Mediating Discharge Disputes—A Tough Task

A tough task (photo by Marilyn Swanson)

By Donald L. Swanson

Lawsuits opposing discharge are tough, to begin with.

That’s true whether the action is under Sec. 523 (opposing discharge of the plaintiff’s claim) or under Sec. 727 (opposing discharge of all claims).

Here are some reasons why:

  • A revenge-type motivation is commonly involved, since all such lawsuits contain an allegation of debtor misconduct, and plaintiffs commonly believe that the debtor needs to be punished in some way;
  • Typically, there are little-to-no resources for a debtor to fund the lawsuit, so it is usually handled on a shoestring budget with limited-to-no discovery by debtor; and
  • Often, the creditor has solid evidence of debtor’s misconduct, so the question becomes one of collectability, instead of liability.

Mediating Discharge Disputes

So, it should not be surprising that mediating a settlement of discharge disputes is also tough. For example:

  •  It’s often difficult to see how a debtor might repay a substantial debt, since the debtor is newly emerging from a bankruptcy proceeding; 
  • Adding legal fees for mediation preparations and a mediator’s fee onto a cash-strapped debtor trying to fund a discharge defense is commonly viewed as prohibitive; and
  • Sometimes, creditors have a solid Sec. 523 claim for their own debt but include a Sec. 727 claim for all debts in their complaint to apply greater pressure on debtor toward settlement.

A decade-or-so ago, I heard a panel of bankruptcy judges discussing the mediation of discharge disputes.  Here is an exchange (as I recall it) from that panel:

     Question:  Why not send all discharge disputes to mediation?

     Answer:  Because that encourages creditors to file more of those lawsuits—figuring they’ll be able to extract something from the debtor in mediation, at limited cost.

This judge was speaking from his own experience and observations, not from mere theory.

An Example

Some time back, I mediate a discharge dispute:

  • The creditor raises claims under both Sec. 523 and Sec. 727;
  • The amount at stake approaches $100,000;
  • No discovery has occurred; and
  • Trial is scheduled within two weeks after the mediation.

To minimize mediation costs:

  • The session is limited to 3 hours;
  • I do a discounted hourly fee and charge only for in-session time;
  • Neither attorney prepares any pre-mediation materials; and
  • I review Debtor’s schedules and the lawsuit pleadings.

Attorneys on both sides are highly experienced and capable.  They agree upon an innovative approach, utilizing a joint session focused on getting to the heart of the dispute quickly:

  • Debtor’s attorney begins with a direct examination of his own client on disputed facts, with Debtor answering candidly and admitting several crucial points;
  • Periodically, Debtor’s counsel stops and asks if there are any questions on the subject just discussed;
  • Occasionally, Creditor or its counsel interjects with factual information suggesting that the Debtor may be misremembering some of the time lines or crucial details;
  • All this happens in a civil, professional and respectful manner; and
  • It only takes about 45 minutes to get clarifications and common understandings on, (i) disputed facts, and (ii) what will happen if-and-when a settlement is not reached.

Then separate caucusing happens, so the parties can discuss settlement offers privately.  I bounce back and forth between the two caucuses for the exclusive purpose of communicating offers.  There is no need for me to “pound on” either side, because everyone is on the same page of understanding.

About an hour into the mediation, the basis for an impasse starts to emerge.  The impasse is not over a fact dispute or a dispute of law.  The dispute is over a value judgment.  

One hour and 30 minutes into the session, the parties are getting close to a settlement number and on monthly payment amounts.  But it’s obvious that the parties have divergent views on Debtor’s accountability, and they cannot agree on the value judgment issue.  

So, we return to joint session to assure that everyone has a common understanding.  And then, the mediation session ends without a settlement and with this comment from me: “I assume you will keep talking as the trial date approaches!”  

I charge for 1.5 hours of time.  

But . . . I feel good about this mediation session and about the service I provided.  Here’s why:

  • The parties now have a common understanding of the disputed facts;
  • The attorneys have a clear understanding of the law and the consequences of no settlement;
  • All parties are making their own value judgments on their own terms; 
  • My sense is that the odds of a post-mediation settlement before trial are very high [the parties do, in fact, reach a settlement before trial]; and
  • I’ve provided a valuable service to the parties and to the Court, at a fee that is appropriate to the circumstances.

Conclusion

Mediating discharge disputes is tough.

But a mediation session for such a dispute can, nevertheless, provide a valuable (and personally rewarding) service in difficult circumstances.

  ** 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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