“Blackmail” Exception to Mediation Privilege: A New Appellate Opinion

imageBy: Donald L. Swanson

Mediators and mediating parties beware!

The Facts

The mediation of a contentious commercial case concludes without an agreement.  But the mediator keeps trying.

The mediator sends a post-mediation email to counsel for “Jonathan” conveying a proposal, which includes these statements from the other party:

–“Jonathan knows the extent of his wrongdoings and our client believes that Jonathan is in very serious trouble.”

–“It is clearly in everyone’s (and particularly Jonathan’s) interest to wrap this up speedily and quietly. . . . – the concern being that others will become aware of it.”

–“settlement will obviate the need of further steps such as committal proceedings.”

–“If Jonathan has misled HSF and sworn false evidence . . . Jonathan will face charges of perjury, perverting the course of justice and contempt of court and is likely to be imprisoned.”

–“In the above circumstances, Jonathan’s credibility and reputation will be destroyed.”

The case is pending in England.

The Opinion

On July 12, 2016, Lord Justice Patten, Lord Justice Floyd and Mr. Justice Baker of the “Court of Appeal (Civil Division) on Appeal from the High Court of Justice Chancery Division,” issue their opinion on the matter.  

The question in the opinion is whether Jonathan can amend his petition to add claims against the other party, based on the threats of criminal prosecution quoted above.

Since the threats are in a mediator’s email, the Justices explain the mediation privilege issue like this:

–“The email was sent in the context of a mediation, and thus would normally be the subject of mediation/without prejudice privilege.”

–The question is whether the contents of the email “fell within the ‘unambiguous impropriety’ exception to that privilege.”

The Justices explain that the “unambiguous impropriety” exception would apply:

–“if the exclusion of the evidence would act as a cloak for perjury, blackmail or other ‘unambiguous impropriety.’”

In applying the “unambiguous impropriety” exception, the Justices reference these findings by the trial judge:

–“I am in no doubt that this was an attempt at blackmail which falls firmly within the exception and that the email is admissible.”

–“The impropriety consists, in my judgment, in threatening to pursue contempt proceedings, including a committal to prison, unless Jonathan pays the brothers a much higher price.”

The Justices rule that Johnathan may amend his petition to include blackmail claims, despite the mediation context and privilege.

What do you all think about this?




How Mediation Developed — A Local Example (Part 1)

A Douglas County Courtroom, Omaha, Nebraska

By: Donald L. Swanson

In Omaha, Nebraska, where I live and practice, mediation plays a central role in civil litigation outside the Bankruptcy Court.  And it’s playing an increasing role in Bankruptcy Court as well—but that’s a story for another day.

Mediation is a vital part of the civil litigation culture around here.  And it’s been that way for quite a while.  It seems that attorneys plan for mediation as part of their strategy in any given case.

Mediation rules in Nebraska’s Federal District Court encourage mediation.  For example,

–Its “Mediation Plan” authorizes a federal judge to “refer a case to mediation” when the judge finds “a resolution of the case by mediation a practical possibility.”

–Its “Rule 26(f) Report” form requires competing attorneys to address mediation possibilities and timing at the beginning of a case.

And Nebraska’s Dispute Resolution Act for state courts begins with these findings:

–“Mediation of disputes has a great potential for efficiently reducing the volume of matters which burden the court system in this state”; and

–“Mediation can increase access of the public to dispute resolution and thereby increase public regard and usage of the legal system.”

Neb. Rev. Stat. § 25-2902(2) & (7).

If you talk with Omaha trial attorneys about civil cases they’ve recently concluded and successes they’ve achieved, you’ll hear stories about excellent results through mediation.

One reason is this comparison:

–all sides to a mediation settlement often walk away with a tale of success; whereas,

–the results of a trial leave at least one party, if not all parties, with disappointment and loss.  [Editorial note: Based on a career-in-court, I’m well-familiar with the concept of all-parties-are-disappointed after trial.]

Mediation has become a highly-valued tool in Omaha for resolving civil lawsuits because . . . [drum roll] . . . it works – and it works well.  As a result, mediation is ingrained in the civil litigation culture.  And here’s guessing that this is similar to what’s happening elsewhere.

