Student Loan Crisis: High-Priced Colleges Support Beautiful Campuses (and Other Luxuries) on the Backs of their Students

IMG_0216By:  Donald L. Swanson

“Back when I was in school . . .”

This is a tired-old phrase, usually followed by tales of hardship.

The Olden Days

But here’s an opposite twist:  Back when I was in college (during the 1970s), you could actually pay your way through, with little-to-no debt, by working part-time jobs and summers and getting grants and scholarships; or by taking a semester (or two or three) off from school to make money for finishing.  “Cramming four years into six,” is the common (but not very funny) joke from back then about paying for school.

–For professional schools back then, add in (as in my case) a working spouse to make ends meet: we say that, while I earned my J.D. (“Juris Doctor” degree), she earned her P.H.T. (“Put Hubby Thru” degree).

Those days are gone!

The Student Loan Problem

Because I live in the professional world of bankruptcy, I see every now-and-then the fallout from student loans.  And the fallout is ugly.  It’s a picture of highly-educated people (mostly young) buried under a burden of student loans.  And in many cases it’s a debt they will never be able to repay — ever.  Heck . . . many can’t even keep pace with interest accruals, let alone make a dent in the principal balance!

And student loan debts can’t be discharged in bankruptcy, except for the most difficult of all hardship cases.

What is the culprit causing all this?  It’s the easy availability of student loans for the benefit of high-priced colleges.

Student loan programs developed over time with the best of intentions.  Who can argue with the benefits of making a college education at the best-of-all institutions available to everyone, regardless of financial means?  “No one!” is the unfortunate answer.

But the best of intentions can (and often do) go awry and produce unintended consequences.

A Diagnosis

Here’s what’s gone awry with student loan programs:  the true beneficiaries are high-priced colleges, not students.

The high-priced colleges, who revel in beautiful campuses and other luxuries, create a demand from tuition-paying students for luxuries.  And other colleges must-keep-pace or die.  Who wants to go to a college with low-quality facilities when luxuries can be enjoyed elsewhere?

And then there is the marketing-genius deception.  It seems, in many situations, that neither young college-bound students nor their parents can discern the difference between, (i) a college charging low-prices and offering limited scholarships, and (ii) a college charging outrageously-high prices but giving huge-percentage scholarships that result in a still-outrageously-high actual cost.  Student loans enable students to choose the still-outrageously-high-cost college.  Unfortunately, this marketing-genius deception merely feeds the beast and magnifies the problem.

An Ancient Proverb

Moreover, the following ancient proverb applies in full-force to the student loan crisis:  “The borrower is servant to the lender.”  Here are some real-life examples of how the proverb works for student loan debts:

–How about the young couple who met at a high-priced professional school and have been in the working world for several years.  Both are buried under a mountain of student loans.  One of them really, really wants to pursue a coaching career, instead of the schooled profession—but that’s not possible because student loans require continuation in the higher-paying career.

–How about the graduate from a high-priced school who works at a high-end salary in his/her schooled profession; but even with the high-end salary, the young professional is unable to pay accruing interest on student loans and can’t even begin to pay on principal.

–Or how about the older person who, feeling trapped in a dead-end job, is persuaded to spend large amounts on additional education at a high-priced college, only to learn the hard-way that this additional education provides little-or-no actual improvement in the student’s marketability.

–And what about the graduate who earns a sufficiently-high income to cover monthly student loan obligations but pines: “If I had known what my high-priced education would actually require in servicing student debt, I would never have taken that path!”

An Escalating Problem

But the high-priced schools from which these people graduated continue to charge their students outrageously-high amounts, continue to build gorgeous buildings and provide other luxuries, continue to invest huge sums into athletic teams, scholarships and facilities, and adamantly refuse to pursue an affordable-cost education model.

The upshot is that even traditionally-low-cost colleges (e.g., community colleges) are forced to compete in the luxury realm: are building fabulous campuses, are increasing their visibility, and are raising their tuition.  And the student loan crisis is hitting students even there.  This is a shame!

Dependency

Have you read the book, “The Millionaire Next Door”?  This book argues that adult children need to be economically self-sufficient, and it decries economic dependence of adult children on their parents.  In the student loan crisis, this argument is commonly applied to students and their parents.

I contend, however, that this argument is most-directly applicable to colleges and the providers of student loans.  Student loans have enabled a bent-toward-luxury among colleges—especially among high-priced colleges—and a related dependence of colleges on this economic support.  Most high-priced colleges (and now even low-cost colleges) are utterly dependent on the continued flow of easily-obtained student loans.  Such dependence always has prevented, and continues to impede, the development of affordability-based education models.

The Impact

Easy student loans have enabled and entrenched today’s unaffordable model of higher education.  And today’s higher education schools are dependent on such loans continuing.

Unfortunately, the ones who pay the ultimate price for such dependence are the loan-incurring students—not the dependent colleges.

Any ideas on what can be done about this problem?

