Chapter 11

Proposal #18: Authorization for Local Mediation Programs

Throughout its deliberations, the Commission has noted the importance of reducing unnecessary costs of the bankruptcy process. This principle has been a prominent theme of its recommendations thus far. Many judges and attorneys have noted that mediation has become a lower-cost, higher-satisfaction alternative to litigation. In the bankruptcy field, clear statutory authority would facilitate the development of mediation programs.

The Recommendation

Congress should authorize judicial districts to enact local rules establishing mediation programs in which the court may order non-binding, confidential mediation upon its own motion or upon the motion of any party in interest. The court may order mediation in an adversary proceeding, contested matter, or otherwise in a bankruptcy case, except that the court may not order mediation of a dispute arising in connection with the retention or payment of professionals or in connection with a motion for contempt, sanctions, or other judicial disciplinary matter. The court should have explicit statutory authority to approve the payment of persons performing mediation functions pursuant to the local rules of that district’s mediation program who satisfy the training requirements or standards set by the local rules of that district. The statute should provide further that the details of such mediation programs that are not provided herein may be determined by local rule.

Reasons for the Change

Both Congress and many judicial districts have endorsed cost minimization through case management techniques and alternative dispute resolution. Although it may not be directly applicable to bankruptcy courts, Congress enacted the Civil Justice Reform Act of 1990, [ FN: 28 U.S.C. §471 et seq.] which set the groundwork for alternative dispute resolution programs in the district courts. Likewise, a considerable number of districts have implemented mediation programs for disputes that arise in bankruptcy cases and adversary proceedings. [ FN: "As of May 9, 1997, twenty-six bankruptcy courts were using mediation (as well as, in some cases, other ADR methods) pursuant to district court or bankruptcy court rules, general orders or guidelines . . . In addition, approximately twenty more bankruptcy courts are considering an ADR program and several others frequently use ADR on an ad hoc basis. " Memorandum from Richard S. Toder & Scott D. Talmadge to Professor Elizabeth Warren Re: "National Bankruptcy Review Commission — Use of ADR Procedures in Bankruptcy Cases, " at p.2 (June 5, 1997).] The programs are in various stages of development; for example, the Southern District of California established its mediation program in 1986, while the Northern District of Illinois just recently made the local bankruptcy rule changes to implement its mediation program. However, while the Bankruptcy Rules currently provide forconsensual and binding arbitration, [ FN: Fed. R. Bankr. P. 9019(c).] neither the Bankruptcy Code nor Bankruptcy Rules authorize or endorse the use of mediation programs, which presently are reducing costs and successfully facilitating the resolution of disputes. Rather, courts have used their "inherent power" [ FN: See, e.g., Link v. Wabash Railroad Co. 370 U.S. 626 (1962) (courts have inherent power to manage judicial affairs to achieve orderly and expeditious resolution of cases).] or section 105 to establish mediation programs.

The experiences with the currently-existing mediation programs appear to be quite positive. The programs have been successful in resolving numerous issues and disputes involving claims, adversary proceedings and plan issues. Mediation offers litigants the opportunity to resolve disputes creatively and provides a catalyst for settlement, while reducing the costs, delay, and burdens that often accompany litigation or the plan negotiation process. [ FN: See, e.g., Judges ’ Desk Book on Court ADR, National ADR Institute for Federal Judges (Federal Judicial Centerl Center for Public Resources 1993); Form of General Order on Mediation, American Bar Association Business Bankruptcy Committee, chapter 11 Subcommittee Task Force on ADR in Bankruptcy (February 1, 1996).] While not all mediation attempts will avert the need for litigation completely, mediation can help to narrow the issues of dispute. This process can be effective in specific matters, and it also can be helpful in the plan negotiation process. [ FN: See Final Report of Cyrus R. Vance, As Mediator, Pursuant to the Standing Mediation Order and the Mediation Order Entered in the Macy ’s Reorganization Cases " (December 8, 1994) (reporting attainment of consensual plan, fair treatment of creditors and employees, and significant cost reduction) attached as appendix to paper of Myer O. Sigal, Plan Mediation Proposal for Large chapter 11 Cases, submitted in connection with testimony to National Bankruptcy Review Commission, May 14, 1997.]

The recommendation includes authorization for payment of a mediator. Although some programs already provide for the payment of mediators, some people believe that statutory authority is necessary for payment from estate assets. Mediators should be compensated pursuant to the same rules as other professionals. Authorizing payment of mediators would complement and not preclude the use of pro bono mediation. Currently, the local rules of certain paid mediation programs require mediators to do some pro bono mediation, suggesting that both paid and unpaid mediation services may be integrated successfully and both are important parts of a functional mediation program.

While the nationwide authorization of mediation provides a uniform structural basis, most parties familiar with currently-existing mediation programs have concluded that the details of mediation programs should be left to local rules. With the basic framework in place, districts can determine what type of program best serves their needs, which may depend in part on the types of cases or disputes that dominate their dockets and that experience reveals are well suited for mediation. Although this proposal has been discussed primarily in the context of business reorganization cases, the use of a mediator would not necessarily be so limited. Likewise,although it is critical that all districts impose standards on the qualifications for mediators, the types of cases in various districts might dictate what those standards should be. The mediator selection process in particular cases also can be determined locally.

It also is unnecessary to delineate the types of matters suitable for mediation, for courts are best able to make this determination in the cases before them. The proposal would exclude only two types of disputes: issues surrounding the retention or payment of professionals [ FN: Not everyone agrees that professional issues should be excluded per se. For example, the ABA ’s Form of General Order on Mediation Comment 3.0 notes that mediation of disputes relating to employment and compensation of professionals, trustees and examiners "if the mediation simply seeks to resolve factual disputes. " However, the Form also notes that a mediated settlement could not affect the court ’s role under sections 326-330 of the Bankruptcy Code.] and matters involving contempt of court, sanctions or other judicial disciplinary actions. These issues have been identified as those belonging before the court for judicial resolution. Nothing would preclude districts from further restricting the range of subject matter in their mediation programs, nor would judges be compelled to order mediation in any case where they believed the process would not be useful.

Competing Considerations

Because many districts already have established some mediation programs, some people question whether specific statutory authority is necessary.

Some people may have reservations about authorizing courts to mandate mediation if the parties do not consent. However, mediation often is a useful tool for a multi-party dispute, and one party could withhold consent as a leverage tool or a delay tactic unnecessarily. Because mediation is not binding and entails only a good faith effort by the parties, requiring parties to meet with a mediator when the court so determines should not unduly prejudice any parties. Existing mediation programs employ mandatory but non-binding mediation with little problem.