Based on the foregoing, it’s surprising that the use of mediation in bankruptcy courts has been slower to catch on.  After all, settlements are at the essence of what bankruptcy is all about.

But the sense is growing that mediation is heading toward the same central role in bankruptcy courts that it currently holds in other litigation arenas.







What Should be the Mediator’s Role in Documenting a Settlement Agreement?


By: Donald L. Swanson

Conventional thinking (as I understand it) is that mediators should not have a role in preparing a settlement-terms document that concludes a successful mediation.

I’m suggesting that a mediator can/should have a limited-and-neutral role in preparing such a document.  Here’s why.

Some Ancient History

Its 25 years ago — or more.

I’m in a mediation session with a senior partner and a client. This is the first mediation session I’ve ever experienced — and I’m trying to figure out how it’s done.

The mediation lasts all day. And the case settles. By the end, everyone is tired and cranky.

Around 5:30 p.m., all attorneys are in the mediator’s office to prepare the settlement document. The mediator pulls out a single sheet of paper.  It’s a pre-printed form. It has: (1) a state court name at the top, with a blank for filling-in the specific court involved, (2) lines  for filling-in the case caption and case number, and (3) lines at the bottom of the page — presumably, for the parties’ signatures.  Otherwise, the page is blank.

The mediator pens-in the court name, case caption and number and hands the page to the attorneys to write-in the settlement terms. One attorney does most of the writing. An opposing attorney then makes hand-written edits, including carets with lines to the sides of the page where many words are added. Further edits occur. And then the parties sign the still-one-page paper. Copies are made and distributed to everyone.

As we prepare to leave the mediation, I’m looking at this newly-finalized document. I’m trying to follow the nearly-indecipherable penmanship and all the chicken-scratch lines.

–And I’m saying to myself: “Seriously?! This is how it’s done?!”

–What I’m seeing is a mess. It looks like scribbling everywhere. Some hand writing is barely legible. Edits are hard to follow.

–It’s sloppy. And this is a commercial case with lots of knotty issues and lots of money at stake.

Some Later History

Fast forward 15 years or so.

I’m in a mediation session with an associate attorney and a client.

The mediation lasts all day. And the case settles. By the end, everyone is tired and cranky.

Around 5:30 p.m., all attorneys are in the mediator’s office to prepare the settlement document.  The mediator pulls out a one-page form . . . and I swear . . . its the same form as the one from a decade and a half earlier: different mediator / same form.

I’m irritated.  First thing I say upon seeing it is, “We’re in Federal Court.” Whereupon, the mediator takes a pen, scratches out the state court info and writes the Federal Court’s name at the top of the page—while mumbling something like, “No big deal.”

Then the document-completion routine from a decade-and-a-half earlier is repeated—except that the mediator disappears after correcting the court name. We never see him again.

I know, I know.  It’s my own fault.  I should have come prepared with my own draft of a settlement document.  But still . . . shouldn’t the mediator have done something more?!

Some Mediator History

So, when I start working as a mediator, my first “innovation” is to prepare and distribute, in advance of the mediation session, a type-written settlement agreement form in an editable format.

This form contains:

–the court name, case caption, case number, names of the parties

–a recitation of some undisputed and neutral information about the mediation and disputes involved

–a bunch of blanks for filling-in the settlement terms

–a representation by all parties that they have evaluated the tax consequences of the settlement terms

–formal signature blocks with names of parties and attorneys typed-in.

Then I send this form to the attorneys, in advance of the mediation session, suggesting that they:

–correct any inacurate information on the form

–begin filling in blanks with draft settlement language

–start working together to fill-in the form, narrow the issues involved, and minimize the number of blanks that need to be completed by the end of the mediation session.

In my earliest experiences as mediator, I act as scrivener at the end of the session (I’m a darn-good typist) to help the attorneys put their settlement terms into the form I provided.  This seems to work well, and I like doing it.

–But then a continuing education instructor says I shouldn’t be doing this. So I stop.