Next Steps for a Court with Basic Mediation Rules: Mandated and Early Mediation

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The next steps

By: Donald L. Swanson

Here is a common experience in the bankruptcy courts (and other courts) where mediation is a new or little-used tool:

Attorneys have been practicing for years in this court without using mediation.  And mediation is slow to catch on.  Here’s why:

–Attorneys who practice in this court aren’t accustomed to using mediation, aren’t comfortable with inserting mediation into their case planning habits, and rarely even think of mediation as a possibility; and

–Judges in this court aren’t comfortable with the idea of mandating mediation by local rule or by order in a particular case.

            MANDATORY MEDIATION

The Voluntary Mediation Problem

The problem with voluntary mediation, in a new or little-used mediation program, is explained by these two conclusions from a study of empirical data:

–When the goal is to achieve a “regular and significant use” of mediation to resolve court cases, “[v]oluntary mediation programs rarely meet this goal because they suffer from consistently small caseloads.”

–By contrast, “judicial activism in ordering parties into mediation triggers increased voluntary use of the process.”

Moreover, according to the study,  “settlement rates” and a litigant’s perceptions of “procedural justice” are about the same in mandatory mediation as in voluntary mediation.

Three Examples of Mandatory Mediation Rules

Example No. 1.  Circuit Courts of Appeals.  All but one of the U.S. Circuit Courts of Appeals have a mandatory mediation program.  Data from these mandatory programs show them to be highly successful in achieving mediated settlements across all types of cases and regardless of levels of animosity or distrust between the parties.

Example No. 2.  Delaware Bankruptcy Court.  The Delaware Bankruptcy Court, and attorneys who practice there, have extensive experience over many years with using mediation to resolve bankruptcy disputes.  In 2013, the Delaware Bankruptcy Court intensifies its mediation program by adding this mandatory provision to its Local Rule 9019-5(a):

“all adversary proceedings filed in a chapter 11 case . . . shall be referred to mandatory mediation.”

It must be noted that the trajectory of changes to local mediation rules in the Delaware Bankruptcy Court is toward mandated mediation – and away from a voluntary system.

Example No. 3.  New Jersey Bankruptcy Court.  The New Jersey Bankruptcy Court, and attorneys who practice there, also have extensive experience over many years with mediation.  In 2014, the New Jersey Bankruptcy Court expands its mediation program by adding a “presumptive mediation” local rule.  This new rule 9019-2(a) provides:

“Every adversary proceeding will be referred to mediation after the filing of the initial answer to the adversary complaint, except [when a specified exception applies]”; and

“A contested matter . . . may also be referred to mediation . . . by the court at a status conference or hearing.”

In New Jersey, like Delaware, the trajectory of changes to local mediation rules is toward mandated mediation and away from a voluntary system.

EARLY MEDIATION

The Early Mediation Need – Generally

The study of empirical data referenced and linked above observes that mediation “tends to occur late in the life of a case.”  And it issues these findings about mediation timing:

“Holding mediation sessions sooner after cases are filed, however, yields several benefits,” including:

–“Cases are more likely to settle”;

–“Fewer motions are filed and decided”; and

–“Case disposition time is shorter, even for cases that do not settle.”

An Intensified Need for Early Mediation – In Business Bankruptcy

Superimposed over many disputes in a business bankruptcy is an urgent need to maximize value from a debtor’s operations or liquidation.  And this urgency often takes precedence over standard litigation processes like formal discovery and pretrial wrangling.  Accordingly, the need in a business bankruptcy for early and extensive mediation efforts can be particularly intense.

The role of mediation in the early stages of a business bankruptcy case needs to be different from the typical role of mediation that occurs at the end of a lawsuit:

–The role and goal of an early-mediation in a business bankruptcy is to set-the-stage and narrow-the-issues and create-a-direction and a focus for further progression of the case.

–That’s a much different role than a shortly-before-trial mediation in a one-and-done session at the end of a lawsuit, where the goal is to resolve all remaining disputes.

Here’s a link to an example of how mediation can be effectively utilized at the beginning of a Chapter 11 case.

An Example of an Early Mediation Rule

The Delaware Bankruptcy Court recently adopted a provision in its Local Rule 9019-5(j) that allows a defendant to opt for an early mediation of a preference case with less than $75,000 at stake.

Within 30 days after a response to the preference Complaint is due, the defendant in such cases may elect an early mediation of all claims raised in the lawsuit.  In cases where more than $75,000 is at stake, the parties may agree to participate in the early mediation process.

Action Item:

I am passionate about encouraging:

–Bankruptcy courts to adopt local rules on mediation and to expand the role and reach of mediation through mandatory and early mediation requirements; and

–Attorneys who practice is such courts to utilize mediation for resolving their disputes.

And I’d be delighted to discuss such matters with anyone interested in expanding the role and reach of mediation in a local court.

