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When Is Mediation Appropriate Pursuant to Bankruptcy Code Section 327(a)?
Mediation of a bankruptcy dispute takes place outside the presence of the judge before whom the case is pending. There is usually no direct communication between the mediator and the presiding judge before, during or after the mediation. Accordingly, with the utilization of mediation as a dispute resolution tool in bankruptcy cases becoming increasingly common, it is important that courts remain vigilant in protecting the integrity of the mediation process. As the U.S. Court of Appeals for the Second Circuit once famously stated in another context, “[t]he conduct of bankruptcy proceedings not only should be right but must seem right.” In re Haupt, 361 F.2d 164, 168 (2d Cir. 1966).
The decision of the court in In re Cody Smith, 524 B.R. 689 (Bankr. S.D.Tex. 2015), highlights the importance of ensuring that bankruptcy mediations are conducted with sufficient judicial oversight, and it demonstrates the appropriateness of evaluating whether a particular case is suitable for mediation before mediation is ordered. Smith discusses the risk of at least an appearance of favoritism that is posed where the proposed mediator is a former bankruptcy judge. Unfortunately, that court's holding that a mediator is a professional person whose employment must be approved by a bankruptcy court pursuant to section 327(a) of the Bankruptcy Code leaves the misleading impression that a mediator is employed by just one side involved in the dispute, a trustee or debtor, and is not a neutral third party working to assist all parties in reaching a consensual resolution of their dispute
There is not a large body of case law addressing the issues discussed in Smith. A close look at this case and its reasoning is warranted, because this ruling, though helpful in many ways, could inadvertently undermine both the effectiveness of a mediator and confidence in mediation as a fair means of resolving contested matters, adversary proceedings and other litigations that constitute obstacles to successful conclusion of Chapter 11 and Chapter 7 cases.
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