But I still think it’s a good idea for mediators to prepare and circulate an advance settlement form containing basic-and-neutral information. And I especially think its a good idea to encourage attorneys to begin the session with an already-started settlement document — regardless of whether that document uses the form I provide or one they prepare on their own.

I’m not trying to buck conventional thinking on a mediator avoiding the role of settlement-terms scrivener.

But I am suggesting that a mediator should be pushing-the-edge on assuring that the document preparation function is being handled in a proactive manner and long before the session’s end.

Notably, when a preliminary draft is available, negotiations can center on developing language that fills in remaining blanks.  This helps create clarity in the negotiation process and assures that all important terms are included in the settlement document — and none forgotten.


Mediation:“Open-Mindedness” v. “Militant Open-Mindedness”

By: Donald L. Swanson


I’m scanning a news article earlier this week.
The term “militant open-mindedness” catches my eye. My immediate reaction is excitement:

–“Oh great!  This will provide a lesson and analogy for mediation!”

–After all, “open-mindedness” is “a receptiveness to new ideas” and a belief that “others should be free to express their views.”

–“Open-mindedness” is, obviously, a good quality in mediation; so “militant open-mindedness” must be an even-better mediation quality.  Right?”

I focus-in on that phrase in the article. And here is what I read:

“people here pride themselves on a kind of militant open-mindedness.  It is the kind of place that will severely punish any deviations from accepted schools of thought.”

So . . .


How does this apply to mediation? Would “militant open-mindedness,” as used in this article, be a positive quality in mediation?

–I think not!
–As used above, the “militant” qualifier to “open-mindedness” is, actually, a reversal: it refers to an aggressive intolerance.

So, here is a two-part mediation observation:

–“Open-mindedness” is a most-helpful and beneficial quality in mediation. It’s a quality that every party should attempt to exhibit in a mediation session.

–“Militant open-mindedness,” on the other hand, would be a mediation killer. It’s an impasse-waiting-to-happen and a quality that every party should attempt to avoid in a mediation session.

By the way, I’m still stumped and flummoxed every time I re-read the quotation above. I still can’t get my head around the justaposition of the words “open-mindedness” and “severely punish any deviations.” All I know is that any attempt, in mediation, to “severely punish any deviations” would not be a good thing.

So, the lesson for participating in mediation is this: we should all learn to leave our “militant open-mindedness” at home.

They’re in a bit of a pickle — Part Three: Conflicts of Interest for Bankruptcy Judges as Mediators in Chicago

Chicago — Photo by Grant Swanson

By: Donald L. Swanson

One reason given by the Chicago Bankruptcy Court for the recent revocation of its Local Mediation Rules is this:

–Several Judges in the Chicago Bankruptcy Court have agreed to mediate cases for their colleagues on that Court.

The pickle is this:

–such intra-court mediator appointments create a conflict of interest.

This conflict issue comes into focus for me, one day, when I hear a bankruptcy judge (not from Chicago) describing an “uncomfortable” situation as mediator. The uncomfortable situation is this:

–This judge received the mediation appointment from a judge who serves in the same court.

–One mediating party speaks negatively about the “quality of justice” in the court where both judges serve.

–Because of that comment, “I have to excuse myself” for a moment, the mediator/judge explains, because of being “tempted” to make an “imprudent” retort.

Now . . . that’s a problem.

Pickle Jar

–A mediating party must be able to speak freely about any quality-of-justice concerns in the court that will be deciding the dispute.

–What is the risk that the trial judge might “get it wrong”?  Surely this is fair game for discussion during a mediation!

–If such a comment is so bothersome to the mediator that stepping-away to cool-down is necessary, that’s a disqualifying bias.

–Or, at least, the judge/mediator needs to disclose such sensitivity so the parties know they need to dance carefully around this.

Or what if the mediator/judge thinks a party is unreasonable during a failed mediation?

–Will the appointing Judge hear about it and hold it against that party at trial?

 Or what if the mediator/judge views an attorney’s conduct in the session as in defiance of the mediator/judge’s point of view?

–Will the defiant attorney need to be concerned about a grudge surfacing at the attorney’s next appearance before the mediator/judge in another case?

These circumstances and concerns present serious conflict of interest concerns. Such concerns fall into this category for mediating attorneys:

“How might the mediator hurt me?”

