6 Reasons Why Bankruptcy Mediation is a Process, Not a One-and-Done Session: PART THREE — DISCOVERY VACUUM

By Donald L. Swanson

I’m mediating a bankruptcy valuation dispute between a bank secured creditor and debtor. The asset is a building in need of repair. The dispute has been pending for a short while, and a hearing on declaration evidence is to occur soon.

During the mediation, the banker says: “We need to see the building. We can’t settle without seeing the building.”

These words may not seem like a major problem. But I know, in real time, that we have a problem: this mediation is at a crossroads—and the problem is probably insurmountable.

I know that, as soon as the parties walk out my door, the mediation is over. Period. No matter what I say or do, when they leave to inspect the property, all parties will view the mediation as a failed effort and will not come back.

Here’s why:

–The mediation experience of the attorneys is in non-bankruptcy cases. In their experience, mediation commonly occurs after they’ve been through a year or more of interrogatories, requests for admission, requests for production, inspections of property, depositions and disputes over all such discovery things.

–In their experience, mediation rarely happens when a large discovery vacuum exists. So, they view mediation as a one-and-done session: if a settlement doesn’t happen during the one session, the mediation is over. Period.

–In bankruptcy, by contrast, the discovery vacuum is often huge. The timeline for bankruptcy disputes is often measured in weeks or a few months . . . not the one-or-more-years commonly seen in other courts.  In fact, traditional discovery is often nonexistent in contested matters and many adversary proceedings.

Back to the mediation session: I suggest, in multiple and varying ways, that we recess for a time so the bank can inspect the building with an appraiser—and then reconvene the mediation session.

“Sure. We’ll call back and reschedule after the inspection is accomplished,” I’m assured.

“Yeah . . . Right,” I’m thinking. “That’ll never happen.”

The mediation session ends. They all walk out the door. And, sure enough, that’s the end of the mediation.

Action Item. All participants in a bankruptcy mediation need to understand, in advance, that a discovery vacuum, (1) might require a recess in the mediation session until the discovery vacuum can be filled, or (2) needs to be identified and addressed in pre-session communications..

This post is Part Three in a series of six articles explaining how and why bankruptcy mediation needs a different model from the one-and-done session commonly used in non-bankruptcy cases.