JAMS ADR Blog by Chris Poole
In this podcast, JAMS neutrals Judge Joan Feeney and Judge Phillip Shefferly share their thoughts on why mediation is a good tool to resolve bankruptcy disputes, provide listeners with a look into their own approaches to mediating bankruptcy cases and discuss what attorneys and their clients should expect and prepare for in a bankruptcy proceeding.
Moderator: Welcome to this podcast from JAMS. In this episode, we're going to dive into the intersection of ADR and bankruptcy disputes. Our guests are two retired bankruptcy judges and JAMS neutrals with decades of experience. Judge Joan Feeney, who is joining us from Boston, spent almost 27 years on the bench in the District of Massachusetts and 23 years as a member of the U.S. Bankruptcy Appellate Panel for the First Circuit, and Judge Phillip Shefferly, who is joining us from Detroit, spent 18 years on the bench in the Eastern District of Michigan, including over a decade as Chief Judge.
Thank you both for joining us. Judge Shefferly, I'll start with you. The pandemic-inspired tsunami of bankruptcy filings that some had predicted didn't quite materialize, but there is still plenty of activity. What kinds of cases are you seeing?
Judge Phillip Shefferly: [00:00:52] Well recently, I've seen a number of adversary proceedings and the adversary proceedings that have come to me frequently involve claims for avoidance of fraudulent transfers, in larger Chapter 11s that sometimes convert to Chapter 7s. Also, I've seen adversary proceedings that are actions against directors and officers for failed businesses – sometimes in Chapter 11 and its post confirmation of a plan or sometimes in Chapter 7. But again, adversary proceedings are seeking recovery for the estate in these cases for breach of duty of care and duty of loyalty by the directors and officers that manage the company prior to going into the Chapter 11. I've also seen some other adversary proceedings too, claims resolution disputes, non-dischargeability actions, but most recently it's been the fraudulent conveyances and the director's and officer's claims.
Moderator: [00:01:40] Okay. And Judge Feeney, what are you seeing in your neck of the woods?
Judge Joan Feeney: [00:01:43] Very much the same. In both business and individual cases, I’m seeing primarily adversary proceedings, lawsuits within the main bankruptcy case. Many are estate representatives' actions – so a Chapter 7 trustee or a Chapter 11, a debtor-in-possession or creditors committee, or plan trustee's complaint to avoid and recover fraudulent transfers, preferential transfers, and other voidable transfers.
An example would be a trustee's action to avoid a wrongful foreclosure by a secured creditor, due to a defect in a mortgage or a commercially unreasonable sale. Or another example would be an action to recover fictitious profits from investors, which they received in a Ponzi scheme. I'm also seeing a lot of adversary proceedings in individual cases: Section 523 actions brought by a creditor to accept particular debts from the debtor's discharge for fraud or willful and malicious injury. Finally, in individual cases, I've also mediated several Chapter 7 trustees, objections to a debtor's claims of exemptions that would be property that they could keep after bankruptcy.
Moderator: [00:03:03] Both of you didn't mention Chapter 11 matters. I'm curious, Judge Shefferly, why do you think that is? Why are you seeing more adversary proceedings than Chapter 11 matters?
Judge Phillip Shefferly: [00:03:12] You know, that's a very good question. I guess I have a two-fold reaction. One is we don't have a lot of Chapter 11s in the Eastern District of Michigan right now, and I suspect there's going to be more Chapter 11s in the future, but there's been such uncertainty with some of the moratoriums that have been in place by federal and state governments and evictions and foreclosures and things of that nature, that there's almost a sense of waiting for the other shoe to drop and certain types of Chapter 11 cases like single asset cases, for example. Or you might find later on down the road business interruption types of cases.
So, we don't have a lot of those Chapter 11s right now, but I sense that we're going to have some of them or more of them soon. The second part of the answer is I think that the culture of bankruptcy, which really favors compromise and settlement. I think more and more over the last several years has invited the use of ADR, particularly the use of mediation as a way to resolve adversary proceedings.
Now, ADR and mediation are used for all kinds of lawsuits in state and federal courts, but I think the environment of the bankruptcy court and the environment of the bankruptcy community, which is one that places great emphasis on compromise and settlement, I think has really encouraged the use and has ramped up the frequency of these mediations in adversary proceedings.