New Supreme Court Justice Neil Gorsuch Will be Good for Bankruptcy Law

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New Supreme Court Justice Neil Gorsuch, with wife Louise (photo from The Denver Post)

By: Donald L. Swanson

The only things I know about Judge (now Justice) Neil Gorsuch are from what I’ve read in two contexts:

  1. His rating by the American Bar Association’s Standing Committee on the Federal Judiciary, which voted unanimously to give its best possible rating to Judge Gorsuch as a Supreme Court nominee; and
  2. Five bankruptcy opinions he authored as a Tenth Circuit Judge.

Based on these five opinions, I can appreciate why the American Bar Association gave him their best possible rating.

By the way, I try to ignore national politics as much as possible because it seems, many days, that national politics is a vicious business, worthy of contempt on all sides of the partisan divides.

Fortunately, bankruptcy issues rarely provide fodder for partisan disputes.  It’s difficult, for example, to get conservatives, moderates or liberals rallying ‘round issues like cash collateral, credit bidding and structured dismissals.

Based on the five Gorsuch bankruptcy opinions I’ve read, here is my first reaction:

Supreme Court Justice Neil Gorsuch will be good for bankruptcy law.

Here’s why.

Six Examples from Five Opinions

First of all, Judge Gorsuch is an engaging writer—and for those of us required by profession to read lots of cases, this is a bonus!  Here’s an example — it’s a summary of an issue on whether the bankruptcy court can decide a particular dispute (from In re Renewable Energy Development Corp.):

“This case has but little to do with bankruptcy. Neither the debtor nor the creditors, not even the bankruptcy trustee, are parties to it. True, the plaintiffs claim they once enjoyed an attorney-client relationship with a former bankruptcy trustee. True, they now allege the former trustee breached professional duties due them because of conflicting obligations he owed the bankruptcy estate. But the plaintiffs seek recovery only under state law and none of their claims will be necessarily resolved in the bankruptcy claims allowance process. And to know that much is to know this case cannot be resolved in bankruptcy court.”

Second, Judge Gorsuch respects and honors the limitations on his authority.  As a Circuit Judge he is subservient to higher authority — to decisions of the U.S. Supreme Court and to enactments of Congress — despite flaws he may see in those decisions and enactments.  In the In re Woolsey case, for example, he writes:

“We do not doubt a strong argument can be made that the language and logic of § 506 permit the Woolseys to void not only Citibank’s lien but any lien to the extent it is unsupported by value in the collateral. But we fail to see any principled way we might, as lower court judges, get there from here. [The Supreme Court’s Dewsnup opinion] may be a gnarled bramble blocking what should be an open path. But it is one only the Supreme Court and Congress have the power to clear away.”

Third, Judge Gorsuch will bring clarity to jurisdiction issues that have been hounding bankruptcy courts.  The following lengthy analysis shows that he understands (and can explain with clarity) this difficult legal problem and its over-arching civic context (from In re Renewable Energy Development Corp.):

The Constitution assigns “[t]he judicial Power” to decide cases and controversies to an independent branch of government populated by judges who serve without fixed terms and whose salaries may not be diminished. U.S. Const. art. III, § 1. This constitutional design is all about ensuring “clear heads … and honest hearts,” the essential ingredients of “good judges.” . . . After all, the framers lived in an age when judges had to curry favor with the crown in order to secure their tenure and salary and their decisions not infrequently followed their interests. Indeed, the framers cited this problem as among the leading reasons for their declaration of independence. . . . And later they crafted Article III as the cure for their complaint, promising there that the federal government will never be allowed to take the people’s lives, liberties, or property without a decision maker insulated from the pressures other branches may try to bring to bear. . . . To this day, one of the surest proofs any nation enjoys an independent judiciary must be that the government can and does lose in litigation before its “own” courts like anyone else.

Despite the Constitution’s general rule, over time the Supreme Court has recognized three “narrow” situations in which persons otherwise entitled to a federal forum may wind up having their dispute resolved by someone other than an Article III judge.  . . . [One of these three situations is] public rights doctrine.

As developed to date, public rights doctrine has something of “a potluck quality” to it. . . . The original idea appears to have been that certain rights belong to individuals inalienably — things like the rights to life, liberty, and property — and they may not be deprived except by an Article III judge. Meanwhile, additional legal interests may be generated by positive law and belong to the people as a civic community and disputes about their scope and application may be resolved through other means, including legislation or executive decision. . . . But the boundary between private and public rights has proven anything but easy to draw and some say it’s become only more misshapen in recent years thanks to seesawing battles between competing structuralist and functionalist schools of thought. . . . Indeed, the Court itself has acknowledged, its treatment of the doctrine “has not been entirely consistent.” . . .

Bankruptcy courts bear the misfortune of possessing ideal terrain for testing the limits of public rights doctrine and they have provided the site for many such battles. . . . Even today, it’s pretty hard to say what the upshot is. Through it all, the Supreme Court has suggested that certain aspects of the bankruptcy process may implicate public rights and thus lawfully find resolution in Article I courts. . . . But the Court has also emphasized time and again that not every “proceeding [that] may have some bearing on a bankruptcy case” implicates a public right amenable to resolution in an Article I tribunal. . . .

