Mediation in Bankruptcy Proceedings as a Means of Alternative Dispute Resolution

Mediation in Bankruptcy Proceedings as a Means of Alternative Dispute Resolution

What Is Mediation in the Context of a Bankruptcy Proceeding?

Mediation is the process used in bankruptcy cases to help resolve disputes between parties in a less formal and less adversarial manner, than through traditional litigation. During mediation in bankruptcy, a neutral third-party mediator facilitates communication between the parties involved and helps them reach a mutually agreeable resolution to their dispute.

The primary goal in bankruptcy mediation (as is the case with mediation in general) is to negotiate and ultimately reach a settlement through the mediation process. Although mediation often involves testing the realities of a case and requires careful risk assessment, the main emphasis is to encourage open negotiation, exploration of creative solutions, and, overall, a compromise between the parties. The use of mediation in the bankruptcy context continues to grow, particularly in complex cases, and many bankruptcy judges order, or at least, strongly encourage, parties to go to mediation in contested matters, as mediation can often prove to be a more cost-effective means of resolving a case than continuing through a lengthy litigation process.

When Is Mediation in Bankruptcy Available?

Mediation in bankruptcy can generally take place at any point during a bankruptcy proceeding, whenever the parties and their legal counsel agree to participate in the mediation process. Notably, either party involved in the dispute may request mediation, or the court may order mediation as part of the bankruptcy proceedings.

What Is the Mediator’s Role Within Mediation?

The mediator’s role is to assist the parties in highlighting the issues in dispute, to lower the barriers preventing communication between the parties. They can also offer and explore the settlement options that may be available in a particular case. And to hopefully assist the parties with reaching a final settlement agreement. Since the mediator does not issue a “ruling” or otherwise render a determination as to who is “right,” and has no authority to demand a settlement of any kind, the final settlement agreement is one that must be acceptable to all parties; “acceptable” being the key word, as a successful mediation generally results in all parties reaching a settlement through which each party compromises on one item or another in an effort to resolve the issues in dispute.

A key aspect of a mediation in bankruptcy session is that the positions taken by the parties and their respective counsels will not (and in fact cannot) be used against them outside of the mediation. Should an agreement not be reached, the parties are free to pursue litigation regardless of what the settlement discussions may have entailed. To that end, it is the mediator’s role to assure the parties of the confidential nature of the proceedings, in an effort to encourage open and honest communications between the parties.

How Is the Mediator Selected?

A mediator is selected from a list of approved mediators or through mutual agreement of the parties. It often proves helpful to have a mediator with experience in bankruptcy-related matters when such matters are at issue, given some of the unique factors present in the bankruptcy context.

Final Thoughts on Mediation in Bankruptcy

Alternative dispute resolution, and mediation in bankruptcy particularly, provides an efficient method of resolving disputes while reducing the costs of bankruptcy proceedings and the accompanying bankruptcy litigation. Considering the stakes in a bankruptcy proceeding, the benefits of reaching a settlement through mediation as a means of avoiding combative bankruptcy and reorganization cases are as great (if not greater) than in a general civil litigation setting. As such, parties involved in bankruptcy proceedings should take the time to carefully consider whether mediation is likely to prove beneficial in a particular case.