So that's part of the answer, I think, is a more favorable environment for those. That seems to be what's happening right now in the bankruptcy world.
Moderator: [00:04:32] Well, let's shift now to just really the ADR process. Generally, why and when do parties come to you?
Judge Joan Feeney: [00:04:39] Well, I'll discuss the when first. Usually, parties will begin to think about mediation when a trial date has been set, and they realize how much work they need to do before the trial is going to happen, or some other court deadline will prompt the parties to seek assistance from a mediator. Recently, however, I mediated a case where I was hired even before the lawsuits had been filed.
It was a Chapter 11 case where the post confirmation Chapter 11 trustee asserted claims against directors and officers for breaches of fiduciary duty. He also asserted objections to several secured creditors claims and we mediated them all in one day. So, each case is different, and it really depends, but my experience has been, if there's some type of court deadline, then the parties will think about mediation instead of spending the time and fees to prepare for trial.
Judge Phillip Shefferly: [00:05:45] I think Judge Feeney makes a good point – that many times the parties raise the topic of mediation when they're staring at a court deadline or a court hearing coming up. But I think in recent years, many of the bankruptcy judges do become more proactive in suggesting mediation at different points in time, maybe even at the initial conference, in the adversary proceeding, so that even if a case isn't ready for mediation, then, the parties are thinking about it then and not just waiting and suggesting mediation in a reactive way as they get closer to a trial date
Moderator: [00:06:13] So who pays for your services, Judge Feeney, and who is it that chooses you?
Judge Joan Feeney: [00:06:17] Well, counsel to the dispute, whether it's a multi-party dispute or a two-party dispute, choose the mediator, generally. They will often obtain a recommendation from a colleague or sometimes the bankruptcy judge at one of these scheduling conferences might suggest a mediator or several mediators. Some courts have lists of approved mediators that counsel can go to pick a mediator. Sometimes counsel will simply research mediators and pick one of us from our JAMS website.
Payment is usually prorated among the parties, according to how many parties there are, typically. So, in a two-party dispute, each party would pay half. There is an important point I’d like to emphasize about employment of a mediator. If an estate representative, that is a trustee or a Chapter 11 debtor or a Chapter 11 creditors committee, or a Chapter 13 debtor, an individual reorganization, is a party to the mediation, then an application to employ the mediator must be filed and the mediator must file an affidavit of disinterestedness and no adverse interest and disclose any connections with any of the parties or counsel. So, commencing work on the mediation must await for that court order and that court order of employment does not end court involvement. After the mediation is finished, the mediator must file an application for compensation like any professional in a bankruptcy case with an itemization of the time spent and services rendered and await bankruptcy court approval before the estate representative can pay JAMS for the mediation.
Moderator: [00:08:21] Judge Shefferly, can you talk about what you think parties should look for in a mediator?
Judge Phillip Shefferly: [00:08:27] Unlike lawsuits in state or federal court, adversary proceedings in particular, but any contested matter in a bankruptcy proceeding is going to require some bankruptcy knowledge. So, while the mediators who are familiar with various types of disputes and all kinds of different areas of law, it is important if there's a mediation in a bankruptcy matter, whether it be an adversary proceeding or a contested matter. To have a mediator with understanding of the bankruptcy process. For example, Judge Feeney just explained that in a bankruptcy case where there was a representative of the estate, such as a debtor or a trustee that is party to the dispute, such that the compensation for the mediator is going to be paid out of the bankruptcy estate, then that person has to be appointed and employed pursuant to order of the bankruptcy court. So, I guess that's a good illustration of the need to have an understanding of the bankruptcy process, quite apart from that the specific disputing question in the adversary proceeding or in the contested matter.
I think an understanding of how that process works is very important, particularly because there are many parties in the bankruptcy case that may not be party at all to the specific dispute in the adversary proceeding or the specific dispute in the contestant matter, yet, if there's a resolution of that matter in the mediation that may be brought out for hearing in the bankruptcy case with notice to all of these other parties. So, I think it is very important that the mediator who is selected in a bankruptcy matter have bankruptcy knowledge of the process of, of bankruptcy and how settlements are approved.
Moderator: [00:09:56] Judge Feeney, can you talk a little bit about your process for mediating bankruptcy disputes for you? What is the sequence of events?