That much, of course, hardly decides cases. What most everyone wants to know is which aspects of typical bankruptcy proceedings do and don’t implicate public rights. Yet even Stern, perhaps the Court’s most comprehensive tangle with the question, offered no comprehensive rule for application across all cases. Instead, it invoked a number of different factors to support the result it reached in the particular and rather unusual case at hand.

Fourth, Judge Gorsuch does much more than a grammatical parsing of statutory language.  In the In re Dawes case, Judge Gorsuch deals with farmer-tax issues under Chapter 12, on which the Eighth and Ninth Circuit Courts of Appeals had split. Judge Gorsuch sides with the Ninth Circuit, based on three separate considerations: (i) “the plain language of the statute before us,” (ii) “the larger statutory structure,” and (iii) “Congress’s expressed purposes.”  As to Congressional purposes, Judge Gorsuch says:

Our interpretation as well gives effect and respect to the congressional purpose they identify. Ordinarily, of course, taxes are not dischargeable in bankruptcy; the tax man is rarely avoidable. Yet under our interpretation of § 503(b), income taxes incurred as a result of the pre-petition disposition of certain farm assets are eligible for § 1222(a)(2)(A)’s generous rule allowing them to be treated as unsecured claims, compromised, and discharged. . . . Clearly, then, our reading gives respect to Congress’s wish to provide a substantial form of special assistance targeted to farmers. We only stop short of extending § 1222(a)(2)(A)’s treatment to income taxes incurred post-petition by the debtor rather than the estate.

The U.S. Supreme Court ended up siding with Judge Gorsuch and the Ninth Circuit on this farmer-tax issues.

Fifth, Judge Gorsuch respects and applies non-binding precedent.  In the Ardese v. DCT, Inc. case, Judge Gorsuch applies the law and rationale developed in a prior Tenth Circuit case, indicating that “there is little obvious daylight between [the prior case] and Ms. Ardese’s case.”

Finally, Judge Gorsuch shows professional humility in the TW Telecom Holdings, Inc. v Carolina Internet Ltd. case.  The Tenth Circuit had been applying a specific rule of law involving the automatic bankruptcy stay.  Judge Gorsuch notes that at least “nine other circuit courts of appeals disagree” and that the Tenth Circuit rule is based on faulty reasoning.  So, his opinion overrules the Tenth Circuit rule and declares that the Tenth Circuit will thereafter follow the same rule applied in other circuits.

Conclusion

Based upon these five opinion, I like Judge Gorsuch and believe he will be good for bankruptcy law as a Supreme Court Justice.

Structured Dismissal Negotiations are Ripe for Mediation: Until the Supreme Court Upends Precedent (In re Jevic)

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Ripe for eating

By: Donald L. Swanson

We are not final because we are infallible, but we are infallible only because we are final.”

–From concurring opinion of U.S. Supreme Court Justice Robert H. Jackson, in Brown v. Allen, 344 U.S. 443 (1953), on role and function of the U.S. Supreme Court.

Structured dismissals are [correction: were] a rapidly developing field in today’s bankruptcy world.  That all changed on March 22, 2017, when the U.S. Supreme Court puts the kibosh on structured dismissals in its In re Jevic ruling.

Negotiations in this rapidly developing field would be ripe for mediation.  But, alas, that will not happen, because of the In re Jevic ruling.  Now, the rule is simple:  distribute sale proceeds through the Bankruptcy Code’s priority scheme.

Necessity Produces Creativity

Creative processes, like structured dismissals, arise out of a need in bankruptcy to maximize value and distribute proceeds in an efficient and prompt manner.  Plan confirmation processes are, often, inefficient and expensive in the extreme.  So, when an opportunity arises to maximize value and distribute proceeds in a way that is quick, efficient and effective, practitioners gravitate to that opportunity.  Structured dismissals provide one of those opportunities.

Some History

Bankruptcy courts have been struggling for as long as I can remember with how to handle asset sales and the distribution of sale proceeds.  My first recollection of a bankruptcy sale issue relating to today’s structured dismissals is from 1982:

–a bankruptcy judge rules in 1982 that a bankruptcy trustee may not “serve as the handmaiden” of secured creditors in liquidating collateral.  Accordingly, a sale of assets should not occur in a Chapter 7 case, the judge says, when the only persons to benefit are secured creditors.

–The judge in 1982 explains: “Secured creditors by consent and the trustee by acquiescence cannot impose upon the [Bankruptcy] Court the duty to serve as a foreclosure or collection forum.”

The “handmaiden” phrase from 1982 stands the test of time.  It’s still good law today, especially in Chapter 7 liquidation cases: if all debtor’s nonexempt assets are fully encumbered, the Chapter 7 trustee must issue a “no asset” report.

But a bankruptcy sale of fully-encumbered property can still provide benefits to the bankruptcy estate in a business reorganization.  Such benefits might include keeping a business alive under new ownership, which will continue providing jobs and business activity and tax payments in the local community.

