The Use ofAlternative Dispute Resolution

in Bankruptcy Proceedings*

*Portions reprinted by permission of JAMS.

Overview of the ADR SpectrumAlternative Dispute Resolution (ADR)

provides a range of alternatives between direct negotiation and litigation

Mediation Arbitration Facilitated Settlement Early Neutral Evaluation

ADR Spectrum

Advantages of ADR Use in Bankruptcies

In most bankruptcies, there are claims and preferences that do not settle easily but do not require full-scale litigation to reach resolution

ADR can avoid unnecessary costs of discovery, motion practice and trial preparation

Advantages of ADR Use in Bankruptcies

The time and expense of preparing for and appearing at a mediation (and other ADR proceedings) are modest by comparison to the costs of trial - even a short cause

The use of ADR can significantly shorten the length of the bankruptcy proceeding

Preference Actions Are Particularly Well Suited to Mediation

Factual issues require a case-by-case and industry-specific analysis

Case law often does not provide a clear rule of decision for the case at hand

Mediation provides a forum in which the parties’ disagreements can be aired and settlement reached based on a balancing of competing views

Mediation provides a cost-effective forum for the resolution of smaller disputes

How to Initiate a Bankruptcy ADR Program

A motion is made in the bankruptcy court for an order establishing the procedures for the submission and resolution of cases through mediation and/or arbitration

The Order Provides:

Date, time, hearing location, ADR neutral

Hearings are often held in multiple locations depending on the location of the debtor, the creditors, other parties, and the court in which the action is pending

Multiple hearing locations increase program usage and reduce transactional costs

Documentation Accompanying the Notice: Explains the ADR process to be used

Sets a schedule for the exchange of key documents and briefing

Allows for limited discovery (Any party may seek leave for discovery designed to yield information necessary to assist the parties in making informed decisions regarding settlement)

Discovery is completed quickly under the supervision of the mediator or arbitrator

Typical Objections Raised

Forum

Cost

Time

Should not prevent trial de novo in the bankruptcy court (arbitration only)

Constitutional issues, such as preference defendants being sued involuntarily (arbitration only)

Mediation vs. Arbitration

Arbitration-related objections are typically overcome in two ways:

1. The ADR order can distinguish between claims and preferences. Claims may be subject to either mediation or arbitration, while preference actions may be limited to mediation only.2. Wherever arbitration is an option, either side can accept the award or estimation - or proceed to trial de novo.ADR programs are drafted to safeguard the parties' rights to fairness and due process.

Examples of Recent Bankruptcy ADRPrograms and Orders Mediations noticed between 35 and 40 days before the

hearing date Notice described the mediation process, the identity and

qualifications of the mediator and the location of the mediation

Clear deadlines set for the exchange of mediation-related documents

Because of the relatively small dollar amount of many of the preference actions (between $25,000 and $50,000), a typical mediation day involves four to six cases

Multiple cases with the same lawyers on the same day further increases efficiency and cost-effectiveness

Bankruptcy CourtADR Programs

Bankruptcy Mediation Program

Established in 1995 “All controversies arising in an adversary

proceeding, contested matter or other dispute in a bankruptcy case for referral to the Mediation Program”

Specific ADR method used to be determined by mediator and the parties.

Available ADR methods “include, but are not limited to, mediation, negotiation, early neutral evaluation and settlement facilitation.”

Mediation Panel

Appointed by the Court. At least, one full day per quarter

provided pro bono Thereafter, compensation as agreed by

parties and mediator, subject to approval of Bankruptcy Judge if charged to bankruptcy estate

Survey Results

October 2003 survey mailed to 7300 attorneys and clients who

participated in Mediation Program

Approximately 2500, or 34% responded, as follows:

Table - Assessment of Program by Participants

Participants satisfied with the ADR Program

83%

Participants who would use the ADR Program again

93%

Participants who considered their settlement fair

82%

Participants who believed parties will comply with settlement

87%

Participants who believe mediator was effective in encouraging clients to engage in meaningful negotiations

84%

Participants who believed mediator was effective in getting the attorneys to engage in meaningful negotiations

85%

Mr. Levy is a principal of JAMS in San Francisco. Mr. Levy founded JAMS’ Class Action Settlement Adjudication Program and now supervises its Bankruptcy Claims and Preference Resolution Facility. He is experienced in the design and implementation of multi-party ADR programs and has overseen several large bankruptcy processes pending in courts around the country. Mr. Levy is an adjunct professor at the University of San Francisco Law School and Co-Chair of the American Bankruptcy Institute’s ADR Committee. He can be reached at llevy@jamsadr.com.