Mediation in Bankruptcy: A Glimpse | Fox Rothschild LLP

If you were a party to a lawsuit or a contested matter in a bankruptcy proceeding, would you be interested in working towards settlement with the assistance of an impartial third party, that is, a mediator, rather than take on the significant cost of litigation and going to trial? More and more parties in bankruptcy cases are answering this question with a resounding yes.  See generally, Mediation Matters: The Use of Mediation in Large Chapter 11 Cases (Part I), ABI Journal, August 2023.

It is difficult to track the use of mediation in bankruptcy cases, as participation in mediation may occur informally and/or referral to mediation may not appear on the docket.  Reliance on mediation, at least in chapter 11 cases, appears to have been occurring for decades.  The results of a 2009 survey of bankruptcy judges revealed that “81 percent of judges reported using mediation in their chapter 11 cases in some capacity and plan negotiation was the most common reason for mediation.” Id. (citing Ralph Peeples, “The Uses of Mediation in Chapter 11 Cases,” 17 Am. Bankr. Inst. L. Rev. 401, 406 (2009), available at abi.org/members/member-resources/law-review).

More recently, there is a growing trend of reliance on mediation in adversary proceedings.  Going the route of mediation unquestionably reduces the costs of litigation for the parties.  To facilitate the process, many bankruptcy courts have some provision in their local rules or a link on the website regarding mediation practices.

Some bankruptcy courts, such as the District of Delaware and the District of New Jersey, have mandatory referral to mediation for certain adversary proceedings.   In Delaware, “all adversary proceedings filed in a business case shall be referred to mandatory mediation” with the exception of certain limited types of cases, such as when one of the parties is pro se.  See Del. Bankr. L.R. 9019-5(a).  In New Jersey, “[e]very adversary proceeding will be referred to mediation after the filing of the initial answer to the adversary complaint,” with limited exceptions set forth in the local rules, including, like Delaware, when one of the parties is pro se.  See D.N.J. LBR 9019-2.[1]

Other bankruptcy courts, such as the Northern District of Georgia, “encourage parties to engage in mediation to resolve disputes in adversary proceedings and contested matters.” See Mediation Procedures link under General Information on Northern District of Georgia Bankruptcy Court website (Mediation_Procedures_NDGA.pdf).  Once the parties agree to mediate, they can refer to the guidelines set forth on the court website. No referral to mediation or other involvement from the court is necessary.

Indeed, this informal process in the Northern District of Georgia Bankruptcy Court set the stage, in early August 2023, for Fox Rothschild attorneys to reach a settlement, in principle, of a hotly contested adversary proceeding with numerous causes of action against multiple defendants.  Five years earlier, in August 2018, Fox Rothschild attorneys filed a complaint, on behalf of their client, a liquidating trustee of a post-confirmation trust, against forty-one (41) defendants made up of former directors and officers of the chapter 11 debtor and related affiliated entities and individuals.  In the complaint, the liquidating trustee alleged an assortment of wrongdoing in the span of twenty-eight (28) counts, including breaches of fiduciary duties and receipt of fraudulent and preferential transfers, among other claims.

After defending motions to dismiss, amending the complaint and settling with several defendants, the liquidating trustee was set with the task of engaging in formal discovery with the remaining thirty (30) defendants.  The discovery process was contentious, at best, and abusive, at its worst.  The process was riddled with what seemed like endless disputes and allegations from the defendants about the adequacy of the plaintiff’s responses.  In response to the defendants’ motion to compel discovery, the bankruptcy court ruled that the liquidating trustee had adequately responded to discovery.  Additionally, the bankruptcy court directed that the parties commence the next phase of discovery – taking depositions.  Within several weeks of that ruling, the defendants approached the liquidating trustee about engaging in mediation.

The parties did not involve the bankruptcy court in the mediation process in any way.  As such, neither the main case nor the adversary proceeding docket reflect any notation regarding a referral to mediation or appointment of a mediator.  Instead, the parties consensually selected a mediator, provided comprehensive mediation statements, and participated in two full days of mediator supervised discussions. The parties were able to reach a settlement in principle and began the task of memorializing the specific terms into a written settlement agreement.

It is noteworthy to mention that as result of the settlement reached through mediation, significant costs were avoided.  The costs avoided include not only the trial and pretrial motions, but also  additional discovery, including numerous depositions.  There is also the benefit of expediting the litigation process and ultimately, emerging from bankruptcy sooner. 

The parties finalized the written settlement agreement, and in January 2024, the liquidating trustee presented it to the bankruptcy court for approval, by way of a motion pursuant to Fed. R. Bankr. P. 9019. The court entered the order approving the settlement without even conducting a hearing.  Although the motion mentioned that the parties engaged a mediator to reach settlement, there is no indication on the docket or any other formal, trackable documentation that this settlement was the result of mediation proceedings.  This certainly leaves one to wonder how many other settlements are reached as a result of the use of mediation in bankruptcy cases and go “undocumented.”   

Documented mediations are increasing due to mandatory referrals in some courts.  In addition, as in the case of Fox Rothschild’s recent mediation experience, bankruptcy attorneys appear to be increasingly recommending mediation to their clients that may be informal, not mandatory and not documented.  In the end, mediation, be it mandatory or informal, provides a less costly and often faster route to settlement.

[1] Several Fox Rothschild attorneys are on the list of mediators in New Jersey.

[View source.]