Such concerns are unacceptable.

Moreover, it seems that such a conflict should not be subject to waiver. How would a waiver conversation go? Something like this, perhaps:

“I’m about to appoint my colleague, Judge XXX, as mediator for your dispute. You need to know that Judge XXX is a little sensitive to pejorative comments about our Court. So, if anyone wants to object to this appointment, speak now or forever hold your peace.”

Yeah. Right. That’ll be effective.

These types of circumstance require a mediating party to factor extraneous considerations about the mediator into mediation strategies. And such circumstances are an impediment to a free and full mediation process.

These are precisely the types of concerns that conflicts rules are (or should be) designed to address and prevent.

To view Part 1 click here ans Part 2 click here


“How Do I Get a Bankruptcy Case to Mediate?” Or . . . “How Do I Find Someone to Mediate My ‘Smaller’ Bankruptcy Case?”

Ready to perform!

By Donald L. Swanson

You are out there: professionals who’ve had mediation training and are set-to-go as mediators of bankruptcy disputes but, alas, are still looking for cases to mediate.

I’d like to introduce you to some attorneys who can’t afford a mediator for their smaller-amount cases: they are reading this article.

Attorneys with smaller-amount cases, say “Hi” to mediators looking for cases to mediate: they are reading this article, too.

First of all, let’s acknowledge reality: every trained mediator trying to develop a mediation practice has the same start-up problem. No one is immune. Every now-successful mediator started out with one case . . . then another . . . then another . . . etc. . . . and often with long droughts in between.

Similarly, there are attorneys out there with smaller-amount cases who would like to mediate their dispute but figure the case economics won’t allow it.  So . . . they don’t even consider the mediation possibility.

Here’s the deal:

–Mediators-getting-started are more-than-happy to mediate cases for a modest flat-fee or a reduced-hourly-rate.  What they need is a case to mediate.

–Attorneys wishing they could get a modest flat-fee or reduced-hourly-rate mediation need to find these mediators.

Getting that first one or two or three cases to mediate can be a daunting task for a newly-trained mediator. It’s sort of like trying to find a job when unemployment is high — law school graduates from 2009 and a few years thereafter can empathize.

Here’s a two-step suggestion for mediators:

Mediators wanting to get started in the bankruptcy mediation world should:

1.  Develop a strategy to mediate smaller-amount disputes in half-day sessions for a modest flat fee; and

2.  Identify practitioners who handle those types of cases, and make yourself a pest at selling them on your strategy.

Here’s a one-step suggestion for attorneys:

Attorneys wanting to get a modest flat-fee or a reduced-hourly-rate mediation should:

–Look for mediators who are following the two-step suggestion above.

Types of smaller-amount cases

The smaller- amount cases I’m talking about include these:

–dischargeability actions  [Editorial Note:  These actions are frequently filed, are difficult for either party to justify economically, and are prime mediation prospects.]

§ 523(a)(2) — commonly used nondischargeability standards

–confirmation of contested plans in Chapter 13 and individual Chapter 11 cases

–objections to exemptions

–transfer avoidance lawsuits

–objections to proofs of claim

–any adversary proceeding in which a summary judgment motion is denied.

Promotional targets for mediators

Practitioners to identify as promotional targets for mediators in small-amount cases are:

–attorneys for debtors

–attorneys for creditors

–attorneys for trustees

[Editorial Note: this list is intended as a joke because it includes nearly every bankruptcy attorney out there, excluding large-case and mega-case folks — but as I re-read the list . . . it’s not all that funny.]

A selling point to such practitioners is this: they don’t need to incur an extra cost of preparing mediation statements in advance of the mediation session because pleadings, motions, exhibits, schedules, orders, etc., are already available to the mediator on the CM/ECF system,

As Chair of a Bankruptcy Court Mediation Committee, I’ve been promoting this suggestion for years. The number of takers to date is [ … drum roll … ] zero—that I know of. For years I’ve thought some mediator would catch a vision around this suggestion, pursue it, and make it work. No such luck—as far as I can tell.

So . . .