Additionally, parties in a bankruptcy often negotiate for ways to create benefits to the bankruptcy estate from a sale of fully-encumbered property.  One way is to carve-out a portion of the funds the secured creditor would receive from a sale and then gift that portion to priority wage claims or to unsecured creditors.

A Long-Standing Precedent

That’s what happened, for example, in the case of  In re SPM Manufacturing Corp., 984 F.2d 1305 (1st Cir. 1993).

–In the In re SPM case, a secured creditor would get all proceeds from the sale of debtor’s assets.  So, the secured creditors enters into a pre-plan settlement agreement for distributing proceeds from a bankruptcy sale.  The agreement would gift to unsecured creditors a portion of sale proceeds the secured creditor would otherwise receive.

–The bankruptcy court rejects this agreement because tax claims have a higher priority, aren’t receiving any of the gift, and remain unpaid.  The District Court affirms, and the case is appealed to the First Circuit Court of Appeals.

–The First Circuit reverses and approves the agreement.  Here is part of the First Circuit’s rationale:

The Bankruptcy Code’s distribution scheme “does not come into play until all valid liens on the property are satisfied.  . . .  Because [the secured creditor’s] claim absorbed all of SPM’s assets, there was nothing left for any other creditor in this case.  . . . creditors are generally free to do whatever they wish with the bankruptcy dividends they receive, including to share them with other creditors.”  [984 F.2d at 1312-13.]

This In re SPM ruling has been the law-of-the-land in the First Circuit for fourteen years.  And the ruling makes sense, as reflected by this fact: an online research tool [Casemaker] says this In re SPM decision, (i) has been cited 183 times, and (ii) has been “criticized” only once on unrelated grounds.

Overruled?

So . . . did the U.S. Supreme Court decide to overrule this long-standing In re SPM rule in its In re Jevic decision . . . without even mentioning it?!  Perhaps not: the In re SPM decision might be distinguishable (arguably, at least).  But In re Jevic’s “simple answer” of “no” suggests otherwise.

This result is unfortunate in the extreme for bankruptcy practitioners and judges striving to maximize and distribute value in an efficient and effective manner!!

In re Jevic: Once Again, the Supreme Court Screws Up Our Bankruptcy World — And Justice Thomas is Wise in His Dissent

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U.S. Supreme Court Opinion

By: Donald L. Swanson

I think it is unwise for the Court to decide” this issue because: (i) “Experience shows that we would greatly benefit from the view of additional courts of appeals on this question,” and (ii) “We also would have benefited from full, adversarial briefing.”

–Justice Clarence Thomas, dissenting in Czyzewski v. Jevic Holding Corp. (In re Jevic)., Case No. 15-649 in United States Supreme Court (March 22, 2017).

On March 22, 2017, the United States Supreme Court issues its ruling in the In re Jevic case that, once again, screws up our bankruptcy world.

The U.S. Supreme Court has a history of rulings that screw up everyday life for bankruptcy practitioners and judges. One example is Stern v. Marshall, 564 U.S. 462 (2011). Who would’ve ever guessed that a minor pop-culture celebrity (Vicki Lynn Marshall, aka Anna Nicole Smith) could wreak such havoc in our bankruptcy world. In a case with a long history of bizarre facts and procedural wrangling, the Supreme Court in Stern v. Marshall puts extreme limitations on the jurisdiction and role of the U.S. Bankruptcy Courts. The Supreme Court, in Stern v. Marshall, made a narrow and inflexible ruling about bankruptcy court jurisdiction. And it did so on constitutional grounds, which means that Congress is incapable of changing (or minimizing the impact of) the decision. We’ve all been struggling with the result ever since.

Here is the essence of the majority decision in the new In re Jevic case, penned by Justice Stephen Breyer:

“We turn to the basic question presented: Can a bankruptcy court approve a structured dismissal that provides for distributions that do not follow ordinary priority rules without the affected creditors’ consent? Our simple answer to this complicated question is ‘no.’”

Yikes! Therein lies the problem for bankruptcy practitioners and judges: the Supreme Court is providing a “simple answer” to a “complicated question.”

Here is some griping:

–None of the Supreme Court Justices has any significant experience in practicing under the Bankruptcy Code, which is a specialized area of the law. Perhaps that’s why they fall back on a simple answer to a complicated bankruptcy question. And, perhaps, that’s why they keep screwing things up for us.

–And the Supreme Court had to ignore some technical rules for getting to this In re Jevic decision: hence, Justice Thomas’s statement that rues the absence of “full, adversarial briefing.” Here’s my translation of his absence-of-full-briefing statement: “The Supreme Court doesn’t have adequate information or an adequate understanding to make this decision.”

So, what are we supposed to do with the Supreme Court’s simple – and simplistic – answer? Keep in mind that structured dismissals commonly arise in large and complex reorganization cases. There is nothing simplistic about such cases. A simple answer is not merely unhelpful . . . it’s harmful. Perhaps the Supreme Court Justices, in the bankruptcy context, could follow the words of the medical profession: “First do no harm.”

