Getting Mediators Approved and Paid in Bankruptcy

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Getting paid?

By Donald L. Swanson

Every now and then a mediator gets stiffed on fees.  It doesn’t happen often.  But it happens.  And it’s always a shame.

Mediators of bankruptcy disputes have an additional payment-related hurdle they must navigate.  The hurdle is this:

–Advance court approval is required for getting paid from bankruptcy funds.

Statutory Requirements

Two different statutory requirements are potentially involved with this advance-approval requirement.

The first is 11 U.S.C. § 363(b)&(c).

–Subparagraph (c) of § 363 provides that bankruptcy funds MAY be used to pay bills “in” the ordinary course of debtor’s business without obtaining court permission first; but

–Subparagraph (b) of § 363 provides that bankruptcy funds MAY NOT be used to pay bills “outside” the ordinary course of business, unless advance permission is obtained from the court after notice to interested parties.

The second is 11 U.S.C. § 327(a).

Section 327(a) requires court approval for employment of a “professional person” by the bankruptcy estate.  The term “professional person” is not defined in the Bankruptcy Code.  Instead, it is used like this:

–The bankruptcy estate, with court approval, may employ “one or more attorneys, accountants, appraisers, auctioneers, or other professional persons.”

Additionally, Fed.R.Bankr.P. 2014 describes the procedures that must be followed in obtaining approval under § 327(a) for the professional’s employment.  And the professional’s fees are subject to an after-the-fact review and Court approval, upon notice to interested parties.

General Agreement

A general agreement exists on the proposition that the payment of a mediator’s fee is outside the ordinary course of a debtor’s business.   Accordingly, approval of the mediator’s fee, prior to payment, is required under § 363(b).

Many bankruptcy courts have local mediation rules authorizing motions to approve mediation proposals and to retain mediators.  And it is common for such mediation-approval orders to also authorize payment of a fee to the mediator from bankruptcy funds, under § 363(b).

A Minority View

One Bankruptcy Judge in Texas caused a commotion, in early 2015, on bankruptcy mediation.

On a belated request to hire a mediator and pay the mediator’s fee from bankruptcy funds, the Judge is reported to have said in open court:

–“Over my dead body. I do not like mediation. I think it is wasteful for the most part and you all needed to get my permission”; and

–“Ain’t gonna happen. Don’t you ever do that again.”

This same Judge, in the same case, issues a written opinion explaining how a mediator is a “professional person,” requiring advance employment approval and fee application formalities under § 327 and Rule 2014.  However, it seems that this Judge’s view is driven by his desire to disapprove all mediation efforts, rather than by an unbiased application of technical requirements.  See, e.g., this article titled, “Are Mediators ‘Professionals’ under § 327(a)?

It appears that other bankruptcy courts are shunning the minority view espoused by this Bankruptcy Judge.  That’s a good thing, of course!!

A Proactive v. Passive Distinction

Bankruptcy Courts, however, have seen a new type of mediation process: a mediator position that is highly proactive in initiating, leading and controlling mediation in a case.  This process seems to be more like a settlement master role (under Fed.R.Civ.P. 53) than a traditional mediator.

One of the highest-profile cases with proactive mediators is the City of Detroit bankruptcy.  In that case, the Bankruptcy Judge creates a proactive mediation process and appoints a lead mediator who, in turn, appoints a team of deputy mediators.  The mediator team, then, moves swiftly and aggressively to exercise the full-extent of powers delegated to them by the Bankruptcy Court.  See, e.g., this article titled, “Detroit Bankruptcy’s ‘Proactive Mediators’: A New Mediation Model.”

The proactive Detroit mediators have a dramatically different role and function from a traditional mediator, whose role is essentially passive and limited.

The safeguards for paying compensation outside the ordinary course of business in § 363(b) are sufficient for employment and compensation of a traditional mediator.

But proactive mediators, like those in the City of Detroit bankruptcy, are different.  Proactive mediators exercise autonomy and authority over the entire mediation process—from identifying disputes for mediation to ordering parties into mediation for those disputes.  Therefore, such mediators should be considered “professionals” and subject to all the § 327 and Rule 2014 requirements for employment and compensation.

Conclusion

Mediators operating in a traditional / passive role should not be subject to the “professional” retention and compensation requirements of § 327 and Rule 2014.  Section 363(b) requirements for advance approval of payments outside the ordinary course of business are sufficient protections for the traditional / passive mediation process.

Proactive mediators, however, acting in a role similar to that of the Detroit mediator team, are exercising authority and responsibility in the bankruptcy case and should, therefore, be subject to the “professional” requirements of § 327 and Rule 2014.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

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