How a Judge Makes Mediation Work: Supporting Mediation with Timely Orders

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Making it work: Shoulder-to-the-wheel support

By Donald L. Swanson

“We in bankruptcy impair contracts all day, every day . . . That is what we do.”

–Judge Steven Rhodes, as quoted by Nathan Bomey in “Detroit Resurrected: To Bankruptcy and Back.”

Michigan’s State Constitution provides that public pension rights cannot be impaired.  So, pensioners take the position, in Detroit’s bankruptcy, that pension rights are sacrosanct and cannot be touched.  Their positions in mediation are, therefore, inflexible.

An Initial Supporting Order

Judge Rhodes wrestles with the question of whether contract rights of pensioners can be impaired in bankruptcy.  And he issues an early order on that question.  He rules:

–The U.S. Bankruptcy Code takes precedence over pension provisions in Michigan’s Constitution; and

–Therefore, the contract rights of public pensioners can be modified and impaired in bankruptcy.

Bomey reports in Detroit Resurrected that this ruling, “delivered a blow to unions” and exposed “a serious crack in a financial foundation” previously believed “to be indestructible.”  This ruling brings unions and pensioners to the mediation bargaining table to negotiate the best deal possible–and they negotiate a very good deal.

Without this ruling, Detroit’s bankruptcy might still be slogging along in bankruptcy.  Instead, it creates an incentive for unions and pensioners to bargain for settlement.  And the ultimate results are invaluable for the pensioners—their decision to bargain, instead of fighting in court, proves to be well-taken.

Another Example of Supporting Mediation with a Timely Order

Similarly, Judge Rhodes supports the mediation effort in another context by expressing his opinion on a contentious issue.  Bomey reports:

–Detroit is in a dispute with outlying counties over regionalization of Detroit’s water system, and the mediation is at impasse.

–Judge Rhodes addresses the dispute by declaring his “sense” that “a regional water authority” is “in the best interest” of the City and all its customers.

–Judge Rhodes adds that, “if we do not take advantage of this unique opportunity,” it will, in all likelihood, “be lost forever.”

–The result: “the counties caved” and reached a settlement, “rather than risk having one imposed” upon them by Judge Rhodes.

Conclusion

Such supportive-rulings work!

And they provide a model for other courts to follow.

–Judicial action addressing the merits of contentious issues can be useful, if not essential, in creating incentives for settlement.

How a Judge Makes Mediation Work: Minimizing Risks in Close-Call and Winner-Take-All Disputes

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Minimizing Risks (Photo by Marilyn Swanson)

By Donald L. Swanson

“The decision here is most likely all or nothing.  One side is going to win and the other side is going to lose—and that’s going to be very happy on one side and very tough on the other side.”

–Judge Steven Rhodes, encouraging parties to reach a settlement, as quoted in “Detroit Resurrected: To Bankruptcy and Back,” by Nathan Bomey.

This statement from Judge Rhodes is a powerful argument for insisting that parties mediate their disputes in close-call / winner-take-all circumstances.  Such circumstances create a moment, if ever one exists, for judicial activism in moving the parties into a mediation process.

Actions, like the quotation above from Judge Rhodes, meet an essential need:

–Imagine you are a party in a lawsuit.  Mediation has not occurred and is not being considered.  Trial day is approaching.  And imagine the judge believes this:

–the decision-after-trial is likely to be a close call; and

–the result is likely to be all-or-nothing for both sides.

–Wouldn’t you want to know this?  And, armed with such information, wouldn’t you appreciate one-last-chance to consider settlement possibilities?

A Duty

I suggest, in such circumstances, that the judge has a duty and obligation to communicate such beliefs to the parties and to direct them into mediation.

A Reason Why

Attorneys who’ve been working a case for an extended period of time often start to believe their arguments!

This is neither cynicism nor a joke.  Here’s how it works in the day-to-day grind of managing a case:

–Upon learning about a case from the client, the attorney’s first impression is of a weak case; but the client is in a difficult position and desperately needs to win.

–The attorney’s research identifies several legal theories, each of which, on its own, seems a bit of a stretch; but the attorney keeps developing the theories—which, collectively, begin after a while to seem plausible.

–After extensive work on the case, the attorney now has a carefully-crafted set of arguments that have an aura, in the attorney’s mind, of weightiness.

–The attorney and the party are beginning to believe they can actually win this case and need to forge ahead.

–They now believe their arguments.

This is one of the reasons why statements, like Judge Rhodes’s quotation above, need to be made to the parties in a close-call / winner-take-all situation.  And this is why the parties must, armed with such knowledge, have one last chance to mediate their case.

