The ADR Spectrum: Subchapter V Adds A New / Unique ADR Role

By: Donald L Swanson

Alternative dispute resolution (“ADR”) has always referred to the use of a neutral third party to help resolve disputes. 

But the recent addition of Subchapter V to the Bankruptcy Code has changed that.  I’ll try to explain.

Alternative Dispute Resolution Act of 1998

28 U.S.C. § 651(a) is part of the Alternative Dispute Resolution Act of 1998 and is captioned, “Authorization of Alternative Dispute Resolution.”  It provides this definition (emphasis added):

“an alternative dispute resolution process includes any process or procedure, other than an adjudication by a presiding judge, in which a neutral third party participates to assist in the resolution of issues in controversy”

28 U.S.C. § 651(a) also provides four examples of alternative dispute resolution processes:

• mediation;
• early neutral evaluation;
• minitrial; and
• arbitration.

All four of these examples invoke a “neutral third party” to “assist in” resolving disputes.

ADR Spectrum

What differs among the four examples is this: the levels of evaluation and authority involved in each.  Such differing levels create a spectrum of alternative dispute resolution processes (the “ADR Spectrum”).

–From 28 U.S.C. § 651(a)

Here is a list of statutory examples (from § 651(a)) of neutral third parties on the ADR Spectrum who help resolve disputes [note: the list starts with neutrals who provide no evaluation and have no authority, and then it progresses with increasing levels of both to binding arbitration]:

• Traditional Mediation: a mediator, under traditional theory, plays no evaluative role and has no authority over the merits of the dispute.
• Evaluative Mediation: some mediators provide a degree of evaluation, notwithstanding the traditional theory—but they still have no authority over the merits of the dispute. 
• Early Neutral Evaluation: an early neutral evaluator provides an evaluation, of course, but has no authority over the merits of the dispute.
• Minitrial: a minitrial involves a judge who hears evidence and provides an evaluation but has no authority over the merits of the dispute.
• Contract for Binding Mediation: some contracts provide that disputes go to mediation and, if the parties are unable to reach a resolution in mediation, the mediator is then empowered to issue a ruling on the merits of the dispute that is binding on the parties.
• Contract for Binding Arbitration: arbitration involves a contract between disputing parties for one or more arbitrators to provide, (i) an evaluation, and (ii) a ruling on the merits of the dispute that is binding on the parties.    

–From Bankruptcy Code

The Bankruptcy Code provides two additional roles on the ADR Spectrum:

• Examiner:  a Chapter 11 examiner investigates the debtor’s conduct and financial affairs (§§ 1104(c)-(d))—but the examiner has no other duty or authority, except as ordered by the court (§ 1106(b)); and
• Subchapter V Trustee Facilitator: a Subchapter V trustee has a statutory duty to “facilitate the development of a consensual plan of reorganization” (§ 1183(b)(7)).

The examiner role is well-within the ADR spectrum.  An examiner is much like the early neutral evaluator and minitrial judge, but with the possibility of a greater role: the Bankruptcy Code provides an examiner’s duties can be expanded, (i) “to the extent that the court orders,” and (ii) to include duties “the court orders the debtor in possession not to perform” (§ 1106(b)).

Subchapter V Trustee =/= Neutral Third Party

The Subchapter V trustee’s statutory “facilitate” role, however, is new and unique and goes beyond the prior ADR Spectrum in this respect:

• it creates an ADR “facilitate” role for a trustee, who cannot qualify as a “neutral.” 

Here’s why the trustee is not neutral: statutory duties for a Subchapter V trustee include, (i) investigating debtor’s conduct and financial affairs, (ii) objecting to proofs of claim, (iii) opposing debtor’s discharge, (iv) taking positions on the merits of substantive issues, and (v) performing the duties of a debtor in possession when the debtor is removed as such (§ 1183(b)).

Accordingly, the ADR spectrum now includes, by Congressional edict, a third party facilitator (i.e., the Subchapter V Trustee) who is interested in the merits of a dispute and, therefore, not-neutral. That is both new and unique.

ADR Spectrum—A Line Sequence

The photo at the top of this article is of a line sequence, showing how the ADR Spectrum (using roles identified in 28 U.S.C. § 651(a) and in the Bankruptcy Code), (i) progresses from a no-evaluation and no-authority mediation on the left to binding arbitration on the right, and (ii) now includes a not-neutral third party facilitator—the Subchapter V trustee.

Conclusion

The ADR Spectrum has always included a neutral third party as an essential ADR element, under 28 U.S.C. 651(a).

The Bankruptcy Code, with its recent addition of the Subchapter V trustee (and the trustee’s “facilitate” duty), has added a not-neutral third party to the ADR Spectrum.   That is a significant change!

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