–for all you newly-minted mediators out there, I suggest following the two-part suggestion above.

–for all you attorneys out there who would like to find a low-cost mediator for your smaller-amount case, I suggest that you look for mediators who are following the two-part suggestion above.

A mediation opportunity is out there for someone to seize. And this opportunity exists in every jurisdiction.

It’s not an easy task. But it can work.

Action Items.

–A plan of action for a start-up mediator is this: develop a strategy for mediating smaller-amount disputes in half-day sessions for a modest flat-fee, promote the strategy with every bankruptcy professional you know, persist with the strategy over time and through disappointments, and make it work.

–A plan of action for an attorney wanting to mediate a smaller-amount dispute is to look for a mediator who is following-through on the preceding action item.


The Absolute Priority Rule Torpedoes Mediation in Individual Chapter 11 Cases (Part Two)

The Absolute Priority Rule: 11 U.S.C. § 1129(b)(2)(B)

By: Donald L. Swanson

A tragedy of recent Chapter 11 times is this:

–it looks like Congress tried to remove the absolute priority rule from individual Chapter 11 cases (see the “individual” exception in § 1129(b)(2)(B)(ii) photo above); but Congress didn’t quite get the removal words right, according to subsequent court rulings.

We now have an excellent example in the Nebraska Bankruptcy Court of benefits arising from a removal of the absolute priority rule in individual cases.

–Judge Thomas L. Saladino, Chief Bankruptcy Judge in Nebraska’s Bankruptcy Court, issues the first-ever ruling on effects of the newly-amended § 1129(b)(2)(B)(ii), which adds an “individual” exception to the absolute priority rule. In the case of In re Tegeder, 369 B.R. 477 (Bankr. Neb. 2007)Judge Saladino rules that the absolute priority rule no longer applies in individual Chapter 11 cases because of the newly-amended § 1129(b)(2)(B)(ii).

–As a result, individual Chapter 11 plans are thereafter confirmed in Nebraska, and mediation plays a role in resolving plan confirmation disputes in some of such cases.

–Another result is that standards become relatively low for involuntary conversion of high-earner debtors from Chapter 7 to Chapter 11 under § 706(b), based on an ability to pay creditors.

–When the weight of precedent in other jurisdictions goes a different direction, Judge Saladino has an opportunity to reverse course but declines to do so.  He reasons that his ruling in Tegeder “has worked well in this jurisdiction the last seven years,” in that “many individual Chapter 11 plans have been confirmed” (In re Woodward, Case No. 11-40936, Doc. 287 (Bankr. Neb. April 4, 2014)).

–Thereafter, the Eighth Circuit BAP reverses Judge Saladino and says the absolute priority rule still applies in individual Chapter 11 cases, despite the statutory exception (In re Woodward, Case No. 15-6001 (8th Cir. BAP 2015)).

So now, here in Nebraska, we are back to the old absolute priority rule being operative in individual Chapter 11 cases. As a result, the old pathologies of the absolute priority rule return in individual cases, including the following:

–many individuals with large debts and significant assets (e.g., failed entrepreneurs) don’t qualify for Chapter 13 and have no viable reorganization option in Chapter 11;

–creditors who might have benefited from an involuntary conversion of a case from Chapter 7 to Chapter 11 under § 706(b), based on an ability to pay, probably no longer have that option, since a confirmable Chapter 11 plan is no longer viable in many cases; and

–mediation can no longer play a significant role in Chapter 11 plan confirmation disputes for individual debtors, when the debtor can’t pay all debts in full and creditors won’t agree to something less, because we are back to a 0% chance of confirming a plan over creditor objection.

Action Item

Congress needs to amend § 1129(b)(2)(B)(ii) to get it right this time: namely, to remove the absolute priority rule from individual Chapter 11 cases.

Mandatory Mediation & Good Faith: “You can lead a horse to water, but . . . “


By: Donald L. Swanson

Mandatory mediation is a good thing [see, e.g., my blog post titled, “Local Bankruptcy Rules Without Mandatory Mediation are Like a Toolbox Without a Vise-Grip“].

But the words “mandatory mediation” refer only to a required process.  They do not suggest any such thing as compelled settlement or compelled concession or even compelled listening.

