When an adversary proceeding or contested matter occurs in a bankruptcy case, lawyers for the parties sometimes can negotiate a settlement to avoid having the bankruptcy court decide the dispute. If the parties cannot agree, mediation may be an option under a local rule adopted by the U.S. Bankruptcy Court for the District of Minnesota.
Local rule 9019-2 of the Bankruptcy Court for the District of Minnesota states: The court may refer any adversary proceeding or contested matter for mediation by any other federal judge or any mediator chosen by the parties. The rule includes several notable provisions.
First, it applies to both adversary proceedings and contested matters, which are two types of disputes that can arise during a bankruptcy case. An adversary proceeding (also called bankruptcy litigation) is a separate court action within a bankruptcy case. Contested matters arise in the bankruptcy case itself and usually are resolved without a separate action. A previous blog post contains a detailed explanation of the differences between adversary proceedings and contested matters and examples of both types of disputes.
The rule gives a bankruptcy judge authority to refer any adversary proceeding or contested matter for mediation. While referral generally occurs on request of the parties, the rule permits the court to refer a case for mediation even if it is not requested by the parties.
The rule allows a bankruptcy judge to refer a matter for mediation by a federal judge or by a private mediator chosen by the parties. The difference in the two types of referrals is significant. Mediation by a federal judge is provided at no cost to the participants. If the parties wish to use a private mediator, they bear the cost of paying the mediator.
In addition to Bankruptcy Court Rule 9019-2, a local rule of the U.S. District Court for the District of Minnesota also applies to bankruptcy litigation mediation, by virtue of district court jurisdiction over bankruptcy courts and matters. Minnesota District Court Local Rule 16.5, relating to alternative dispute resolution for civil matters, specifically mentions adversary proceedings in bankruptcy cases. Application of LR 16.5(d) is particularly important, because it ensures the confidentiality and nondisclosure of communications made to a mediator during the process.
In Minnesota, the process starts with the parties reporting to the bankruptcy judge that they agree to mediate the dispute. The local bankruptcy judge then refers the matter to another bankruptcy judge in the district for mediation. All of the local judges are skilled mediators, so this service provides a great value to the parties. The process also gives parties an excellent opportunity to test out their arguments on a bankruptcy judge.
It is important for each party to determine their settlement strategy before mediation begins. The goal should be to know what is the most they would move off their desired settlement position, and what is the worst possible outcome if the dispute does not resolve.
Before the mediation session, the mediator generally asks both sides to submit a written statement with relevant information about the case. The lawyers for the parties prepare the statements, which include factual statements, legal issues and analysis, and a calculation of damages. The mediation statements are always confidential and prepared only for the mediation.
The mediator then moderates and facilitates discussion of the issues among the participants and their attorneys, with the goal of reaching agreement on settlement terms. During the sessions, the mediator may hold separate caucuses with participants to address specific matters under discussion. Most mediators put the parties in separate rooms. The mediator then shuttles back and forth between the rooms to have separate discussions with the parties. Currently, a mediation session may take place via conference call or Zoom as well.
If the process succeeds and the parties agree on settlement terms, they sign a written statement before the end of the final session, or put the agreement on the record with the mediator so a transcript is available. The written document, referred to as a settlement agreement or term sheet, rarely is a final document. When the parties agree on the final document, it is submitted to the bankruptcy court for approval.
Mediation may enable parties to find a resolution to a bankruptcy dispute, even if efforts by legal counsel fail to produce agreement. The process may enable a party to better understand the adverse party’s position and the risks and costs involved in pursuing the litigation, as well as explore alternative avenues for resolution. Mediation also resolves the dispute privately, which may help preserve existing relationships between the parties.
While mediation is a good option in some cases, there are limitations to using it. Mediation does not establish legal precedent, nor can it provide injunctive relief for a party. It also may not deter future similar claims. Bankruptcy litigation with numerous parties or complex issues may not be suitable for mediation. The process also does not work well if one party insists on pursuing litigation, rather than considering a negotiated or mediated settlement.
While mediation communications are confidential, a mediated settlement agreement does require approval of the bankruptcy judge. In some cases, the court may take issue with the terms of settlement. In addition, court review means the terms of the settlement are not confidential, which could be a concern for a party.
At the Dave Burns Law Office, I represent clients in all types of adversary proceedings and contested matters in the United States Bankruptcy Courts in Minneapolis and St. Paul. Bankruptcy litigation is a primary focus of my practice. If you require representation in an adversary proceeding or contested matter in a bankruptcy case, I welcome you to contact me at (612) 677-8351 or by sending an email to me at firstname.lastname@example.org. I am available to meet with clients in both Minneapolis and St. Paul and welcome inquiries from clients and referring attorneys throughout the State of Minnesota.
The Dave Burns Law Office hopes you find this article helpful. But please do not rely on it as legal advice. The law changes regularly and the outcome of any legal matter depends on its unique circumstances. View full disclaimer