Justice Thomas is precisely correct in his comment that the Supreme Court would “greatly benefit” from an opportunity for additional courts of appeals to weigh-in on the question. Structured dismissals are a relatively new development in the bankruptcy world and apply only in exceptional circumstances. There are lots of smart judges out there in the Federal system: bankruptcy judges, district court judges, bankruptcy appellate panel judges, and court of appeals judges. One of the benefits of those many and multi-layer judges is that many smart judges can evaluate and address and explain and rule upon issues and facts relating to an important legal question before the question ever gets to the U.S. Supreme Court. Then, the Supreme Court Justices can draw on the words and wisdom of those other smart judges in reaching a decision. For the Supreme Court to jump-in at this early stage, without the benefit of a fully-developed multi-layer analysis of this In re Jevic question, is unfortunate in the extreme.

As a result, this new In re Jevic opinion creates major questions about basic bankruptcy practice that are hugely important to the administration of bankruptcy cases.  For example:

What about first day orders and early/interim distributions mentioned in the majority opinion (which also violate the Code’s distribution priorities)?

–Are they actually okay or merely cited as a point of reference?

–Did the Court actually intend to bless critical vendor orders?

And what about an under-secured creditor gifting a portion of its collateral to the unsecured class as part of a structured dismissal–is that now prohibited . . . seriously?!

And how is the essence of this “simple answer” going to spill over into other complex contexts?

Ok. I’m done. Sorry about this rant!

How Mediation at the End of a Case is Wasteful

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A Wasteland

By: Donald L. Swanson

When mediation occurs early-in-a-case, instead of late, “cases are more likely to settle, fewer motions are filed and decided, and case disposition time is shorter, even for cases that do not settle.”

–B. McAdoo, N. Welsh & R. Wissler, “What Do Empirical Studies Tell Us About Court Mediation?” (2004)

A lawsuit consists of these overlapping phases: (i) pleadings, (ii) discovery, (iii) dispositive motions, (iv) pretrial steps, and (v) trial with final verdict or judgment.

The study linked above concludes, obviously, that an early-in-the-case mediation is more effective than a late-in-the-case mediation.

Wasteful

Nevertheless, the customary time for mediation is late-in-the-case: as discovery winds down, pretrial steps are in process, and trial is in the offing. Unfortunately, this late-in-the-case time (without an early mediation effort first) is about as wasteful as can be imagined. Consider this:

–A huge amount of time, effort, energy and fees are spent before a late-in-the-case mediation begins, and avoiding many of such costs can be a powerful incentive to settle in an early-mediation; and

–If the optimum time for mediating is early-in-the-case, then all the time, effort, energy and fees spent between an unused early/optimum time and the late/customary time is a pure and unmitigated waste!

A Faulty Rationale: More Time is Needed

One faulty rationale for end-of-the-case mediation is that the parties need more time to, (i) recognize the risks of their legal position, and (ii) come to grips with the reality of what it takes to resolve the case. Here are two examples of how this rationale is faulty.

1. A lack of opportunity. I remember representing a business defendant who gives ten reasons why they are not responsible for the bad things that happened. The months-long discovery process turns into a ten-step effort that proves each and every one of the reasons wrong. No early-settlement overtures occur in the case from either side, and my client appears ready to engage in meaningful settlement discussions only after all ten reasons are refuted. In retrospect, however, I’m pretty sure that, (i) they knew or suspected, all along, that they were in the wrong, and (ii) would have jumped at the end-of-case settlement terms, had those terms been available early in the case.

2. A lack of imagination. I remember representing a plaintiff against a business defendant that had clearly breached standards of care. But defense counsel refuses, in numerous different contexts, all early settlement overtures (he blames his client for the refusals). We settle at the end with defendant paying much more than defendant would ever have had to pay in an early-stage settlement. The early-refusals cost defendant dearly! I’ve often wondered why all early olive branches were rebuffed . . . and attribute it to a lack of imagination from the other side.

Another Faulty Rationale: Exhaustion Helps

Another faulty rationale for end-of-the-case mediation is the exhaustion element: when parties are weary of paying fees, weary of the time and energy consumed by the lawsuit, and concerned about risks of losing, they become more-inclined to settle. But this exhaustion element bears an unreasonably high price to pay for getting into a better mood for settling the case.

Bankruptcy Experience 

This early-mediation idea is now institutionalized in the Delaware Bankruptcy Court. In 2013, the Delaware Court establishes an early-mediation program for preference cases (see this article).

And it should be noted that early-mediation benefits are particularly in-play for bankruptcy reorganization disputes. Reorganization cases are best served when many disputes are resolved as quickly as possible. The business needs of a debtor, typically, cannot survive long and protracted battles. A debtor, simply, cannot afford to fight every battle all the time. So, early-mediation can be critical to the success of the reorganization process.

Conclusion

Early-mediation is optimal for resolving legal disputes, especially in bankruptcy cases. But end-of-the-case mediation is what usually happens (without any attempt at early mediation).  This is wasteful and needs to change!