Conclusion

In such circumstances, every effort must be made by the judge to fully-inform the parties of the risks and to move the parties into mediation.  Then the parties can:

–take and receive a fresh-look at their arguments and assess anew the risks of their position; and

–take the resolution of their dispute into their own hands – rather than letting a stranger tell them what the resolution is going to be.

Because of Judge Rhodes’s efforts, like his quotation above, mediation worked well in the City of Detroit bankruptcy.

City of Detroit Withstands Another Challenge to Its Confirmed Bankruptcy Plan

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Detroit (photo from Wikipedia)

By: Donald L. Swanson

Who knew that the City of Detroit’s confirmed bankruptcy plan is still in legal jeopardy?

Well . . . it is.  But the jeopardy today is much-less than it was two days ago.

Several Detroit pensioners had challenged the City of Detroit’s plan confirmation order because the plan reduced their benefits.  The U.S. District Court in Detroit had dismissed their challenge, and the pensioners appealed.

On October 3, 2016, a three-judge panel of the U.S. Sixth Circuit Court of Appeals issues its decision affirming the District Court’s dismissal.

But get this: the decision of the three-judge panel is not unanimous.  There is a dissent!

How can this be?

Legalities.

Detroit’s Chapter 9 plan confirmation occurs on November 7, 2014, following extensive and successful mediation efforts.

Thereafter, huge sums of money change hands to effectuate the terms of the plan.  And many, many people take action in reliance on the confirmed plan.  All such actions are irreversible.  The effects of the confirmation order cannot be undone.

Yet . . . these pensioners are still trying to undo what happened – nearly two years later.

–The Ruling

But it’s precisely because of the irreversible realities that the two-judge majority from the Sixth Circuit upholds the dismissal of these challenges.

The technical legal theory the two judges utilize is “equitable mootness.”  This theory allows an appealed-from plan-confirmation order to stand, without a ruling on the merits of the appeal, if,

(i) a stay has not been obtained,

(ii) the plan is substantially consummated, and

(iii) the requested relief would “significantly and irrevocably disrupt the implementation of the plan” or “disproportionately harm the reliance interests of other parties.”

The Sixth Circuit majority applies this three-part test and affirms dismissal, explaining:

–“In this case, all three factors favor the application of equitable mootness.”

–“This is not a close call. In fact, the doctrine of equitable mootness was created and intended for exactly this type of scenario, to ‘prevent a court from unscrambling complex bankruptcy reorganizations’ after ‘the plan has become extremely difficult to retract.’”

The pensioners argue that the “equitable mootness” theory, if it exists at all, applies only to businesses in Chapter 11 cases and not to cities in Chapter 9 cases.  The two-judge majority disagrees, explaining:

–“Equitable mootness is the law of the Sixth Circuit, . . . and we continue to apply it.”

–“We conclude that equitable mootness applies to Chapter 9 cases just as it applies to Chapter 11. In fact, considering the particular facts of this case, equitable mootness likely applies ‘with greater force to the City’s Chapter 9 Plan, which affects thousands of creditors and residents.’”

The one-judge dissent disagrees on all these points.

–Still in Jeopardy.

So . . . the City of Detroit’s plan confirmation order survives another challenge.  But even this survival is not final:

–These pensioners will, undoubtedly, seek a rehearing and a ruling from the entire panel of Sixth Circuit judges, followed by a Petition for a Writ of Certiorari to the United States Supreme Court if such efforts are unsuccessful.

Practicalities.

It’s a little hard to have a lot of sympathy for these litigating pensioners.

Every creditor in the City of Detroit bankruptcy experienced considerable loss.

But great efforts were made to minimize losses for pensioners: the entire “Grand Bargain,” for example, occurred to prefer pensioners, dramatically, over all other creditors.

–Footnote 2 of the Sixth Circuit decision says the pensioners received a “4.5% reduction in benefits.”  That’s far, far better than any other group of creditors.

The Sixth Circuit majority finds that a contrary ruling — in favor of these pensioners – would:

–“necessarily rescind the Grand Bargain, its $816 million in outside funding, and the series of other settlements and agreements contingent” upon settlements with pensioners,

–“thereby unravelling the entire Plan and adversely affecting countless third parties, including among others, the entire City population.”

Conclusion.

Here’s hoping, and expecting, that this Sixth Circuit ruling holds-up under further judicial scrutiny.

 

 

They’re in a Bit of a Pickle, Part Two: What if the City of Chicago Files Bankruptcy?

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Chicago — Photo by Grant Swanson

By: Donald L. Swanson

If the City of Chicago were to file bankruptcy, the Bankruptcy Court in Chicago would find itself in a bit of a pickle.

