The Use of Alternative Dispute Resolution in Bankruptcy Proceedings * *Portions reprinted by permission of JAMS.

Overview of the ADR Spectrum Alternative 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 ADR Programs 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 Court ADR 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