By: Donald L Swanson
What follows is a script (more or less) of my portion of a panel presentation in an webinar, presented on September 14, 2021, sponsored by the Mediation Committee of the American Bankruptcy Institute (“ABI”), titled “Facilitation Skills for Subchapter V Trustees.”
A video of the webinar appears at this link, subject to password protection for ABI members.
This is something new—the Subchapter V trustees’ facilitation role. All of us, who serve in this role, are trying to figure it out. And we are doing it on the fly—learning by doing.
But here’s the encouraging thing: early returns are positive. All indications are that we are, collectively, doing very well. It’s working!
In fact, it’s working so well, I suggest, this facilitation role will become a model for dealing with disputes in other types of cases.
- Congress has inserted a proactive, mediation-type role into each Subchapter V case—at the very beginning; and
- Studies on mediation timing declare: the earlier mediation occurs in a case, the better it is—that’s because every contested motion (to dismiss, on discovery spats, on a dispositive motion, etc.) entrenches the parties in their positions and reduces the odds of settling.
Normal mediation, of course, waits until the end of the case, right before trial, when everyone is exhausted financially and emotionally—that’s the worst time.
Subchapter V changes all of that. It inserts a facilitator (with a mediator-type role) into the case at the very beginning with a duty to work, proactively, toward a consensual plan.
A Model—City of Detroit Bankruptcy
When we look for a model or analogy on how this should work, here’s one: the mediator team’s proactive role the City of Detroit bankruptcy. Here’s what happened:
- At the very beginning of the case, the Bankruptcy Judge appoints a Chief Judicial Mediator and gives the mediator team broad powers to deal with all plan-related issues; and
- The mediator team, from the beginning, identifies disputes to be resolved, then identifies interested parties in each dispute, and begins a mediation process on each one. [Note: the mediation of each dispute is not a one-and-done session—it’s a process that begins immediately and continues through plan confirmation.]
The role of the City of Detroit’s proactive mediation team is nothing more and nothing less than “facilitating the development of a consensual plan of reorganization.” And a consensual plan is precisely the result they achieve—a huge and valuable accomplishment!
That is a model for our plan facilitation role. Here’s an article on the subject: The Detroit Bankruptcy Creates “An Ideal Model for Futhre Municipal [and Other?] Debt Restructurings.
Initial Facilitation Meeting
One judgment call every Subchapter V Trustee must make is this: when, how, on which issues and in what way, should facilitation be initiated?
To make that judgement call, one approach is to hold a Zoom “facilitation meeting” immediately following the § 341 meeting. Here’s how that might work:
- An email invitation goes to counsel for debtors and creditors, asking them and their clients to appear by Zoom together at the designated time;
- The agenda for the facilitation meeting is this:
- Debtor’s counsel explains the intended course of action and plan terms,
- Creditors raise questions, concerns and issues in response, and
- The parties talk about what is needed to reach a consensual plan;
- If creditors don’t enter an appearances by the § 341 meeting, the facilitation meeting is deferred until such appearances occur—usually, after a motion for relief or objection to plan is filed.
One case illustrates the value of this. Prior to the facilitation meeting, I’m not seeing any type of scenario the debtors could propose that creditors would support. But in the facilitation meeting, under the first agenda item, Debtors’ counsel explains a proposed sale of certain real estate, along with creative bells and whistles for a potential plan. It’s a brilliant idea that had never occurred to me as a real possibility. So, everyone in the facilitation meeting is thinking: “That would be great! Hope they can pull it off!” There are doubts that debtors can—but creditors are definitely on board with what Debtors are proposing.
That meeting is how facilitation is supposed to work. It:
- begins at the beginning of the case;
- focuses on making progress on broad issues;
- concludes in less than an hour; and
- is the beginning of the facilitation effort—not the end.
As we Subchapter V trustees work out the details of our “facilitate” role, one point is clear: our role is mediation-ish. Here are three reasons why we know this is true:
- facilitating a consensual arrangement between disputing parties is precisely what mediation is all about;
- the U.S. Trustee’s initial solicitation for Subchapter V trustee applicants says they are looking for people with “mediation” experience; and
- a Bankruptcy Judge in Florida recently declares, “the subchapter V trustee acts more like a mediator than an adversary.”