Judge Joan Feeney: [00:10:04] Certainly. If there is an estate involved after retention and court approval as is necessary, or if no court approval is necessary, I will read the pleadings on the docket, the public record in the case or adversary proceeding, to understand the background facts and the legal theories being advanced. After I've familiarized myself with the basic facts and legal theories, I have calls individually with counsel to every party to fill in any gaps in information that I can't glean from the docket submission. Thereafter, I ask all counsel to submit to me a confidential mediation memorandum of no more than 15 pages with certain categories of information.
Most importantly, the background facts, the legal theories, and a history of their settlement negotiations. It's important to me to understand why counsel hasn't been able to settle the dispute on their own. I want to understand how far they are apart and what their goals are for the mediation. I also will look at any documents they want to send me, and they're welcome to upload those onto the JAMS portal confidentially.
Thereafter, when I understand the party's goals for the mediation and all of the facts and the legal theories and arguments, I will then do my own evaluation of the strengths and weaknesses of the case and defenses.
What's interesting to me that I didn't realize before I started mediating, is that a mediation starts the moment that the mediator is engaged, and the mediation is not just the six or eight hour session on the assigned date of the mediation. It really starts with the mediator’s preparation, and counsel to the parties should start preparing for the mediation early on as well to make the session itself more efficient.
Moderator: [00:12:31] Judge Shefferly, do you want to talk a little bit about your preparation as well?
Judge Phillip Shefferly: [00:12:36] Sure. I have many similarities with Judge Feeney's comments. I think that the pre-session phone calls are very important. I do have a joint precession phone call, and then it decide whether I need to have separate precession phone calls as well because there is a lot of legwork and investigatory work that can be accomplished there to save time on the actual mediation session date, and to give context to the dispute. So, my written submissions are a little bit different, but very similar to Judge Feeney's. Like Judge Feeney, I like to go on the file on the public record, which is accessible to us in bankruptcy cases and federal court cases.
I like to eyeball the file myself and get a feel for the history of the cases to get some context to how this dispute came before the court through ultimately, before me. But then in my initial joint pre-session phone call, I explained what my requirements are ordinarily for written submissions. I'd like to get the buy-in from the counsel on it, that they have a different idea. I'm open to different ideas, but I explained that generally speaking, I would require three things in writing. One is a joint exhibit book that the two sides get together and prepare, and they just identify in that book who selected each exhibit for inclusion. I encouraged them to put only documents, pleadings and other papers in that book that are really relevant to the dispute that I have to mediate. So that's the first thing, give me a joint exhibit book and I asked for that one week in advance of the actual mediation session itself.
In addition, I ask for a mediation summary, similar to what Judge Feeney described to you.
I put a page limit on it too, because I'm not intending to burden the parties with exceptionally long briefs that frankly I don't need and that will duplicate much of the work they've done in the litigation. So, I do require a mediation summary. I put a page limit on it, but in the mediation summary, I require, when they send it to me, they serve it on the other parties as well.
So, everybody knows both the documents that I'm going to be looking at, the universe of documents in the joint exhibit book, and copies of mediation summaries served by each party. Again, those are required one week before the session.
The third item I require is a little different, and this is a confidential mediation statement that sent to my personal email and not copied to anybody else for my eyes only. The contents of it is not to be revealed by me through the course of the mediation to any other party. In this last document, I put a pretty tight page number on this, usually five pages. What I really want is the brutal honesty of the parties in terms of the history of the settlement discussions to date, where things stand right now on settlement and a down and dirty assessment of the other parties' settlement goals and objectives, and where this case can realistically settle at.
So, this is kind of a bottom line type of document. It's not intended to set forth legal arguments. It's not intended to set forth the facts of the case. I really want to know the history of the settlement discussions and I want to know it in a confidential way. I use this as I see fit, but I certainly do not disclose it.
So, I actually require to three different things. In that last document, I'd require only three days before the mediation session itself and the reason I did delay that is because I want the parties to see the joint exhibits that I'm going to look at and I want the parties to see the mediation summaries of each party, so they know what is being told to the mediator.
I asked for this last one three days before. So, my preparation is very similar to Judge Feeney's. I want to understand the legal arguments. I want to understand the universe of documents, and I want to understand the history of the settlement discussions. It's just a little different in terms of how we require the facts and the papers to be submitted, but very similar in nature.
