and approaches), encourage the parties to agree on the approach and understand what methods work best for specialized issues, matters and areas.

What method, if any, do you think best suits bankruptcy-related disputes?

Sources:

Zena Zumeta, Styles of Mediation: Facilitative, Evaluative and Transformative Mediation, http://learn2mediate.com/resources/nafcm.php.

Diane Cohen, Evaluative Mediation, http://www.mediate.com/articles/CohenDbl20110321.cfm (Mar. 2011).

What Facilitative Mediation Has to Offer, http://dianecohenmediation.com/site/what-facilitative-mediation-has-to-offer/ (Jan. 2010) (originally published at mediate.com).

Alison Faria, What is Transformative Mediation?, http://www.wisegeek.com/what-is-transformative-mediation.htm.

Toran Hansen, The Narrative Approach to Mediation, http://www.mediate.com/articles/hansenT.cfm (Sept. 2003).

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.

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