Can a Party to a Mediation Agreement Oppose Its Court Approval?

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A Binding Arrangement

By: Donald L. Swanson

The plan confirmation process does not provide a party to the mediation “with a renewed opportunity to challenge the [mediated] settlement to which they are bound.” 

–In re RPP, LLC, 547 B.R.158, 164 (Bkrtcy.W.D.Pa. 2016).

The RPP, LLC bankruptcy case is a Chapter 11 reorganization, with plan confirmation occurring on June 2, 2016.

The Facts and Disputes

The case has intense and protracted litigation.  The disputes culminate in a mediated settlement agreement, following an 11-hour mediation session held on August 17, 2015.  The terms of the agreement are subject to approval by the Bankruptcy Court during the plan confirmation process.

Thereafter, a husband and wife party to the agreement, Mr. and Mrs. Ferrone, request Court clarification of certain issues.  In particular, the Forrones want the Bankruptcy Court to rule that the mediated arrangement includes a grant of security interest to them.

The Ferrones argue that the Bankruptcy Court approval requirement, in the settlement agreement, allows them to contest the terms of the mediated agreement that they signed.

The Bankruptcy Court finds that, (i) the mediated agreement makes no mention of a security interest for the Ferrones, and (ii) their request for one is “in the nature of ‘buyer’s remorse’” and “regret regarding the settlement.”

The Bankruptcy Court rules that the Ferrones are bound by the settlement agreement and cannot use court approval processes as an excuse to seek a better deal:

In questioning the settlement, the Ferrones also contend that the settlement was never approved in compliance with Fed.R.Bankr.P. 9019.  . . .  Although the plan confirmation process achieves the goals of providing complete disclosure to all parties and review by the Court, to be clear, it does not provide the Ferrones, or any party to the mediation, with a renewed opportunity to challenge the settlement to which they are bound.

On December 9, 2016, this ruling is affirmed on appeal by the U.S. District Court for the Western District of Pennsylvania.

The Rule of Law and a Question

The rule of law established in the RPP, LLC ruling is this:  When a mediated settlement agreement is subject to subsequent court approval, the parties to the mediation are still bound by their mediated agreement and may not oppose the required court approval.

A question:  Is this RPP, LLC ruling limited to the specific facts of the RPP, LLC case?

The specific facts of the RPP, LLC case include a judicial mediator who issues a “Final Judicial Mediation Consent Order,” instead of a regular agreement between mediating parties using a private mediator.

The Answer

I suggest that the answer to this question is, “No”: the ruling has broad and general application.

A mediation party is bound by the terms of the mediation settlement agreement until the required court approval is granted or denied, and such party may not directly or indirectly oppose the granting of such approval.  A mediation party cannot use the court approval requirement to renegotiate a better deal.

The RPP, LLC ruling, I suggest, is operative in a broad range of circumstances and is not limited to the “Final Judicial Mediation Consent Order” facts of that case.

Why Don’t Consumer Cases Mediate?

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A wide gap

By: Donald L. Swanson

Mediation is firmly entrenched as a dispute resolution tool in bankruptcy.  Mediation is commonly and regularly used throughout the bankruptcy system.  And mediation’s value in bankruptcy is almost-universally recognized.

A Mediation Gap

But there are wide gaps in bankruptcy where mediation is still under-utilized.  One of the gaps is consumer cases.  Hardly anyone uses mediation to resolve disputes in consumer cases, unless mediation is required by local rule.

I don’t know why or how this gap exists in consumer cases.  But the gap’s existence is a shame because:

–There are mediators in nearly every bankruptcy district who would be more-than-happy to make consumer mediation work.

–Costs and time commitments can be minimized in consumer cases by, for example:

–agreeing to a reduced or flat fee for the mediator;

–eliminating mediation statements (the mediator can get information from the court’s online filings);

–limiting the time commitment for a mediation session to a couple hours or half-day; and

–meeting by telephone when distances are prohibitive.

Attorney Resistance

My experience is that bankruptcy judges would be more-than-happy to approve mediation in consumer-cases.  It’s the attorneys in such cases who are resistant to (or simply don’t think about) mediation.

A 2016 Example

Here’s an example of resistance.

In re Whittick, 547 B.R. 628 (Bankry. N.J. 2016), is an adversary proceeding brought by the Chapter 7 Trustee to recover $13,642 from the Chapter 7 Debtor and his spouse.  The spouse did not file bankruptcy.  Legal wrangling ensues.

New Jersey’s Bankruptcy Court has a local rule mandating mediation.  N.J. LBR 9019-2(a)(1) provides:

–“Every adversary proceeding will be referred to mediation after the filing of the initial answer to the adversary complaint,” unless the parties decline.

The In re Whittick case is teed up for mediation under this local rule.  But the parties decline mediation.

So, the case moves forward on cross-motions, and supporting briefs, for judgment on the pleadings.

