Mediators Just Want to Get Paid: A Recent Hiccup in Bankruptcy

“Girls just want to have fun,” according to Cyndi Lauper.

–And mediators just want to get paid!

We receive an important lesson for mediators getting paid out of bankruptcy from a recent mediation hiccup.  The lesson is this:

–If you want to get paid from bankruptcy estate funds, you need court approval in advance.

The case is In re Magleby (Case No. 16-15322) in the Bankruptcy Court for the Central District of California.  Mr. Magleby, the Chapter 11 Debtor, is having family law disputes with his wife / soon-to-be-ex.

4/24/2016: Debtor files Chapter 11 bankruptcy.

9/27/2016: Bankruptcy Judge orders Debtor and spouse to mediate disputes over multiple bankruptcy/divorce issues.

10/10/2016: First mediation session occurs. Debtor had already paid an $6,500 up-front fee to the mediator but owes an additional $1,925 for this session.

10/12/2016: Mediator submits her $5,775 bill for the remaining $1,925 from the first session plus an additional $3,850 up-front fee for the second session (which is scheduled to occur on 11/2/2016).

10/28/16: Debtor files  “Emergency Ex Parte Application for Authority to Pay Post-Petition Fee of Family Law Mediator,” seeking authority to make the advance payment for the second mediation session.

10/31/2016: Bankruptcy Judge issues “Order Setting Hearing” on the Emergency Application for 11/29/2016.

11/2/2016: The previously-scheduled second mediation session does not occur.

11/8/2016: Debtor files and serves on all creditors an “Amended Application for Authority to Pay Post-Petition Fee of Family Law Mediator,” which requests, (i) after-the-fact approval of the first $6,500 payment, and (ii) advance approval for payment of the $5,775 bill.

11/29/2016: Hearing is held on the Amended Application.

12/5/2016: Bankruptcy Judge issues “Order Approving Debtor’s Amended Application,” which approval is based in part on the fact that no one filed an objection to the Amended Application.

The 10/31/2016 “Order Setting Hearing” contains a lengthy expression of dissatisfaction from the Judge.  Here is a flavor of his thoughts:

–“While the court had encouraged the parties to mediation, . . . the court does not sanction Debtor’s failure to make sure that the applicable rules are followed with respect to the authorization of use of estate funds out of the ordinary course of business.” This is the fault of Debtor’s counsel, he says, not of the Debtor or the Mediatior.

–“ There are several problems with this Application.”

–“First, Debtor . . . has already incurred the obligation . . . to pay the mediator . . . without complying with [advance-approval requirements].”

–“Second,” Debtor’s counsel procrastinated and now requests an emergency hearing.

[Editorial Note: The Court retains a sense of humor:  “Counsel’s procrastination brings to mind that T-shirts are available for purchase online that state: ‘Your Procrastination is Not My Emergency.’”]

–“It appears to this court that the Application is simply an attempt to flout” applicable rules.

–So, “the court hereby . . . sets the Application for hearing . . . on November 29, 2016 at 2:30 p.m.” and “Debtor must serve copies of a notice of the hearing, the Application and a copy of this order on all parties [as required by law].”

Whenever a mediator is to be paid from bankruptcy estate funds, everyone needs to remember that all such payments require advance approval from the bankruptcy court.

Everything may have turned out okay in the In re Magleby case for the mediator and the Debtor.

–But it didn’t turn out so well for Debtor’s attorney, who had to, (i) put in a bunch of additional work (undoubtedly, without additional compensation), and (ii) endure disparaging comments from the Bankruptcy Judge.