It’s not a between-a-rock-and-a-hard-place type of pickle. It’s more of a between-a-rock-and-an-I-don’t-want-to-go-there pickle. Continue reading “They’re in a Bit of a Pickle, Part Two: What if the City of Chicago Files Bankruptcy?”

The Detroit Bankruptcy Creates “An Ideal Model for Future Municipal [and Other?] Debt Restructurings”

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An ideal.

By Donald L. Swanson

Bankruptcy Judge Steven Rhodes declares in his Detroit plan confirmation opinion (Doc. 8257) that the mediated settlements: Continue reading “The Detroit Bankruptcy Creates “An Ideal Model for Future Municipal [and Other?] Debt Restructurings””

Multiple Mediators and Hundreds of Sessions for Detroit’s Mediation: Why / How it’s Done

Detroit’s use of multiple mediators and hundreds of mediation sessions is not surprising. How else could a Court deal with billions of dollars of debt and a multitude of creditors of a City that must keep operating and must meet the daily needs of its hundreds of thousands of inhabitants.

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Multiple parties are difficult to manage

By Donald L. Swanson

One mediator in a one-and-done mediation session: that’s how mediation of legal disputes typically works these days.

So . . . of course . . . the Detroit bankruptcy mediation effort is nothing like that . . . whatsoever. Instead, the Detroit bankruptcy has a team of six mediators who conduct hundreds of mediation sessions.

Detroit’s use of multiple mediators and hundreds of mediation sessions is not surprising. How else could a Court deal with billions of dollars of debt and a multitude of creditors of a City that must keep operating and must meet the daily needs of its hundreds of thousands of inhabitants.

A Chapter 7 liquidation or a going-concern sale of all assets are not even remotely possible alternatives. The Detroit case must succeed in creating an economically viable and effectively-operating municipality – and it must do so quickly. Continue reading “Multiple Mediators and Hundreds of Sessions for Detroit’s Mediation: Why / How it’s Done”

Detroit Bankruptcy’s “Proactive Mediators”: A New Mediation Model (Updated 4/1/16 with Responses)

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Definition is from vocabulary.com

By Donald L. Swanson

“Mediator” and “proactive” are, usually, oxymoronic terms. A mediator’s role is usually passive: to help parties deal with disputes they bring to the mediator.

Detroit bankruptcy mediation rejects mediator passivity.

One of the early—and monumental—judicial actions in the Detroit bankruptcy is this: the referral of a sweeping array of issues to mediation, along with a grant of initiating authority to the mediator team. Continue reading “Detroit Bankruptcy’s “Proactive Mediators”: A New Mediation Model (Updated 4/1/16 with Responses)”

Proactive Mediation: The Great Innovation of Detroit and Diocese Reorganizations

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Commercial Bankruptcy Litigation Webview

The Commercial Bankruptcy Litigation website is publishing an article by Donald L. Swanson, entitled “Proactive Mediation: The Great Innovation of Detroit and Diocese Reorganizations.”

The article appears on the Commercial Bankruptcy Litigation website at this address:

https://www.dailydac.com/commercialbankruptcy/litigation/articles/proactive-mediation-the-great-innovation-of-detroit-and-diocese-reorganizations

Follow Don on Twitter by clicking here.

Mediating Detroit’s Pension Disputes: The Process Explained (Updated with Responses 3/24/16)

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Detroit Bankruptcy’s Pension Mediation: the initial fact question

By Donald L. Swanson

40 people are in the room at the first mediation session about Detroit’s two pension plans.  There aren’t enough chairs in the room to go around, so the mediator, Eugene Driker, stands for the entire four-hour meeting.

This is an unusual mediation: Continue reading “Mediating Detroit’s Pension Disputes: The Process Explained (Updated with Responses 3/24/16)”

Eugene Driker: Private Practice (“Civilian”) Mediator in Detroit’s Bankruptcy

 

By Donald L. Swanson

Get this: all six mediators in the Detroit Bankruptcy are sitting or retired federal judges -except one.

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Eugene Driker is the lone exception.  He is the only private-practice mediator in the group – or, as Mr. Driker describes it, “I was the civilian.”  That makes him an example and hero for all private practice (“civilian”) mediators out there.

Mr. Driker is a lawyer, a litigator, a business counselor. He’s a Detroit native who earned his B.S. and J.D. credentials at Detroit’s Wayne State University.  And he’s practiced law in Detroit for 55 years – mostly as a commercial litigator.  He’s a professional that people turn to when their stakes are high – when their company’s existence is on the line. Continue reading “Eugene Driker: Private Practice (“Civilian”) Mediator in Detroit’s Bankruptcy”