Bankruptcy Mediators Shouldn’t Serve as Trustees in Same Case

Can a mediator in a Chapter 11 case subsequently serve as the trustee in the same case? The issue recently arose in a current single asset real estate Chapter 11 case where the secured lender requested the case mediator be appointed as the Chapter 11 trustee. The debtor opposed the appointment of the mediator as trustee based on the debtor’s disclosure of highly confidential and sensitive information to the mediator.

If a mediator can subsequently serve as trustee in the same case, it compromises the effectiveness of the mediation process. While general principles of disinterestedness are applicable to appointment of estate professionals, explicit disqualification of a mediator from serving as trustee is a necessary and appropriate addition to the Bankruptcy Code.

The code doesn’t explicitly prohibit a mediator in a Chapter 11 case from thereafter being appointed as the trustee in the same case. But there is an analogue in the code already. Bankruptcy Code Section 321 doesn’t allow a person to serve as both examiner and trustee in the same case.

Section 101(14) of the code says a disinterested person excludes those who have an interest “materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason.” A mediator has a direct relationship with the parties to mediation.

Based on a case’s facts and issues, whether the mediator’s relationship with the mediation parties causes them to have an interest materially adverse to the debtor can be debated. The words “for any other reason” should include having served in the confidential role of mediator for the mediation parties.

The roles of mediator and trustee are distinct. A mediator is expected to remain impartial and facilitate negotiations between parties. If the same individual were to transition from mediator to trustee, it could lead to questions about their neutrality and the integrity of the mediation process.

Similarly, serving as both examiner and trustee in the same case would create a conflict of interest. The examiner is tasked with investigating and reporting on the case, while the trustee is responsible for managing the debtor’s estate and making decisions that affect the case. The separation of these roles helps maintain objectivity and integrity within the bankruptcy process.

A trustee who previously served as mediator can’t meet the disinterested test, nor can they practically be expected to not disclose or use information learned in connection with the mediation. They might be able to meet the disinterested test theoretically, but they can’t do so practically.

The effectiveness of mediation relies heavily on the trust and openness between all parties involved—and the mediator. The mediation process’s efficacy would be adversely affected if a party in the mediation held back information or wasn’t candid with the mediator.

The mediator needs all relevant information to understand the situation fully and help both parties reach a fair and equitable solution. Transparency builds trust, which is essential for the mediator to facilitate open communication and collaboration between the parties. Withholding information due to a concern that the mediator may become the trustee can lead to misunderstandings, prolonged negotiations, and potentially unresolved issues, making the mediation process less efficient and effective.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Kenneth Rosen practices debtor and creditors’ rights law and advises companies on practical strategies for resolution of financial distress.

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