Moderator: [00:16:08] What about common misconceptions? What are the biggest common misconceptions about mediating bankruptcy disputes that you come across?
Judge Phillip Shefferly: [00:16:16] That's a very good question. One of the most common misconceptions that I come across is the party's perception that the mediator's role is to just shuttle back and forth with offers, which I think is a minimalist view of what a mediator can or should be doing.
The mediation process is a voluntary process, but it's more than just shoveling off as back and forth to two sides who haven't previously discussed possible ways of settlement. It requires some education for them of the possible outcomes in bankruptcy, the possible costs would be incurred, the possible delay that would be experienced and a realistic evaluation of the merits of their case.
How much the mediator does in terms of that evaluative component depends on the particular parties and lawyers and how well-informed and how well prepared they are, but I do find that a common misconception is what they think the mediator is there to do. I think sometimes, they learn that the mediator's role is much more evaluative and educational than just being a messenger delivering offers back and forth.
Judge Joan Feeney: [00:17:22] I agree with Judge Shefferly on that point, and there's an interesting corollary to his observation. Another misconception is that the mediator will decide who was right and wrong and who's going to win and who's going to going to lose.
Although mediators aren't necessarily message carriers, and they do evaluation of strengths and weaknesses, a mediator should not hear from the parties and decide who is going to prevail and who was going to be unsuccessful in the lawsuit. There are also a couple of other misconceptions. One is that mediations take a long time. Most of the mediations that I do in bankruptcy disputes take at the most one day. One eight hour day.
I've been finding during COVID, when we've done our mediations by Zoom, that the mediations are taking about two thirds of that amount of time. Finally, I think there's a misconception of clients, not necessarily lawyers, that the statements made by parties in the mediation are not confidential. They are confidential.
We spend a great deal of time during the joint opening session, explaining to the parties in particular, that what is said during the mediation is confidential and cannot be admitted into evidence, and I give the parties and counsel an additional opportunity. I tell them that if there is anything that they do not want me to convey to the other side during my caucuses with them to please let me know, and I will maintain confidentiality.
Moderator: [00:19:15] Judge Shefferly, let's talk a little bit about some of the legal nitty gritty of mediating bankruptcy disputes. Can you talk a little bit about the kinds of settlements that need to be approved by a bankruptcy judge and the standards that settlements have to meet to receive that approval?
Judge Phillip Shefferly: [00:19:30] Sure, that is one thing that it's unique to the bankruptcy world from other types of judicial disputes is that once a settlement is achieved between the parties, that's not necessarily final. Some matters, not all matters, have to come back to the bankruptcy court. If the nature of the dispute is a claim by a representative of the bankruptcy estate – so say a Chapter 7 trustee or a debtor-in-possession in a Chapter 11 case. If they're the party who is prosecuting a claim against a third party defendant, such as the recovery of a fraudulent conveyance of property, or to sue a claim of breach of duty of care, duty of loyalty against the former director or officer or to recover a preferential transfer that was taken out—those are assets of the bankruptcy estate. So, if the representative of the bankruptcy estate, the trustee or the debtor, is going to compromise in any way the value of that asset and propose a settlement of the litigation to recover that asset, that representative the estate must go back to the bankruptcy court and get bankruptcy court approval.
Typically, that requires a showing of certain elements that the bankruptcy court will look yet to determine, ultimately, is this a fair and reasonable settlement? Not whether it's a perfect settlement, but it's the compromise of this asset, which belongs to the bankruptcy estate and for which this person is a fiduciary, is this a fair and reasonable settlement that it gives value to the estate in light of the complexity of the litigation, the likelihood of success of the litigation, the cost would be incurred going forward?
Is this a settlement that's perceived by the creditors of the estate to be one that represents a fair and reasonable return on this particular asset? So typically speaking, it's the recovery of assets for the benefit of the bankruptcy estate. Those are the subject of the dispute. Those are the types of matters that the representative of the estate has to come back to the bankruptcy court and seek bankruptcy court approval on.
Moderator: [00:21:18] Judge Feeney, in actions against directors and officers, insurers typically have an important role to play. How do you get them involved?
Judge Joan Feeney: [00:21:26] Well, fortunately in the D&O litigation that I've mediated, the insurer is already involved. The insurer is appearing under a reservation of rights in the policy, and they are representing one or more of the directors and officers.
