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Releasing the Albatross
In the context of large Chapter 11 cases, the resolution of disputed claims can often be the proverbial albatross around the neck of the debtor, delaying the closing of the debtor's case to the detriment of the debtor's estate. The litigation costs associated with the resolution of hundreds or thousands of disputed claims operate as a drain on estate assets, thereby reducing the value of the estate and ultimately lowering values received by creditors holding allowed claims. Chapter 11 cases can last for months or years after plan confirmation solely as a result of unresolved disputed claims. Swift claims resolution can be especially problematic when dealing with tort or other claims where factual issues predominate.
To address the speedy resolution of such claims, debtors have increasingly turned to mandatory “alternative dispute resolution” or “ADR” procedures. Generally, such ADR procedures stay related non-bankruptcy court actions and require claimants to engage in mediation and/or non-binding arbitration with the debtors prior to seeking relief from the bankruptcy court to allow them to proceed with their case in a non-bankruptcy forum. It is clear that the bankruptcy court may institute voluntary ADR programs in lieu of state court actions, ie, where the affected creditors elect to participate. See Federal Rule of Bankruptcy Procedure 9019(c), which states that “On stipulation of the parties to any controversy affecting the estate the court may authorize the matter to be submitted to final and binding arbitration.” But there has been little consideration of the bankruptcy court's ability to require claimants to participate in mandatory ADR procedures. Recently, in Spierer v. Federated Department Stores, et al. (In re Federated Department Stores), 328 F. 3d 829 (6th Cir. 2003) (hereinafter, “Federated“), the Sixth Circuit affirmed the power of the bankruptcy courts to implement mandatory ADR procedures. Of importance, the Federated court confirmed that the constitutional authority of the bankruptcy court to oversee the expeditious resolution of claims includes utilization of a mandatory ADR procedure.
The Utilization of Mandatory ADR by Bankruptcy Courts
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