Former Judge as Bankruptcy Mediator (IN RE SMITH, Part Three)

By: Donald L. Swanson

This is the third-of-three articles on In re Smith, 524 B.R. 689 (Bkrtcy.S.D.Tex. 2015).

Sitting Judges as Mediators–for Comparison

I’ve published an earlier article on sitting bankruptcy judges as mediators in bankruptcy cases titled, “What’s the Fascination with Requesting an Unnamed ‘Sitting Bankruptcy Judge’ as Bankruptcy Mediator?”

In response to that article, an attorney from New Jersey provides this comment / concern on sitting bankruptcy judges serving as bankruptcy mediators:

–[This subject] has been a source of much frustration for me and many other practitioners I know over the years as the situation has worsened (i.e., you see more and more sitting judges mediating). I think that the honest reason that parties ask for a sitting judge . . . is because there is the assumption that a sitting judge will be most likely to force a settlement . . . . In my experience, practitioners generally have expressed (privately) their concern about what the “mediator”/sitting judge will tell the judge that is overseeing the ch 11 cases if they are the holdouts and what that may mean as far as their treatment in both the ch 11 cases at issue and in future cases. It is for all of these reasons and many more that I think sitting judges should never be allowed to oversee mediations in their own districts (frankly, I think it should be generally frowned upon).

Former / Retired Judges as Mediators:

The Judge in the In re Smith case, weighs in on the subject–only this time involving a former / retired bankruptcy judge, who previously served alongside the presiding judge.

Here’s what the In re Smith Judge says about the matter:

–[T]he Court . . . noticed that the parties . . . had already scheduled mediation . . . with retired Bankruptcy Judge Leif Clark (ex-Judge Clark) to serve as the mediator.
–Here, for the reasons stated below, this Court finds that to prevent the abuse of–including the appearance of abuse of –selecting ex-bankruptcy judges as mediators, it is necessary to apply § 327(a) and Rule 2014(a).

The “Cronyism” Concern:

The Court rejects the proposed mediation retention for various reasons, including the following:

–Shortly after the modern U.S. bankruptcy system emerged with the Bankruptcy Act of 1898 (the Bankruptcy Act), the practice began to develop a reputation for incestuousness and cronyism. . . .

The practice was essentially controlled by “bankruptcy rings,” closely knit groups of professionals who would appoint each other for every role in a bankruptcy case. . . .

This insularity bred a perception of the bankruptcy practice as exploitative and unprincipled.

–The instant case provides a prime example of the risk and appearance of “cronyism.“

The undersigned judge and ex-Judge Clark were long-time colleagues in the innermost circle of the bankruptcy profession. . . .

If the undersigned judge were to allow ex-Judge Clark’s employment without the protections of § 327(a) and related provisions, it would reopen the door–at least in appearance–to the cronyism that the Bankruptcy Reform Act was designed to prevent. . . .

In cowboy parlance, the process of selecting an ex-judge as a mediator must be “clean as a hound’s tooth.”

–The undersigned judge and ex-Judge Clark served on the bankruptcy bench in Texas for eight years until the latter’s retirement in late 2012.

Editorial Comments:

This Bankruptcy Judge in Texas is on record as being opposed to mediation in general.  And he is most-definitely opposed to mediation in this particular case.

But his anti-mediation bias seems to get the better of his rationale.  For example:

–Who is still citing “cronyism” problems that arose under the “Bankruptcy Act of 1898”?

That Act has been old-news for decades.

And no one is suggesting that the current bankruptcy system is plagued by the “cronyism” that this Judge so adamantly wants to protect us from.

–This proposed mediation is between two disputing parties: a bankruptcy trustee and a partnership.  And these two parties chose this mediator themselves, without the Court’s input.

It’s not like the Judge selected his former colleague as mediator and imposed him upon the parties: that might raise a “cronyism” concern–but that’s not what happened here.

The appointment of a sitting bankruptcy judge as mediator, and imposing that appointment upon non-consenting parties, may raise “cronyism” concerns.

But that’s not what happened here either.

Surely, former bankruptcy judges are entitled to make themselves available as mediators to whichever parties want to retain their services!

Question:

What does everyone think about this?

View previous articles IN RE SMITH: Part I and Part II .