Sometimes, if a conflict of interest is present because several directors and officers are defendants in D&O adversary, the insurer will obtain separate counsel for the directors and officers.
If there isn't an insurance company representing one or more of the defendants, and it doesn't appear that there is counsel for an insurance company, I always ask counsel if there is available insurance. In addition to counsel for a director or officer participating in the mediation, I always ask that the insurance adjuster participate in the case. The insurance adjuster, as opposed to the client or the attorney who's appearing in the D&O adversary proceeding, is the person with settlement authority.
It's essential for that person to be in the room.
Moderator: [00:22:53] Well both of you know that ADR is now firmly part of the bankruptcy landscape. How would you characterize its evolution over say the last decade and where do you see it heading? Judge Shefferly?
Judge Phillip Shefferly: [00:23:04] Well, I think it's become much more prevalent over the last decade.
I think one indicator of that is that many of the bankruptcy courts around the country have now adopted local rules, providing for some form of mediation or ADR. In the court where I sat, we had local law that governed mediations, but frankly it was for mediations in primarily consumer cases or for pro bono cases where it was recommended that a mediator to be appointed and a fee was set at a very nominal amount.
That rule did not really address mediations in Chapter 11 or in complicated adversary proceedings. So, the mediation of those matters was left primarily to the parties to decide to mediate, to select somebody, say off of JAMS' roster, or the bankruptcy judge to recommend it. Hey, this is a good case for mediation, and at least in my practice as I indicated before, I did like to confer with the lawyers about it because sometimes there were complicated disputes that did require mediation.
Now we didn't have a local law that provided for mediation of those types of complex matters, but I think that the tendency among the bankruptcy courts is to recognize more and more the need to have an ADR process that is approved by the court that is consistent with the wishes of the bench.
So, I guess to sum up, in my experience, mediations become more and more prevalent in bankruptcy court, and I think the trend is going to continue. As I said before, the bankruptcy system is predicated upon notions of compromise and settlements that will only make sense to continue to use it there. In many cases, we're dealing with limited resources in the bankruptcy estate, which in many cases are used to fund both the legal fees for the plaintiffs in a dispute and the defendants in the dispute. They're coming out of the same pot of resources.
So, I think the trend is going to continue to use and develop the different ways to use mediation in bankruptcy cases, going forward.
Moderator: [00:24:55] Judge Feeney, where do you see things heading?
Judge Joan Feeney: [00:24:57] I agree wholeheartedly with Judge Shefferly. I think good counsel recognizes that litigation and bankruptcy are not a good fit. There are limited funds and the more fees spent on litigating, the less the creditors will receive as a dividend.
I think virtual mediations are here to stay. During the past year and three months with COVID, we've done every mediation by Zoom. I found that they take less time, so they cost less and they're quite efficient. Right now, we're talking about doing hybrid mediations, part by Zoom for those who don't wish to come to a JAMS Resolution Center, and partly in person for those who do and for those who want in-person.
So, in my cases, I still ask, even though the office has reopened, whether counsel wants to do the session by Zoom.
Judge Phillip Shefferly: [00:26:00] I also want to add one other thing. I think there are many more opportunities for mediation of consumer bankruptcy disputes. I think that consumer bankruptcy lawyers can utilize JAMS and utilize mediators at JAMS, to resolve some of those disputes.
Judge Feeney mentioned objections to exemptions in a consumer case and mortgage foreclosure disputes in the Chapter 13 case. These are disputes that are going to be more frequently mediated going forward, even though those are consumer cases, and we don't typically think of them the same way we think of the use of mediation and Chapter 11 cases.
I do think that mediation in the bankruptcy courts is headed to more comprehensive treatment of cases, not just commercial cases, but consumer cases as well.
Moderator: [00:26:39] Okay, well, we'll leave it there. Judge Shefferly and Judge Feeney, thank you so much for joining us.
Judge Joan Feeney: [00:26:44] My pleasure. Thank you.
Judge Phillip Shefferly: [00:26:45] Thank you.
Moderator: [00:26:46] You've been listening to a podcast from JAMS, the world's largest private alternative dispute resolution provider. Our guests have been JAMS neutrals Judge Joan Feeney and Judge Phillip Shefferly.
For more information about JAMS, please visit www.JAMSadr.com. Thank you for listening to this podcast from JAMS.
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