Vol 12 (2015) - Issue 6

Article preview

Recent Use of Mediation for Resolution and Effective Management of Large Case Insolvencies

Introduction
The use of claim resolution facilities, which use structured negotiation and mediation to resolve large numbers of disputed matters in substantial insolvency cases in the US, was developed in the 1990s in the context of significant Chapter 11 cases. It has become a standard feature in cases involving hundreds or thousands of disputed creditor claims and recovery actions. The use of mediation to reach consensual plans of reorganization, while not yet standard protocol in cases, has become common and is no longer controversial. This article explores the history and recent uses of mediation in substantial insolvency cases in the US and suggests methods of introducing mediation in cases in Europe as well.


Managing litigation
A claim resolution facility is a custom-designed alternative dispute resolution program using structured negotiation, mediation and, sometimes, arbitration to resolve disputed claims in insolvency cases. The program, the terms and implementation of which must be approved by the bankruptcy court after notice and hearing, is typically drafted, proposed and administered by attorneys representing the Chapter 11 debtor business or its representative.
The facility enhances prospects of reaching a negotiated settlement by promoting the exchange of necessary information and providing a procedure for the exchange of a settlement offer and a counteroffer. If the structured negotiation provisions do not yield a quick settlement, the facility will provide for mediation to commence with mediators previously approved by the court based on recommendations usually made by the debtor or its representative. If mediation is not successful, some facilities may then provide for arbitration.
Since these procedures are not governed by formal rules of evidence and procedure, there can be a significant saving of time and cost for all parties. The success of the early facilities has made them a mainstay in today’s practice. In one of the first uses of a facility in the 1990s, the procedure implemented in the Greyhound Bus Chapter 11 case involved more than 3,000 claimants. The procedure was subsequently used successfully in many other cases involving substantial numbers of disputed claims.
Experience demonstrates that voluntary settlements occur in the great majority of matters where facilities are used, with the majority of the settlements occurring even prior to the mediation stage. A recent example is in the Lehman Brothers liquidating Chapter 11 cases in the Southern District of New York, where structured negotiation and mediation was used to manage and resolve hundreds of disputes arising from early termination of derivative contracts due to the bankruptcy filings. A June 2015 status report states that over USD 2.9 billion was collected by the Lehman Estate in 410 ADR matters resolved with 527 counterparties. Of the 235 disputes that went through mediation and were concluded as of the time of the report, 219 were settled and only 16 failed to reach settlement. A similar facility has been used to manage and seek resolution of numerous clawback actions in the Madoff SIPA liquidation case, although public reporting of the results has not been provided.