A hearing on the cross-motions results in a lengthy opinion from the court (the opinion covers fifteen pages — small type; single space; narrow margins; no pictures).  But the opinion resolves only one issue and sets a trial on remaining issues.  The ruling is as follows:

The Trustee’s “Motion for Judgment on the Pleadings is GRANTED IN PART only to the extent that the court finds that the loan proceeds/funds are property of the estate, but DENIED as to all other matters.

The Defendants’ “Cross Motion for Judgment on the Pleadings is DENIED.”

“A trial will be scheduled on the issue of whether the Debtor transferred the proceeds/funds with the intent to conceal (section 522(g)), and if not, if an exemption applies.”

Several months later, as trial approaches, the parties enter into a “Stipulation of Settlement,” under which the Defendants agree to pay $10,000 to the bankruptcy estate.

A Mystery

This is a mystery.  Why did the parties decline to mediate this dispute?  Declining mediation make no sense here:

–The economics of the case are terrible — who can afford to litigate anything where $13,642 is at stake?

–The parties decide to litigate instead of mediate, and they probably spend more in fees (on each side) than the amount that’s at stake in the dispute.

This is a shame!

 

Success of Mandatory Mediation Leads to an Expansion of its Role

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This plant expanded successfully from one small shoot.

By: Donald L. Swanson

It’s always great to see an experiment produce successes that lead to an expansion of the experimental endeavor.

This success-and-expansion is exactly what’s happened with mandatory mediation experiments in the Delaware Bankruptcy Court.

Delaware’s Mandatory Mediation

The Delaware Bankruptcy Court began mandating mediation, by local rule, in preference cases back in 2004.

Nearly a decade later, the Delaware Bankruptcy Court expands its mandatory mediation program to include all adversary proceedings filed in Chapter 11 cases. The new language, appearing in Local Rule 9019-(5)(a), is this:

–“all adversary proceedings filed in a chapter 11 case . . . shall be referred to mandatory mediation.”

The Delaware Bankruptcy Court’s history with mandated mediation is positive.  One advantage of such a mandate-by-local-rule is this:

–attorneys know that a mediation must occur before trial, so they plan on the mediation and incorporate mediation into their case plans and strategies.

Mandatory Mediation Elsewhere

In addition to the history of success-and-expansion in Delaware preference actions, mandatory mediation has a long history of success-and-expansion elsewhere too.  For example:

–In the Second Circuit Court of Appeals, mediation experiments from the 1970s contain a mandatory mediation component — and those experiments became successful.

–Today, nearly all of the U.S. Circuit Courts of Appeals have mediation programs with a mandatory mediation component that are similar to the Second Circuit’s experiment efforts in the 1970s.

A Prediction

Here’s predicting that mediation-mandated-by-local-rule will become increasingly prominent in bankruptcy courts throughout the land.

Mediating Pre-Packaged Plan Disputes: a Recent Example

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A different kind of pre-packaged plan (photo by Marilyn Swanson)

By Donald L. Swanson

Who would ever think that mediation could serve an important role in pre-packaged Chapter 11 cases?

–After all, the essence of a pre-packaged plan is speed: all major issues are supposed to be resolved in advance of the bankruptcy filing so the plan can move promptly to confirmation.

But disputes do arise in pre-packaged cases, despite best efforts to resolve all disputes before the bankruptcy filing.  And these disputes slow things down.

A Pre-Packaged Case — With Mediation

In a recent pre-packaged case, mediation plays a crucial role in confirming the pre-packaged plan. The case is In re Hercules Offshore, Inc., Case No. 16-11385, in the Delaware Bankruptcy Court.

Hercules supplies offshore jackrigs and liftboats to the oil industry in the Gulf of Mexico and around the world. Hercules’s business has been suffering over the last couple years as crude oil prices drop from $100 per barrel in 2014, to $52 per barrel in July 2015, to just under $30 per barrel in early 2016.  Prices have since recovered to $50+ per barrel in December 2016.

Hercules files its first-of-two prepackaged Chapter 11 cases on August 13, 2015, and confirms its first pre-packaged plan on September 24, 2015.

With further declines in crude oil prices into 2016, Hercules needs a second reorganization and files its second pre-packaged Chapter 11 case on June 5, 2016.

The Mediation

Significant disputes surface in the second pre-packaged case, and the Bankruptcy Court refers the disputes to mediation on August 17, 2016. The mediation efforts resolve nearly all disputes, except that the equity class still wants to pursue claims against the Hercules directors for their actions in dealing with financial difficulties.  The plan releases such claims.

Following a confirmation trial, the Bankruptcy Judge confirms the mediated plan on November 15, 2016, and finds that the directors acted properly amid difficult circumstances. No appeal is filed, so confirmation of the mediated plan is final.

A Lesson from the Hercules Case

Even in a fast-paced pre-packaged plan context, mediation can be an effective tool for dealing with and resolving confirmation disputes.
In fact, the need-for-speed is precisely why mediation can be crucial and effective in pre-packaged contexts.