Creditors' Rights and Bankruptcy Sectionഀ Newsletter

Greetings:

In this issue we continue to examine Alternativeഀ Dispute Resolution (ADR).  ADR has been around for quite a while and hasഀ dramatically impacted the direction and course ofഀ litigation.  We explore mediation as one of the most popularഀ and widely used forms of ADR.  Weഀ also address representation of entities in litigation and examineഀ a recent decision out of the Seventh Circuit which portends toഀ extend the avoidance powers of chapter 7 trustees seeking toഀ avoid pre-petition lender liens.

As always, should you have any questions, pleaseഀ feel free to contact me at any time.

Bruce W. Akerly
ഀ Chair, Creditors’ Rights & Bankruptcy Practice Group
ഀ Cantey Hanger LLC, Dallas

Alternative Dispute Resolution ("ADR"), Part II

Authored by Bruce W. Akerly, Partner

Mediation

Mediation is defined as "the act of a thirdഀ person who interferes between two contending parties with a viewഀ to reconcile them or persuade them to adjust or settle theirഀ dispute." Blacks Law Dictionary,ഀ 1113 (4th ed. 1968). 

Mediation can be consensual or court directed.ഀ While parties to mediation must cooperate in the process, theyഀ are not obligated to resolve their differences.  Failing toഀ settle simply means a return to litigation.

a. The Mediator

The mediator conducts the mediation. A mediator isഀ a facilitator of discussion and communication between theഀ parties. A mediator is not a judgment and may not impose hisഀ judgment or opinion on the parties. (Tex. Civ. Prac. Code § 154.023(b)). The mediator is notഀ aligned with either party

Mediators are contracted to perform their dutiesഀ by the parties. Typically, the mediator, whether court appointedഀ or selected by the parties, will contact the parties and provideഀ them with an information sheet, rules of mediation, and agreementഀ to mediate.  Most mediators are paid for their services byഀ the parties to the mediation.

b. The Process

Typically, the mediator will request each party toഀ the mediation submit confidential statement of their position,ഀ supported by relevant pleadings and authorities.

Each mediator handles mediation a littleഀ differently.  Mediation often begins with a general sessionഀ where party representatives and their counsel present positionഀ statements.  The general session can be waived.  Duringഀ the general session the parties are encouraged to ask questionsഀ of each other, express positions and opinions, and makeഀ statements, and the mediator will reiterate the ground rules forഀ the mediation.  For mediation to work, each party must beഀ willing to talk and have an open mind toward the possibility ofഀ settlement.

Following the general session, the parties will beഀ separated and the mediator will begin with one party and thenഀ proceed back and forth with position statements, offers andഀ discussion toward facilitating a settlement.

If matter settles, the terms of the settlementഀ should be reduced to writing signed by all parties and counsel soഀ that there is no misunderstanding of the agreement reached. ഀ The outline of the settlement is frequently reduced to a moreഀ definitive settlement agreement.

If a matter does not settle, some mediators willഀ keep the mediation open if time permits to allow the parties toഀ digest what transpired during the mediation session and,ഀ hopefully, continue efforts to reach a compromise andഀ settlement. 

All communications that occur in mediation areഀ confidential and may not be used by any party for any purpose inഀ the underlying action.  The mediator will report the resultsഀ of mediation to the court, but may not reveal anything more thanഀ the outcome of mediation, i.e., whether it resulted in aഀ settlement or not.

Corporations Are Not People (At Least When Itഀ Comes to Representation in Litigation)

In Texas and federal courts, “[o]nly a licensed attorney may practiceഀ law.  A corporation may not appear in court through itsഀ officers who are not attorneys.”  S.W. Express Co., Inc.ഀ v. Interstate Commerce Comm’n,ഀ 670 F.3d 53, 56 (5th Cir. 1982); U.S. ex rel Southern Rock, Inc. v. Precision Impactഀ Recovery, 2011 WL 609902, at *4 (N.D. Tex., Dallas Division,ഀ Feb. 14, 2011); Gloveഀ Leasing, Inc. v. Engine Supply and Mach. Serv., 437 S.W.2d 43, 45 (Tex. Civ. App. – Houstonഀ 1969.  This goes for entities of other types such asഀ partnerships and limited liability companies.  Failure toഀ engage counsel to represent your business may result in dismissalഀ or judgment being entered by default.

Trustees (Andഀ Debtors-In –Possession) – The Strong Men of the Bankruptcy Circus

Bankruptcy section 544(a) is called the “strongഀ arm” provision of the Bankruptcy Code.  Under this section,ഀ chapter 7 Trustees and debtors-in-possession in chapter 11 areഀ afforded the power to avoid preferential and fraudulent transfersഀ for the benefit of their respective bankruptcy estates. ഀ This section also enables the trustee to act as hypothetical lienഀ creditor.  In other words, the Bankruptcy Code provides thatഀ the trustee is given the status of a lien creditor as of the dateഀ the case is filed.  This status is often used often used toഀ attack UCC financing statements andഀ other liens, seeking to avoid them to elevate the value of assetsഀ for the benefit of the bankruptcy estate.  In a recent case,ഀ the Seventh Circuit Court of Appeals effectively enlarged theഀ strong arm power as a tool to attack and avoid securityഀ agreements where the written documents do not support properഀ perfection of lien rights.  In State Bank of Toulon v. Covey (In reഀ Duckworth), the Seventh Circuit recently held that aഀ trustee is bound only by the written agreements involved in theഀ transaction at issue and held that the requirement of sectionഀ 9-203(b)(3)(A) of the UCC that collateral be described in writingഀ extends to other terms, including a description of theഀ indebtedness at issue, ignoring a well-established line of casesഀ which permitted oral agreement and modification with respect toഀ such terms.  The court also held that the “compositeഀ document” rule, which allows a secured party to supplement anഀ incomplete or erroneous written security agreement (e.g., missingഀ an adequate collateral description) with other documents to createഀ a “composite security agreement” where the missing description isഀ essentially supplied by other documents in the transaction, doesഀ not apply to a bankruptcy trustee.  This decision, hopefullyഀ an anomaly, creates a slippery slope and should be of concern toഀ any lender whose borrower is financial insolvent and headed toഀ bankruptcy court.

In theഀ News

We are excited to announceഀ that Christopher A. Klement has joined our practice group as anഀ associate. 

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“The only limit toഀ our realization of tomorrow will be our doubts of today. ഀ Let us move forward with strong and active faith."

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-FDR

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What’sഀ On Your Mind?

If you have an issue or question you would likeഀ addressed in a subsequent e-newsletter, please let us know and weഀ will attempt to do so.