The “Estate Neutral” as an Expert Witness, a Mediator and a Financial Advisor

Neutral Functionality

By: Donald L Swanson

When ABI’s Commission to Study the Reform of Chapter 11 issued its Final Report in 2014, one creative approach it recommended is to authorize a new bankruptcy position: the “estate neutral.”

The Final Report says that chapter 11 “needs to offer tools to resolve a debtor’s financial distress.” The estate neutral would be such a tool. The precise function of the new position would be established in the order of appointment and would be designed to meet “the particular needs” of each case. The idea is that an estate neutral offers “a tool to more cost-effectively investigate and resolve disputes and other potential barriers” to reorganization.

Here are three examples, from the Final Report, of how an estate neutral could be utilized.

 1.  Court-Appointed Valuation Expert. The Commission finds that (1) “courts should be permitted and encouraged to appoint valuation experts in cases in which such an expert can provide assistance to the court,” and (2) “if the court intends to rely” on such an expert, the expert “must testify in the case and be subject to cross-examination.” Estate neutrals could, the Commission determines, perform such a role.

 2.  Mediator. The Commission finds that an estate neutral could fill the role of a mediator.

 3.  Financial Advisor for Small/Medium-Sized Business Cases. The idea for an estate neutral in a small or medium-sized business is to appoint a person with financial expertise to “evaluate the viability of the business” and to “assist both the court and the debtor” in assessing prospects for reorganization. The estate neutral could be appointed for such specific purposes, says the Commission, as performing a financial review of the debtor, consulting with the debtor on its finances and reorganization options, investigating the debtor’s affairs and helping debtor develop a chapter 11 plan.

While an estate neutral would be a new position in bankruptcy, it has plenty of historical precedent in federal courts and under state laws — both directly and by analogy.

Federal Courts: Special Masters

U.S. district courts have been utilizing special masters under Fed. R. Civ. P. 53 for a very long time; in fact, there is a special masters “Handbook” for federal courts. Common roles for such masters include expert advisor masters (see valuation expert role mentioned above), settlement masters (see mediator role mentioned above) and accounting masters (see financial advisor role mentioned above). A study of special master appointments and results concluded the following:

–“All of the judges interviewed” indicated that “the special masters were effective in meeting their objectives,” and most judges “described the level of effectiveness as ‘extremely’ or ‘very’ effective.”

–“Almost all of the attorneys” for various parties “reported that the master effectively met the purposes and goals of the appointment.” Responses of attorneys “ranged from ‘good job’ and ‘reasonably effective’ to ‘very effective’ and ‘extremely effective.’”

–In cases involving “complex issues” or “a specialized question” as the primary purpose for appointment, “all of the judges felt the master was very effective in helping them understand complex issues and thus move the case along.” Several of these judges “reported that the appointment saved the parties’ money, made the case settle faster, or made better use of judicial time.”

Unfortunately, the special master role under Fed. R. Civ. P. 53 never made its way into bankruptcy: Fed. R. Bankr. P. 9031 says, “Rule 53 F. R. Civ. P. does not apply in cases under the Code.” Yet a special master appears to be precisely the type of role being proposed by the Commission as an “estate neutral.”

Federal Courts: Court Appointed Experts

A 2013 report on “Court-Appointed Neutral Economic Experts” provides the following information on the appointment of neutral expert witnesses under Rule 706 of the Federal Rules of Evidence:

–Judge Richard Posner “has advocated the use of Rule 706” for court-appointments of expert witnesses.” Judge Posner (1) observed that “the judicial constraints on tendentious expert testimony are inherently weak because judges (and even more so juries … ) lack training or experience in the relevant fields of expert knowledge”, and (2) recommended “asking each party’s hired expert to designate a third, a neutral expert who would be appointed by the court to conduct the necessary studies.”

–In one case, Judge Posner “considered the statistical evidence that the parties’ economic expert witnesses submitted” and “recommended that on remand ‘the district judge … appoint his own expert witness, rather than leave himself and the jury completely at the mercy of the parties’ warring experts.’”

–In another case, Judge Posner wrote that “suits under the Fair Debt Collection Practices Act have repeatedly come to grief because of flaws in the surveys conducted by the plaintiffs’ expert”; he recommended that district judges “consider exercising the clearly authorized but rarely exercised option of appointing their own expert … to improve judicial understanding of survey methodology.”

State Laws

The estate neutral also has historical precedent-by-analogy under state laws. Back in the Farm Crisis days of the 1980s, many farm states adopted mediation requirements that had to be met before a lender could begin enforcement action on a delinquent farm loan. Many of these farm states, including Nebraska, Iowa and Minnesota, also established a process that helps farmers prepare for mediation under these laws: the farmer meets with a financial advisor, who helps the farmer evaluate the financial situation, consider various options for addressing financial problems, and develop negotiating goals for the mediation session.

Such a mediation-plus-financial advisor process has proven to be highly successful. A report on the Minnesota program for the 2015 fiscal year, for example, indicates that, of the 917 farm debtors who completed mediation, 79 percent reached a settlement with the creditor.

All of the historical precedents mentioned above provide strong support for the Commission’s “estate neutral” recommendation.


The estate neutral role proposed by the ABI Commission appears to offer great promise. It is well supported with precedent, both directly and by analogy, and it should be pursued with all due haste.

Perhaps a pilot project in a few courts would be appropriate?

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