Early Mediation of Plan Confirmation Issues in Difficult Chapter 11 Cases

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Creating order out of chaos — Antoni Gaudí

By Donald L. Swanson

Bankruptcy courts “generally presume that good chapter 11 lawyers can and should negotiate without the help of an outside mediator.” However, some Chapter 11 cases are “so inherently complex” or “riddled” with “high levels of distrust” that “the presiding judge (or more rarely, the parties) views the appointment of a plan mediator as a virtual necessity from the outset.” [Footnote 1]

Need for a Different Process

Mediation processes for plan confirmation in a chapter 11 case are different from mediation processes in a typical lawsuit. A typical lawsuit wends its way, at a leisurely pace, from the pleadings stage, into written discovery and then depositions, followed by pre-trial wrangling, then into trial, concluding with appellate action (with the possibility of a remand restarting the entire process). Mediation in a typical lawsuit occurs toward the end of the case in a one-and-done session: either the case settles in that session or the mediation is viewed as a failure.

Chapter 11 plan-confirmation processes are nothing like a typical lawsuit.

First, the “leisurely pace” component does not exist. A chapter 11 case is about a business that must either remain alive or liquidate in an orderly manner. The value of the business, in a liquidation or as a going concern, must be maintained and maximized at all costs. This necessity creates a sense of urgency and a need to resolve pressing business disputes quickly and efficiently.

Second, there is no such thing as a pleadings stage in the early portions of a chapter 11 plan process. The plan and disclosure statement are the closest thing to that, but many issues relating to plan confirmation are being addressed and resolved from the earliest days of the bankruptcy case — and long before a plan is ever proposed.

Third, written discovery, followed by depositions, is a luxury that is something of a rarity in Chapter 11 processes. Disputes over first-day motions, cash-collateral use, relief from the automatic stay and adequate protection are immediate, must be addressed in haste and have little tolerance for delays in any form. The reality is that formal discovery is nonexistent for many Chapter 11 disputes.

Fourth, the number of disputing parties in a Chapter 11 case can be enormous: e.g., hundreds of vendors, unsecured creditors and customers, dozens of landlords, a variety of secured creditors, numerous employees, taxing authorities from all levels and other priority claimants, government regulators, multiple owners, etc. This is a significant difference from the number of constituencies in a typical lawsuit with its limited group of plaintiffs and defendants.

Timing and Goals

Because of these differences, the timing and goals of a Chapter 11 plan mediation need to be dramatically different from — and perhaps the polar opposite of — mediation in a typical lawsuit. Here is a suggested mediation model for Chapter 11 plan confirmation:

Timing: Chapter 11 plan mediation consists of multiple sessions that begin in the early stages of the case — an optimum time is after the initial flurry of motions for use of cash collateral and relief from stay are resolved and it is clear that the debtor will remain in possession.

Goals: In the early sessions, chapter 11 plan mediation needs to focus on bringing order out of the chaos and on creating an organization and structure for identifying, addressing and resolving disputes through subsequent legal action and negotiations.

One Example

Many bankruptcy attorneys, parties, mediators and judges can tell stories of how this Chapter 11 plan mediation model works. Below is an example of a successful early-mediation effort in a Chapter 11 case.

We’re at the beginning of a Chapter 11 case with lots of competing interests. Everyone is in a fight-every-battle mode. We are past the initial flurry of motions, and it is clear that debtor will continue in possession. However, creditors remain hostile and there is no clear path to a confirmable plan.

The case has a chaotic existence. Efforts to bring order and structure to the case fail to gain traction — and the case is going nowhere. A dozen or more parties and their attorneys schedule a mediation session, which has many participants and lasts all day. It begins with an around-the-conference-room discussion, then groups of two and three disputing parties break into closed-door meetings.

The mediator acts as an orchestrator (as opposed to a controller) of the mediation session. As the day proceeds, parties continue acting on their own initiative: grabbing a disputing party and holding an impromptu discussion, then adding in another party, then breaking up and beginning anew with another group.

As the afternoon wears along, the mediation effort begins to bear fruit. As everyone leaves the session in the evening, the sense of chaos and confusion is gone. Few issues are actually resolved, but an organization, a structure and a direction are beginning to emerge for solving the problems of the case. Many more negotiation and mediation and litigation efforts are still needed to bring the case to conclusion but the case is on its way toward a successful resolution.

This is but one example of how an early mediation model for Chapter 11 plan confirmation can — and should — work.

Topics for Discussion

Every case is different, but here are some topics that might be discussed in early-mediation efforts in a small or medium-sized business case:

What are debtor’s intentions for terms of a plan?

–Are such terms realistic and feasible?
–How does debtor intend to deal with requirements of the absolute priority rule?

What would the various creditors and other bankruptcy constituencies like to see the debtor do?

–Primary secured creditors?
–Landlords/tenants?
–Executory contract holders?
–General unsecured creditors?
–Insurance companies?
–Employees?
–Others?

Is there a direction that might be identified where everyone could get on board?

What chapter 5 avoidance and similar claims exist?

–Against insiders?
–Against non-insiders?

If creditors are demanding liquidation and, if debtor were to pursue liquidation in a manner designed to maximize value for everyone, what would such an effort look like?

–Might creditors be willing to make concessions on guaranty, chapter 5 and other claims against insiders?

Which nondebtor constituencies are in disputes with each other?

–Are lien interests or priorities in dispute? If so, who are the disputing parties and how might these disputes be addressed?
–Is there anything non-insiders might to do minimize chapter 5 and similar claims against them?

Conclusion

The idea behind early mediation efforts in a chapter 11 case, toward plan confirmation, is to begin developing an organization, a structure and a direction for the case. The rest of the case can then build on that, with further negotiation, mediation and litigation efforts to bring the case to a successful conclusion.

Footnotes

Footnote 1. These quotes are from Hon. Lisa Hill Fenning (ret.) contained in the book, “Bankruptcy Mediation” (ABI 2016), which is available for purchase in the ABI Bookstore (store.abi.org).

Note:  This article was originally published in the ABI Business Reorganization Committee Newsletter dated November 29, 2017.

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