Hard times lead to new ways. The City of Detroit falls on hard times—and files bankruptcy to find a new way. Catholic Dioceses in various places are confronted with massive litigation burdens—and are finding solutions through bankruptcy.
The Detroit bankruptcy case and the group of Diocese bankruptcy cases have little in common:
Yet, these cases arrive at a common innovation for successful reorganization: “proactive mediation.” This is the great reorganization innovation of today.
The City of Detroit files its voluntary Chapter 9 Petition in the Eastern District of Michigan on July 18, 2013, at Case No. 13-53846.
The “proactive mediation” term is coined by Judge Steven Rhodes in confirming the Detroit reorganization plan (see Doc. 8257). It refers to a mandatory mediation process and empowered mediators that Judge Rhodes creates to handle Detroit’s reorganization issues.
The elements of Detroit’s “proactive mediation” are these:
The result of Detroit’s “proactive mediation” is a confirmed plan and a functioning City.
Merely declaring such result masks the difficulties involved – it almost seems a simple and inevitable result. But there is nothing simple about the Detroit bankruptcy or inevitable about results achieved.
Instead, positive results come from the creativity, courage and persistence of many people — and from the creation and effective implementation of Detroit’s “proactive mediation” process.
The group of Diocese cases develops a similar “proactive mediation” process. But they do so in a much different way: by trial/error and lessons learned from hard experience.
At last count, there are 14 Diocese bankruptcy cases in the U.S. at various stages of progression.
The Archdiocese of Milwaukee bankruptcy is where many of the hard-lessons are learned. The Archdiocese files its voluntary Chapter 11 Petition on January 4, 2011, in the Eastern District of Wisconsin at Case No. 11-20059.
The approach of the Archdiocese for the first couple years is to fight every battle and shield large asset values from creditors. Its initial reorganization plan proposes to pay $4 million to sex abuse claims. This approach fails.
So, the Archdiocese changes its approach. In a mediated and confirmed plan of reorganization, the Archdiocese agrees to pay $21.5 million to sex abuse claims. Unfortunately, though, it has incurred legal fees of $20 million to get there.
By contrast, the Diocese of Helena, Montana, engages in a proactive mediation process before filing bankruptcy. The mediation succeeds in reaching a settlement agreement. The Diocese of Helena then files its voluntary Chapter 11 Petition to effectuate the terms of the mediated settlement. Bankruptcy filing occurs in the District of Montana on January 31, 2014, at Case No. 14-60074. The result is that a plan of reorganization is confirmed on March 4, 2015 (Doc. 475) that pays $21 million to sex abuse claims, while the Diocese of Helena incurs legal fees of only $2.5 million for the entire process.
The Diocese of Helena is much smaller than the Archdiocese of Milwaukee. So, average benefits to abuse claimants in Helena are much, much greater than average benefits to abuse claimants in Milwaukee.
The Diocese of Duluth provides a recent illustration of proactive mediation. This Diocese files its voluntary Chapter 11 Petition in the District of Minnesota on December 7, 2015, at Case No. 15-50792. Within two months after filing, the Diocese asks the court to “enter an order directing” the parties to participate in mediation (Doc. 51). The Court promptly grants this mandatory mediation request (Doc. 70). And a proactive mediation process is under way in the Duluth case.
Both the Detroit bankruptcy and the group of Diocese cases create the same innovation: “proactive mediation.” But they do so in entirely different ways.
Regardless of how they get there, these two disparate types of cases achieve excellent reorganization results through the same “proactive mediation” innovation. This is their great contribution to bankruptcy reorganization processes.
Business reorganization cases would do well to follow their lead.
Donald L. Swanson is an attorney with Koley Jessen P.C, L.L.O., in Omaha, Nebraska. Don hosts a blog promoting bankruptcy mediation: https://mediatbankry.wordpress.com/.
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