Use of mediation in bankruptcy on the rise

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Mediation in bankruptcy cases is becoming more common, as judges and lawyers discover how it can prevent the loss of millions in litigation costs in large, complex cases. Settlement of a recent Virginia construction dispute in bankruptcy court demonstrates mediation can be a useful tool in smaller cases, as well.

This method of dispute resolution, which is common in civil litigation, is gaining traction in the bankruptcy arena, one bankruptcy judge said.

Richmond lawyer David G. Browne said he was relieved to mediate a bankruptcy dispute where projected litigation costs threatened to consume all the money at stake.

The spat arose from a large Richmond area residential real estate project. Browne’s client, a site contractor who wishes to remain anonymous, filed a mechanics lien on the property after a dispute with the owner. The owner put up a bond for the lien and then declared bankruptcy.

A cash bond worth $130,000 cash bond was worth a fight, according to Browne. But the stake was too small to take it to trial. “It would have taken $50,000 of legal time on each side to litigate and try the case,” he said.

Instead, Norfolk U.S. Bankruptcy Judge Stephen C. St. John was named to work with the parties to get the claims sorted out. After a February session with St. John, the two sides agreed on a split of the bond money. “We ended up getting the majority of the bond,” Browne said.

Browne said more lawyers ought to know about the possibility of court-approved mediation in smaller cases. He said he talked with other attorneys who practice in the Richmond bankruptcy court – one was not even aware that mediation was available.

“It is a tool that I think makes a lot of sense in cases where there is a modest amount in dispute, but the case would be very expensive for both sides to litigate and actually try,” Browne said.

Richmond bankruptcy lawyer Ronald A. Page Jr. said the availability of mediation is not unknown among the bankruptcy bar, but may be overlooked. “It doesn’t get as much play as it otherwise would because bankruptcy practice is so fast,” he said. Mediation is not used enough, he added.

As bankruptcy lawyers get educated about the potential of mediation, they are using the methods to resolve cases, said Richmond’s Roy M. Terry.

Terry said he recently resolved a civil claim through mediation in a real estate bankruptcy case.

U.S. Bankruptcy Judge Kevin R. Huennekens has overseen cases big and small where mediation has kept the debtor’s estate from being chewed up in litigation. “It’s an inexpensive way of resolving complicated problems without everybody losing their shirts,” he said.

Huennekens suggests mediation may not be as common in bankruptcy because it’s not required in every case and bankruptcy is such a specialized practice area. “It requires a mediator to be informed on bankruptcy issues,” he said.

Huennekens generally appoints fellow judges to serve as mediators, bringing their knowledge and expertise to the table. Many times, he said, a judge-mediator will tell the parties, “Look, the likely outcome is going to be this,” perhaps reinforcing a message a lawyer has been trying to deliver to a client.

Mediation also can bring focus to the discussion process, Huennekens said. Parties get bogged down on side issues that will not ultimately resolve the case, or leave out critical players. “Mediation can be very helpful in that fashion to get the parties to focus on the right issue rather than arguing over their particular issue,” he said.

In 2009, Huennekens appointed a mediator in the complex LandAmerica Financial Group Inc. case, where a lot of investors lost money. “There were a lot of very angry people involved, as they had every right to be.” The anger, he said, clouded people’s judgments.

Through a two-stage mediation process, the creditors’ committee and the debtor worked out a proposed plan of reorganization for the company. When it was put to a vote, Huennekens noted, every class of creditor voted in favor of the plan.

“That was a very successful situation,” he said.

“We do encourage the parties to mediate from time to time,” Huennekens said. Most of the time it’s a voluntary process, but he’s not reluctant to order the parties to the bargaining table when appropriate.

Huennekens ordered mandatory mediation in the pending Circuit City Stores Inc. bankruptcy where around 600 adversary proceedings were filed challenging the retailer’s transactions leading up to its bankruptcy filing.

“What I did was require the parties in each one of the cases … to actually sit down with a mediator before we litigate those cases. So far, we’ve not litigated one,” Huennekens said. “The process seems to be working pretty well.”

Huennekens did not use sitting judges for the Circuit City mediations, instead forming a panel of experienced bankruptcy lawyers.

In the Western District, Chief Judge Ross W. Krumm also has referred many bankruptcy cases to mediation, albeit with a slightly different procedure. Once the parties agree to mediation, the case is put in the hands of the chief district court judge, who then makes a referral of the disputed matter to one of the U.S. magistrate judges.

The case returns to bankruptcy court after the magistrate judge conducts the mediation and reports on the outcome.

One expert in the field urges judges to let the parties themselves pick the mediator.

Robert Niemic is a retired senior research associate at the Federal Judicial Center.

“The preferred method is to put the power in the hands of the parties and let them select the mediator that they’ll feel comfortable with, and then that’s also the first step towards agreement, where they can agree at least on who the mediator will be,” Niemic said.

One bankruptcy judge overseeing a sensitive and difficult case turned to former New York Gov. Mario M. Cuomo to try to get the parties together. Cuomo is serving as mediator in a $1-billion dispute between the owner of the New York Mets and the bankruptcy trustee trying to reel in money for the victims of Bernard L. Madoff’s investment fraud.

Bankruptcy Judge Burton R. Lifland said the special issues in the case required “an appropriately experienced mediator.”