Why Early Mediation is More Effective in Bankruptcy Reorganization Disputes than in Regular Commercial Litigation

By: Donald L. Swanson

“’Early’ (mediation) is good and usually best”; but
“Lawyers are not easily persuaded away from the view that they ‘need more info’ before they engage settlement discussions in mediation”; and
“in many cases, they may be right.”

–Comment by a mediation professional on a discussion board.

I agree with this comment—100%—for regular commercial litigation.

But for mediation of reorganization disputes in bankruptcy, typically, the “need for more info” is often greatly diminished and grossly exaggerated. Here’s why.

For Regular Commercial Litigation

In regular commercial litigation, disputes are about:

• resolving contested facts;
• then assigning liability (or not) under applicable law; and
• then determining the appropriate damages or other remedy when liability is assigned.

In such circumstances, getting contested facts resolved through discovery is step-one in litigation. And, as the mediation professional points out in the quotes above, getting the facts nailed down, before mediation begins, may be the optimum thing to do.

For Bankruptcy Reorganization

But bankruptcy reorganization is different.

For the vast majority of claims in a bankruptcy reorganization, disputes over liability and the amount of damages are rare.

That’s because bankruptcy claims are commonly based on promissory notes, invoices and security agreements. Under such agreements, liability and amounts of damages are a function of basic information and simple math: computing interest accruals is about as complicated as it gets.

Instead, disputes in bankruptcy reorganization tend to be about collectability, not liability or damages.

Moreover, bankruptcy laws require extensive disclosure by debtors of current and historical financial data–up front. Which means that extensive information on collectability is already provided, early in a debtor’s bankruptcy, via disclosures contained in Debtor’s schedules, statement of financial affairs, monthly operating reports, and disclosure statement.

Accordingly, the need for extensive discovery to address reorganization issues is minimized, which makes viable the prospect for early mediation of bankruptcy reorganization disputes.

Studies: Early Mediation is Better

The ancient admonition says, “Settle matters quickly with your adversary who is taking you to court.”

Studies agree: settlement prospects are heightened during the early stages of a lawsuit. Here’s why: each disputed motion, whether a discovery spat or for dismissal, reduces settlement prospects by entrenching the parties in their respective positions and hardening their resistance to settlement.

My experience is consistent. I remember, for example:

• a client, anxious for settlement at the beginning of a case, becoming offended by opponent’s arguments in preliminary motions—and then rejecting settlement overtures in favor of litigation;
• a client, open to a modest settlement amount in the beginning, becoming driven, during early fights over procedural issues, to make the other side pay dearly;
• an opponent rejecting, in an early mediation, a reasonable offer, only to get hit with much, much worse after trial; and
• an opponent refusing to even consider an early mediation, then suffering drastic consequences at the end of the case.

Bankruptcy Reorganization Urgencies

Bankruptcy reorganization also has an urgency that is not present in most other types of cases.

In a bankruptcy reorganization, the most pressing thing is to assure that asset values are preserved and maximized, whether as a going concern or for liquidation. Quick action is often required, without the luxury to wait a few months for discovery to progress.

So, urgent action is often essential. And an early mediation among interested parties is often the precisely-needed tool for just such a moment.

Conclusion

Early mediation is ideally suited to resolving bankruptcy reorganization disputes and should be given greater consideration and more frequent use.

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