Bankruptcy’s ADR Rules Have Changed Little Over the Past Century

By: Donald L. Swanson

Alternative dispute resolution provisions (“ADR”) involving arbitration and compromises have been part of U.S. bankruptcy laws since at least 1898.

ADR Bankruptcy History – From 1898

An 1899 publication of the U.S. “National Bankruptcy Act of 1898” provides for “Arbitration of Controversies” and for “Compromises” in consecutive sections as follows:

–“§ 26.  Arbitration of Controversies.–(a) The trustee may, pursuant to the direction of the court, submit to arbitration any controversy arising in the settlement of the estate.”

–“§ 27.  Compromises.– (a)  The trustee may, with the approval of the court, compromise any controversy arising in the administration of the estate upon such terms as he may deem for the best interests of the estate.

So . . . arbitration and compromise provisions have been a part of bankruptcy law in the U.S. for a very long time.

ADR Bankruptcy Rule — Current

Today’s Fed. R. Bankr.P. 9019 provides:

Rule 9019. Compromise and Arbitration

(a) Compromise. On motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement. Notice shall be given to creditors, the United States trustee, the debtor, and indenture trustees as provided in Rule 2002 and to any other entity as the court may direct.  . . .

(c) Arbitration. On stipulation of the parties to any controversy affecting the estate the court may authorize the matter to be submitted to final and binding arbitration.

Now, isn’t that amazing!  The compromise and arbitration provisions of today’s Rule 9019 have been around in largely-the-same-form for more than a century (since at least 1898) as next-door-neighbor provisions.

ADR Irony

In today’s practice:

–Arbitration is an infrequently-utilized ADR tool for resolving bankruptcy disputes, despite being explicitly authorized in the Federal Rules of Bankruptcy Procedure.

–Mediation, on the other hand, is a frequently-utilized ADR tool for resolving bankruptcy disputes, but isn’t even mentioned in the Federal Rules of Bankruptcy Procedure.

Back in 1898 (and even at the 1978 enactment of today’s Bankruptcy Code), mediation did not exist as a frequently-used ADR tool.  “Compromises” were achieved (back in those days) exclusively through non-mediation means.

Accordingly, the old-and-new compromise/arbitration provisions of bankruptcy laws (§§ 26 & 27 of the 1898 Act; and Rule 9019 of the 1978 Bankruptcy Rules) were/are the alternative dispute resolution provisions of U.S. Bankruptcy Code and Federal Rules of Bankruptcy Procedure.

The ADR irony is that today’s compromise/arbitration provisions in bankruptcy laws have not substantively changed over the past century, even though ADR practices have shifted dramatically toward mediation as the dominant ADR tool in bankruptcy.

Suggestions

U.S. bankruptcy law needs to be upgraded from its century-old provisions to include today’s primary ADR tool in bankruptcy – i.e., mediation.

In light of the history noted above, Fed.R.Bankr.P. 9019 is already bankruptcy’s Rule for alternative dispute resolution – it simply needs to be updated to reflect, and explicitly authorize, current mediation practices.

So, Fed.R.Bankr.P. 9019 could be a logical place to include an explicit mediation authorization.