Early Mediation is Effective in Bankruptcy — More So Than in Other Disputes

Risks go up as time passes and daylight wanes (photos by Marilyn Swanson)

“When is the optimum time to mediate?”

A 2015 Study

That question is addressed in a 2015 study of 400 mediations titled, “Inside the Caucus: An Empirical Analysis of Mediation from Within.” These mediations were conducted by one of the study’s authors, between 2008 and 2013, on employment disputes (e.g., discrimination and wrongful termination) [Fn. 1].

Its Findings

The study supports findings of other studies that:

“the timing of settlement reflects the arrival of new information over time”;

delay may be costly, but “it is worthwhile when it allows the parties to gather better information”;

parties are “likely to delay settlement when they think they are still likely to receive significant new information”;

parties are “likely to settle when the rate of information revelation wanes”; and

“the high volume of information exchanged during mediations increases the probability of settlement during or soon after the mediation.”

Optimum Time for Mediation

Such findings are consistent with my own experience. But I’d add another element with this proposition:

The optimum time for mediation is when the parties believe they have enough information to assess their risks at trial.

Such a proposition is an outgrowth of this settlement formula:

Settlement = Assessment of Risk + Math

This formula applies in every business dispute, despite the existence of acrimony or anger. The explanation for failed mediation efforts in such cases is this: the parties assess their respective risks differently.

–An Exception

When a business dispute is among family members, however, the settlement formula noted above goes down the toilet. For such disputes, the adage that applies more accurately is often this:

“I’ll see you in hell before you get a dime!” And they mean it . . . literally.

Early Mediation in Bankruptcy

Early mediation in bankruptcy is often effective—and more so than in other types of disputes. That’s because the disputing parties often already have the information they need, without extensive discovery. Here’s why:

In most lawsuits outside of bankruptcy, the most important disputes are over liability and damages amounts, with collectability only a side issue—if it’s an issue at all;

In bankruptcy, however, the vast majority of all claims are on promissory notes or invoices, where neither liability nor damages amounts are in dispute, with collectability being the central problem;

Bankruptcy debtors will have already made extensive disclosures on schedules and statement of financial affairs; and

A need for speed exists for many bankruptcy disputes (the continued viability of a business, or the value of its assets, may be in the balance), which renders useless any time-consuming discovery tools.

So, disputes over issues like cash collateral or plan confirmation are often resolved with little formal discovery—if any at all.

Moreover, delays to get more information are infrequent in bankruptcy disputes. To be sure, parties will cause delays in bankruptcy for a variety of purposes—but to gain more information is not usually one of them.

Conclusion

Early mediation is an effective settlement tool in many cases—but especially in bankruptcy.

Footnote 1: The study report is by Professor of Law & History, USC Law School, Daniel Klerman, and by Clinical Professor of Law and Director, Mediation Clinic, USC Law School, Lisa Klerman, and is published in 12 Journal of Empirical Legal Studies, 686-715 (Dec. 2015).

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