However, the “ish” is because a Subchapter V trustee cannot be a true mediator. Mediation doctrine requires that true mediator not have a dog in the hunt.
A Subchapter V trustee always has a dog in the hunt, because of other statutory duties, which include in appropriate circumstances:
- objecting to claims of creditors;
- objecting to debtor’s discharge; and
- conducting an investigation, complete with a report, on substantive issues.
Consequently, whatever a debtor or creditor says to a Subchapter V trustee can be used against that party.
This raises a confidentiality concern. In mediation doctrine, confidentiality is essential—whatever one party says to the mediator, or to another party during mediation, is not admissible in evidence . . . nor is it subject to discovery or disclosable.
But, since the Subchapter V trustee has multiple statutory duties, none of the parties can have an expectation of mediation-type confidentiality.
Instead, the only confidentiality expectation, in our facilitation communications, is under Federal Evidence Rule 408, which deals with non-admissibility of settlement negotiations.
The confidentiality problem with Rule 408, however, is this: Rule 408 leaks like a sieve.
That’s because Rule 408 is only an evidence rule. It begins with the provision that certain evidence “is not admissible.” But there is a major difference between Rule 408 limitations and mediation confidentiality:
- Mediation confidentiality prevents both discovery and disclosure of information; while
- Rule 408 merely prevents admission into evidence of that same information.
Granted, it’s always possible for the parties, in facilitation discussions, to agree upon additional confidentiality—but that is a matter of contract and not required by law.
Otherwise, Rule 408 is all there is!
With all due respect to mediation doctrine, I suggest that confidentiality issues are not a practical impediment for the facilitation process. Here’s why.
- Whenever concerns arise about confidentiality of facilitation discussions, a response that “Rule 408 applies” should be sufficient—a lecture on confidentiality should not be required; and
- Congress has declared this to be so in Subchapter V and Rule 408.
Facilitation Duty—To help make the case work
The duty to facilitate a consensual plan implies a general duty to help make the case work.
Such a duty does not eliminate adversarial possibilities between the debtor and trustee, but it does have significance in a variety of contexts. For example:
- Eligibility. In the initial interview, when Debtor’s answers aren’t very good on “engaged in commercial or business activities,” the trustee’s immediate response is not to file a dismissal motion—instead, the trustee should call Debtor’s counsel, discuss the standards for being so engaged, and suggest that counsel and debtor think through the issue and be prepared, if possible, with better-and-truthful answers at the § 341 meeting; and
- Disposable Income. When Debtors have scheduled a 2002 MDX and a 2009 Mercedes and lists transportation expenses of $100 per month, it’s time to call Debtor’s counsel and suggest (as an observation, not an objection) that Debtor will probably have several thousand dollars of maintenance and repair expenses on those vehicles over the next three to five years.
The idea of making the case work creates tension with a trustee’s other statutory duties.
What if, for example, the trustee sees large insider preferences that appear to be avoidable—and no creditor has raised the issue? Should the trustee pursue that issue as an objection to confirmation? [Note: there is no independent duty or authority for the trustee to file a preference claim.] Or should the trustee say, “If no creditor cares, I don’t either”?
That requires a judgment call by the trustee. Part of the answer requires a look at the liquidation analysis and the projected disposable income and answering these questions:
- Would avoidance cause a material expansion of required payments under the plan?
- If so, how might that issue be addressed in a plan?
There is no easy answer.
The ideal situation is for creditors to raise the issue, and the trustee to facilitate a resolution. But when creditors are uninvolved or inactive, the tension exists. And dealing with that tension is left to the discretion of the trustee, based on unique circumstances of the case and issues involved.
Since the facilitation role is clearly “mediation-ish,” every trustee should be trained in mediation. And we suggest that joining, and becoming active in, American Bankruptcy Institute’s Mediation Committee would be an excellent step to take.
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