The operative adage for mandatory mediation is this:

“You can lead a horse to water but you can’t make it drink.”

Online sources say this is the oldest-known adage in the English language.  It dates back to at least the year 1175. The phrase appears thereafter, for example, in a play published in 1602 called “Narcissus“:

“Your parents have done what they coode,
They can but bringe horse to the water brinke,
But horse may choose whether that horse will drinke.”

I say this time-honored adage is sufficient authority for what should happen in a mandatory mediation in today’s bankruptcy courts. After all, our bankruptcy jurisprudence and jurisdiction hearken back to “the stuff of the traditional actions at common law tried by the courts at Westminster in 1789” (see, e.g., Stern v. Marshall, 564 U.S. 2 (2011 )).

“Good faith” in mandatory mediation means showing up for participation in the mediation as ordered.

So, what’s the point of mandatory mediation, if it isn’t to compel parties to do something beyond merely showing up?

Here are but-a-few of such points:

1. You never know. Many-a-disputing-party has shown up at a mediation session with no expectation or hope of settling. But lo-and-behold a settlement happens anyway.

2. Bluffing happens. Some people project a belligerent front in negotiations with the hope/expectation that such a front will scare/move the other side into a favorable settlement. After all, displays of bravado-without-substance are common in the non-human animal world. So . . . such actions probably happen in human negotiations too [not that I have ever done — or even thought about doing — any such thing!]. A mandatory mediation provides opportunity for bluffing parties to move away from belligerence toward resolution.

3. Failure/success is a false mediation dichotomy. Whoever started the idea that mediation failure/success is defined by the conclusion of a mediation session should be castigated! Such a dichotomy is false. It’s wrong. It’s harmful. It’s . . . etc.

–Success/failure of a mediation session (particularly a mandated one) should be measured, instead, by the existence of progress toward a voluntary resolution.

–“The whole idea [of mediation] is to get the parties talking.” So says a speaker at a recent CLE event. The goal of a mandatory mediation should be to make progress on furthering communications between the parties: not to produce, as if by magic, an immediate settlement between parties-at-war.

Shouldn’t we treat people (in mandatory mediation contexts) with at least the same deference we afford to thirsty horses?

Total Artificial Heart: How Bankruptcy Provides a Valuable Service – And a Proactive Mediation Suggestion

SynCardia’s total artificial heart

By Donald L. Swanson

Bankruptcy often deals with failure, loss, and broken promises.  So it has a bad reputation.

But bankruptcy often provides a valuable service in time of need.  And we now have a new example of this:

–a company that supplies total artificial hearts to people at death’s door.

SynCardia Systems, Inc., filed bankruptcy on July 1, 2016, in Delaware.

SynCardia’s Total Artificial Heart

SynCardia produces a total artificial heart to serves as a bridge-to-transplant for people with advanced heart failure.  SynCardia reports that:

–over 1,568 of its artificial hearts “have been implanted globally”;

–79% of patients with these implants “survived long enough to receive a heart transplant,” and 70% had a “one-year survival rate”;

–SynCardia is “the world’s only supplier” of this artificial heart, so a failure of its business “leaves patients and hospitals with no backup provider”; and

–The continuation of SynCardia’s business is essential to people who have or will need one of its artificial hearts: “death can occur in minutes in the event of a material malfunction.”

Artificial heart implant process

SynCardia’s Financial Problems

Long-story-short: SynCardia started running out of money and couldn’t pay its debts.  It made numerous unsuccessful attempts to get new money and eliminate debt.

Then, it began looking for a buyer.  Over 120 potential buyers were contacted, but none would make a purchase offer.

SynCardia also looked at multiple alternatives, with this goal in mind:

–“to maintain operations to sustain over 50 patients whose lives currently depend” on this artificial heart.

After “nearly all paths were exhausted,” cash balances were nearly gone and death of the business seemed inevitable, Sindex stepped forward as a buyer.

