What Mediation Actually Does in Bankruptcy

There is a common assumption about mediation in bankruptcy: one party wants to be paid, the other would rather not pay, and a neutral helps them find a number somewhere in the middle. That model applies to preference litigation, fraudulent transfer claims, any dispute where one party is seeking a sum of money and the other would rather not write that check. Mediation works there. But that is not where mediation is most valuable in a bankruptcy case.

Where mediation does its best work is in separating interests from positions.

A position is what a party says out loud. They do not want the plan confirmed. They want a higher interest rate. They want to be paid first rather than third. A position sounds like a demand, and in a contested proceeding, it usually is one.

An interest is the reason behind the position. And in bankruptcy, those two things are often not the same at all.

There is a story that gets used in mediation training that I think about in almost every session. Two siblings are fighting over an orange. Their mother comes home, sees the fight, and separates them. She goes to the first child and asks why they need the orange. The child says their grandmother is visiting tomorrow and they want to bake her a cake and need the orange zest. She goes to the second child and asks the same question. That child says they are not feeling well before a big game and needs to drink orange juice.

Both children could have gotten exactly what they needed from the same orange. They were not communicating. Their position, “I need the orange,” obscured their interest. One needed the peel. One needed the juice.

Bankruptcy is, at its core, an invitation for parties to negotiate. There is a debtor, secured lenders, unsecured creditors, equity holders, landlords, contract counterparties, each with different leverage and a different idea of what a fair outcome looks like. They state positions. They file objections. They take discovery. And often, underneath all of it, their actual interests may not be as incompatible as the litigation posture suggests.

Mediation in that environment is not primarily about splitting the difference on a number. It is about peeling back the position to expose the interest. A creditor objecting to plan confirmation may actually be concerned about a specific release provision affecting a related guarantee. A landlord holding out on a lease assumption may care less about the cure amount than about whether the reorganized debtor can actually perform going forward. A committee pressing an avoidance action may need to demonstrate to its constituents that it pursued recovery, not because the litigation economics are compelling.

When you can surface what a party actually needs, as opposed to what they are saying they need, you can often find solutions that would never emerge from a contested hearing. That is how mediation creates outcomes in bankruptcy that litigation cannot.

If bankruptcy narrows the field of negotiation, mediation in bankruptcy narrows what is being negotiated over. That is where the value is.