ADR SPOTLIGHT: What is the best way to handle Detroit's bankruptcy claims?

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 By William L. Weber Jr.

 
Detroit’s bankruptcy is the largest municipal bankruptcy in the United States.  At least two of the issues have garnered nationwide publicity:  whether the DIA’s treasured works of art should be sold to reduce the City’s liabilities; also, whether City employees should have their pension benefits reduced.  These issues are being handled by Chief Judge Gerald E. Rosen, who is acting as a mediator.   In addition, there are reportedly more than 500 claims against the City that are included in this bankruptcy.  The additional claims involve all types of cases including property damage, personal injury, contracts, commercial transactions, motor vehicle injury claims, etc.  This article is intended to address the disposition of the 500 claims.
 
On November 12, 2013, attorneys for the City of Detroit filed a motion with the Bankruptcy Court to use a combination of mediation and arbitration in an effort to quickly resolve cases pending against the City.  In their proposal, mandatory alternative dispute procedures would be used, including case evaluation and binding arbitration.  The Wayne County Mediation Tribunal was suggested as the forum for resolving the cases. Claims not resolved through the ADR procedures proposed shall proceed to litigation to be liquidated.
 
It is particularly surprising that the City’s proposal includes case evaluation as one of the ADR tools recommended to settle cases in Detroit’s bankruptcy. Many lawyers and judges question the use of case evaluation especially in complex commercial cases. 
 
 A report dated October 31, 2011 prepared for the Supreme Court Administrative Office (SCAO) entitled “Effectiveness of Case Evaluation and Mediation in Michigan Circuit Courts” found that settlements through case evaluation occurred in only 2% of the cases within the 28 days allotted to parties under the court rule, and in an additional 20% of the cases after the 28 days.  In contrast, 47 % of the cases mediated settled at the table, and an additional 25% settled on average 50 days after mediation.  A 72 % disposition rate through mediation, contrasted with a 22 % disposition rate through case evaluation strongly suggests that the case evaluation process may not be the most appropriate process if the key goal is to reach quick dispositions.”
 
Also, case evaluation is the wrong ADR process for bankruptcy cases. In case evaluation the lawyers put a dollar number on the VALUE of the case. In bankruptcy it is not WHAT the VALUE of the case is, it is simply what the parties will settle the case for—that is, so many cents on the dollar.
 
There are many different alternative dispute resolution processes.  There is one process, however, that I believe best fits the needs of the Detroit Bankruptcy.    This is called MED/ARB, which stands for a combination of mediation and arbitration.   MED/ARB combines the mediation and arbitration processes as a means to avoid the increased cost and difficulty of court litigation.  This process begins with a contract between the parties which calls for mediation and if the matter is not settled then it moves to binding arbitration.
 
There is a world of difference between mediation and arbitration.  In mediation a neutral works with the parties and helps them find a solution.  If the matter is not resolved, the MED/ARB agreement calls for the case to move to arbitration which has some similar characteristics to a judicial trial in that the arbitrator is a decision-maker . The parties decide whether to use the same neutral as the arbitrator or bring in a new arbitrator.  An  arbitration is conducted and an award is rendered.  
 
The principal advantage of MED/ARB   is closure.  This is particularly important because emotions often run high when substantial dollars are involved.  Cost savings and reduction of time are typical advantages of the ADR processes.   Also, the inclusion of binding arbitration in the agreement puts additional pressure on the parties to get the matter resolved through mediation.  The parties know if the case is not settled through mediation, arbitration will commence and there will be one winner and one loser. The arbitrator will be making a final, binding decision. 
 
As I said at the outset, there are many ways for Detroit to handle the 500 claims in its bankruptcy.  MED/ARB may be the best approach.
 
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William Weber has a background in litigation, commercial transactions and government relations.  He was an antitrust trial lawyer for the Federal Trade Commission in Washington, D.C. prior to joining General Motors Legal Staff, where he had numerous roles, including attorney in charge of Environmental Law, assistant general counsel and practice area manager.  Weber was legal advisor to numerous General Motors committees, including top management, as well as special counsel for legal and legislative matters.  Weber is the founder and executive director of Professional Resolution Experts of Michigan (PREMi, http://premi.us/), which has 17 independent members who specialize in mediation and arbitration.

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