The Proposed Bankruptcy Sale

On July 1, 2016, lots of things happen in the Delaware Bankruptcy Court, including these filings:

 –SynCardia’s voluntary Chapter 11 bankruptcy Petition;

–SynCardia’s Motion for authority to sell its business to Sindex, “free and clear of all liens, claims, encumbrances, and interests” under § 363 of the Bankruptcy Code; and

–SynCardia’s Motion for authority to obtain loans from Sindex, to continue operating until the proposed sale can be approved by the Bankruptcy Court and closed (the Bankruptcy Court gives its interim approval to this Motion on July 6).

These actions in bankruptcy will enable SynCardia to accomplish the proposed sale in a prompt and efficient manner – a result that would not be possible without the bankruptcy filing.

Maintaining the viability and availability of this life-sustaining device is, obviously, a very good thing!

A Special Need

This bankruptcy case has an unusual constituency: namely, existing and future patients who have, or will need, one of debtor’s artificial hearts.

–Chapter 11 debtors commonly have a group of customers with an interest in the outcome of the case.  Rarely, however, do such customer-interests rise to this life-and-death level of importance.

–Because of the quick sale process expected here, it will be difficult to assure that concerns of patients and their physicians are adequately addressed and protected.

 A Proactive Mediation Suggestion

So . . . here is a proactive mediation suggestion for cases like this with special need circumstances:

Appoint a mediator with proactive authority to:

(i)  identify the people with the special need (i.e., patients and their physicians in this case); and

(ii) order all pertinent parties, including representatives of those with the special need, into immediate mediation so that special need concerns can be identified and addressed in the sale approval process.

Note:  Information about the SynCardia bankruptcy case, including copies of documents filed in the case, can be found at this website.

The Absolute Priority Rule Torpedoes Settlements in Individual Chapter 11 Cases (Part One)

Farm Facilities — Out of Operation

By Donald L. Swanson

I don’t need to see a study or commission report for the title of this article.
I’ve seen the problem play out many, many times in real life.
Here is an attempt to explain.

Some Propositions

Proposition # 1: When one party has 0% odds of success at trial, a mediation effort is a complete waste of time.

Proposition # 2: The absolute priority rule is a Chapter 11 plan confirmation standard requiring that creditors either, (1) be paid in full, or (2) agree to something less.

Proposition # 3: Many individual Chapter 11 debtors who can’t pay all debts in full have 0% odds of getting a Chapter 11 plan confirmed over objection of creditors insisting on liquidation.

Proposition # 4: Individuals are living beings who need a “fresh start”– entities aren’t . . . and don’t.

A Farm Crisis Days Illustration

These propositions are based on long and hard experience from the 1980s Farm Crisis days.

The cattle are gone.

Here is how it worked, back then, in pre-Chapter 12 days:

–Most farms are sole proprietorships, so farmer reorganizations are almost always individual Chapter 11s.

–The Farm Crisis is precipitated by, (1) a dramatic drop in prices of corn, beans, cattle, hogs, used equipment, farm land, etc., and (2) an interest rate spike beyond 18%.

–Farmers in Chapter 11 are, uniformly, unable to pay their debts in full — it’s not even close.

–Primary secured creditors have no interest in anything other than complete liquidation.

–Chapter 11 farmers want to keep the farm together and will fight-to-the-death toward this end — but they rarely succeed because of the absolute priority rule.

–Chapter 11 farmers eventually run out of cash, and farms are liquidated by secured creditors, resulting in huge deficiencies and large tax liabilities, neither of which can be paid.

In Northwest Bank v. Ahlers, 485 U.S. 197 (1988), the United States Supreme Court says the absolute priority rule “applies” in Chapter 11 farmer cases, despite empathizing like this: “we do not take lightly” and we “sympathize” with “the plight of the American farmer.”

Settlement efforts back then almost always fail because debtors have no bargaining chip. This is precisely why Congress enacted Chapter 12 for farmers.

Today’s Reality

So . . . fast forward to today. The absolute priority rule still applies in individual Chapter 11 cases.

And the pathologies of the Farm Crisis days remain today for individual debtors. Such pathologies include this: the absolute priority rule torpedoes mediation (and other settlement) efforts in many individual Chapter 11 cases, when creditors can’t be paid in full.

That’s a problem for individuals who need a fresh financial start.