By Benjamin S. Seigel, Esq.

Chapter 11 of the Bankruptcy Code requires that a plan of reorganization (“Plan”) must be confirmed by the Bankruptcy Court to enable the Debtor to reorganize its financial affairs. It is often the case that there are competing factions unable to agree on the terms and conditions of a Plan.

Consider the case of a corporation that owns valuable assets including real estate, accounts receivable, furniture, fixtures, equipment, inventory and intellectual property. Its business took a turn for the worse when three of its largest customers went out of business.  It has several secured creditors, priority creditors, general unsecured creditors, tax liabilities and pending litigation against competitors for trademark and patent infringement matters.  Its potential customer market is expanding but it needs time to reorganize its finances and aggressively bring in new customers.  Management, its creditors and its suppliers all have confidence that the business can be reorganized and move forward to regain the company’s market position.

A Chapter 11 case has been filed and an unsecured creditors committee has been formed. The Debtor drafts a disclosure statement and plan of reorganization and submits it for comment to the various contingencies.  There are serious disagreements including the treatment to be given to each class of creditors, objections to the Debtor’s proposed post-confirmation budget and the amount that existing shareholders will put into the company to retain their equity interests.

After several months of meetings, arguments, threats of litigation or conversion of the case to a liquidation proceeding or the appointment of a Trustee, the judge handling the case recommended that the parties consider engaging a mediator to attempt to bring the parties together and develop a confirmable plan of reorganization.

The parties agreed on an experienced bankruptcy attorney and mediator.  Each party was asked to provide a mediation statement of its concerns and proposals.  Each was asked to share their statement with all other parties.  The mediator met with all contingency representatives in a group session to set the tone of the mediation and her plans for the procedures she intended to follow. She scheduled meetings with each contingency and eventually re-convened the group meeting during which she presented each side’s proposals.   After a day of separate caucuses an agreement in principal was reached and was presented to all for comment. After some additional negotiations and caucuses the terms of a Plan that could be supported by all was drafted by the Debtor’s counsel.  All agreed to support the Plan. 

The mediation process took place over a two week time span and saved the parties tens of thousands of dollars in attorney fees. Litigation that could have gone on for months was eliminated. The mediation process prevented the case from cratering under the weight of the numerous disagreements.

Although the facts in this example are an over-simplification of those in actual cases, the point is made that a well thought out mediation plan led by an experienced mediator and bankruptcy practitioner can be the least expensive and time consuming road to confirmation of a plan of reorganization.