Early Mediation Proves to Be a Winning Strategy

Frank Monaco

When it comes to resolving business bankruptcy disputes in a way that produces positive results for creditors and stakeholders, mediation works. It gives the parties involved more control and serves to avoid costly and protracted litigation. Of course, in a perfect world, more businesses facing bankruptcy would opt for mediation sooner, rather than waiting until the eve of a trial.

According to the American Bankruptcy Institute, mediation has been used in bankruptcy cases for a wide range of disputes, including complex multi-party Chapter 11 reorganization plan negotiations, preference and avoidance actions, objections to discharge other adversary proceedings, claim objections, and other contested matters. Even when an entire bankruptcy case cannot be resolved through mediation, experience has proven that many of the contested issues can be resolved, which will narrow the remaining issues for trial or later settlement.

Anatomy of a successful mediation

A good example of mediation as a winning strategy in bankruptcy resolution is the example of the 2013 Blitz USA case. Blitz filed for Chapter 11 protection, following wrongful death and personal injury lawsuits alleging the gas cans the company manufactured were defective.

The outlook for a successful outcome looked bleak as the case involved numerous parties including the debtor, the committee, the parent company, insurance companies, tort claimants, and Walmart. In addition, the complexities of the legal issues such as tort, insurance coverage, and corporate and bankruptcy law were complicated by the strong personalities of the attorneys.

After 10 months of mediation, Blitz was able to cut a $161.3 million deal with its insurers and Walmart, its former top customer, to fund a trust set up under its bankruptcy wind-down plan to compensate the personal injury plaintiffs. In addition, a trust was established for the benefit of unsecured creditors. Mediation resulted in a nearly consensual plan of reorganization.

Benefits abound

Because mediation involves a trained, neutral expert who knows how to get parties to negotiate, there is greater opportunity for reaching a settlement. Early mediation also delivers additional benefits:

• Cost-effectiveness. Parties have more control over time spent on proceedings, and discovery is often limited. That adds up to less money spent.
• Control. Parties that undertake mediation play a pro-active role in decision making, and work consensually to arrive at settlement.
• Coverage Confidentiality is guaranteed in mediation proceedings, and the negotiated agreement can include standards of enforceability.

Finally, corporations are wise to look at the possible outcomes if mediation is not considered. Without mediation, the cost for discovery, motion practice, and trial preparation escalate. These costs, and the delay associated with litigation on most cases, reduce the chances of a successful reorganization and reduce the amount of distributions ultimately made to the creditors. Often in the case of bankruptcy or reorganization, the failure to settle early through mediation can eliminate the opportunity to settle the lawsuit at all.