Alternate Dispute Resolution is an accepted alternative to litigation, consists primarily of arbitration and mediation. Arbitration involves the disputing parties presenting their arguments to a mutually agreed upon neutral arbitrator to make a binding decision. Mediation involves a neutral person who attempts to bring the parties together to reach an agreement. It is not binding unless the parties sign an agreement as to the resolution of the dispute.

Most bankruptcy courts have adopted a mediation program and the process has become increasingly popular as a fast and inexpensive way to resolve a dispute. The parties select a mediator from a list of mediators who will serve at no cost for a mediation session, usually limited to four hours. Fees can be charged after that time has been completed. Also mediators can be retained for a fee when the parties agree. Mediators can be lawyers, retired judges, accountants or anyone who has indicated the experience necessary to serve. The parties or their attorneys submit the proposed mediator’s name to the court and an order is issued without a hearing. Court approval is not required so long as the parties agree on the designated mediator.

Mediation programs have been adopted by bankruptcy courts for decades. The Bankruptcy Court for the Central District of California’s web site provides, “The United States Bankruptcy Court for the Central District of California recognizes that formal litigation of disputes in bankruptcy cases and adversary proceedings frequently imposes significant economic burdens on the parties and often delays resolution of those disputes. Therefore, the Court established a Mediation Program to provide litigants with the means to resolve their disputes more quickly, at less cost and often without the stress and pressure of litigation.”

However, a recent Texas Bankruptcy Court decision has questioned the procedures followed by other Bankruptcy Courts in proceeding with mediation.

On January 27, 2015 Hon. Jeff Bohm, Chief United States Bankruptcy Judge for the Southern District of Texas, Houston Division issued a multi-page opinion in In re: Cody W. Smith, Debtor, 524 B. R. 689, holding, among other things, that a mediator is a “professional” person whom a bankruptcy trustee could not employ to assist in resolving a dispute that arose in a debtor’s Chapter 7 case without court approval.

Judge Bohm held that when deciding whether to enter an order allowing parties to mediate and estate funds to be used therefore, the parties seeking mediation must file a motion discussing, at a minimum the following factors (the “Ten Points”):

  1. The subject matter of the dispute.
  2. The amount of discovery completed.
  3. The amount of time the attorneys have spent discussing settlement with their respective clients and whether the lines of communication with the clients have been open.
  4. The amount of time the attorneys have spent discussing settlement with opposing counsel, whether the lines of communication have been open, and whether any progress has been made towards a resolution.
  5. The actual courtroom experience of the attorneys in adducing testimony and introducing exhibits.
  6. Whether the attorneys have explained the mediation process to their respective clients and reviewed with them the costs of mediation versus the costs of simply going forward with the scheduled hearing or trial.
  7. The name, qualifications, and fee of the proposed mediator.
  8. The estimated cost for each client of the mediation (i.e. the client’s share of the mediator’s fee, the attorney’s fees for representing the client in the mediation, and any travel or other associated costs).
  9. The percentage of the estimated cost to the estate (i.e. the estate’s portion of the mediator’s fee, plus attorneys’ fees associated with the mediation, plus costs of lodging and travel, if any) to the actual amount of cash presently in the estate.
  10. Whether any of the parties are opposed to mediation because they want their day in court as soon as possible.

The decision goes on to state:

“After reviewing any motion for mediation that addresses these points-and any other points that the parties believe are germane-this Court may issue a ruling from chambers or may schedule a hearing. If the latter, the Court may require the parties to attend the hearing with their respective counsel, and the Court may ask the parties to give testimony that they understand the mediation process, agree to the associated costs, and do indeed want to proceed with mediation instead of going forward with the hearing or trial.”

If Judge Bohm’s reasoning is to be adopted by other courts mediation as a fast, inexpensive and efficient way to resolve disputes, this will set this process of alternate dispute resolution back to the dark ages.

Consider the cost to draft a motion to articulate responses to the Ten Points in a simple preference action, one of the most mediated issues in bankruptcy proceedings, and possibly attending a hearing on the issues:

  1. The subject matter of the dispute. One must explain that a payment was made within the 90 days preceding the bankruptcy and then discuss the various defenses that might be raised in defense of the action and whether the defenses are or are not viable.
  2. The amount of discovery completed. In a large dollar case there is likely to have been extensive accounting analysis completed by both sides with documents produced and possibly depositions taken by both sides. Must the parties disclose an analysis of their positions as a result of this discovery?
  3. Settlement discussions. It would seem that if settlement discussions had taken place and no settlement was reached the parties would not be seeking to mediate the dispute. Must the parties disclose their strategy if no settlement discussions had taken place or if there were such discussions why they failed to produce a settlement?
  4. Time spent in settlement discussions and lines of communication. Must time sheets of the attorneys be produced? What about the time of the clients? If there was no settlement what difference does it make as to the amount of time spent in trying to reach a settlement?
  5. Courtroom experience of the attorneys. Do tough litigators make good negotiators in achieving a settlement of the case? Many mediators settle cases with little or no court room experience. Their success is based on their skills as a negotiator and understanding the psychological factors at play.
  6. Explanation of the mediation process to clients. Mediation has become such a common and acceptable practice in bankruptcy courts that spending time in a pleading disclosing privileged attorney/client discussions would appear to be an inappropriate and unnecessary expenditure of time and money.
  7. Name, experience and fee of the proposed mediator. The mediator’s resume can be produced. Should the judge determine if the proposed mediator is qualified for this case if the attorneys and the parties have agreed to his or her engagement?
  8. The cost. Most bankruptcy court mediation programs have pro bono mediation programs for a limited amount of time. Fees charged after the time has been expended vary based on the mediator selected, if the mediation is to continue at all. Should the Court decide if the fee charged is appropriate if the parties have already agreed to it?
  9. Percentage of fees and costs to the estate compared to the cash in the estate. Shouldn’t this be a matter to be determined by the estates representative in arranging the mediation? Bringing a mediator from New York to Los Angeles for a $10,000 preference action would not be practical and one doubts that any estate representative would be an advocate of such an expense when mediators in the jurisdiction are plentiful. However, there may be a case involving numerous issues, parties and significant dollars when a particular mediator might be appropriate to be retained even if requiring travel and lodging expenses. Shouldn’t the parties be able to determine if such charges are appropriate and within available estate funds?
  10. Do the parties want their day in court? Mediation is voluntary and not binding unless a settlement is reached and documented. If parties want their day in court, they should not be forced into mediation. However, it often happens that mediation is proposed by the Court and a party will attend with no intention of agreeing to a settlement but the mediator is so skilled that a settlement is achieved.

Before adopting the Ten Point program of Judge Bohm, a court should consider whether the money spent in such a motion to approve mediation is not more expensive and potentially acrimonious than simply spending a few hours in a mediation session with a trained and experienced mediator that could achieve a settlement.