Bank Disputes- Fertile Ground for Mediation?

Thomas O' Malley takes a look at the growing role for mediation in the context of banking disputes.... Mediation affords banks an opportunity to deal with borrowers in financial difficulties outside the usual enforcement remedies available which will include debt proceedings, securing judgment, appointment of receivers and possibly bankruptcy proceedings. In correspondence issued to a defaulting borrower a Bank has suggested that the costs of such actions, from the Bank’s perspective could range from €4000 to €40,000. This is only the cost which the Bank incurs. Currently the banks are not engaging with mediation as a means of addressing issues with borrowers. This is in part because the banks are unwilling to give the impression that they are willing to make any concessions to borrowers in relation to the level of their debt or limit recovery from borrowers. This has resulted in a situation where banks are routinely obtaining judgments against borrowers in difficulties but without any resolution to the position with the borrower in question. A judgment obtained against a borrower can ultimately be converted to a judgment mortgage against any other unsecured assets in the hands of the borrower and the bank may ultimately be in a position to effect a sale over such assets. However a bank may face a situation where other parties, often business partners or spouses will share in the ownership of unencumbered assets which frustrates the ability to get at such assets. By following a confrontational approach with borrowers, banks are alienating the borrowers and, in some instances, impairing relationships which previously worked well and have been impacted negatively primarily by the current economic environment without “any blame” attaching to the borrowers in question. Mediation, to be successful, requires a willingness of the parties i.e. the borrower and the bank, to engage in the process and ultimately a willingness on both sides to compromise their position. Mediation is a journey where both sides may start by taking positions but ultimately it will require an element of give and take on both sides. The role of the mediator is to bring the parties to acknowledge the strengths and weaknesses of their respective positions and to assist the parties in framing a solution which both sides can live with. Mediation is cost effective for both the borrower and the bank. Typically both sides bear their own costs and share the payment of the mediators’ fees. The mediation process is conducted on a without prejudice basis and each of the parties retain their legal rights. If an outcome/settlement is not achieved then the parties’ legal rights as against each other are preserved. Thus the exploring of mediation as a possible means of achieving a result does not compromise either party’s position unless a binding agreement is committed to by both sides. I believe mediation will have a role to play in the resolution of personal debt issues. One of the key difficulties with all disputes is bringing the parties into a forum where they can communicate with each other. The role of the mediator is pivotal in this context in that the mediator acts as a broker between the bank and the borrower and can privately discuss with both parties (without disclosing to the other side unless he has specific authority to do so) certain weaknesses and/or strengths in the position of both. The difficulties banks face currently is that, unless they secure judgments and can identify assets in the sole ownership of the borrower, they may ultimately not be able to effect a sale/recovery against such asset unless there is a future sale of the asset. If a mediation is successful it may also open the possibility of future business between the parties. This is far less likely when proceedings have been instituted as the underlying relationship is often sundered in the process. The banks have concerns about the “moral hazard” of being seen to accept less than the sum originally borrowed. This issue can be addressed by having the borrower furnish a sworn Statement of Affairs. In the event that the borrower chooses to exclude certain assets from the sworn Statement of Affairs then the bank can make provision to reopen their rights of recovery. A key tenet of the mediation process is that the parties to the dispute “own the dispute” and that the solution should come from them. The role of the mediator is to help the parties arrive at a solution. The alternative is a protracted and costly process for the borrower and the bank and respective estimates of 60k and 25k for the Bank and the borrower are not unrealistic. The cost of the resources applied within the Bank will range between 20k – 40k. The delay in concluding a settlement will involve the debt reaching 5m (with accrued interest). There is a potential that the cost of enforcement will absorb c 10% -15% of any recovery through litigation. There is no measure of the worry, stress and anxiety that debtors, their families and bank representatives will endure throughout the litigation process. One of the most beneficial aspects of mediation is that it brings closure for all parties and the negativity that results from adversarial proceedings is not a feature as ultimately, with the assistance of a mediator, the parties to the dispute have worked out a solution acceptable to each of them. Mediation should be explored at the earliest possible juncture ………there is nothing to lose and a lot to gain. Thomas O' Malley is Managing Partner at McDowell Purcell Solicitors. He heads up the Banking and Commercial Property Unit with Breen Purcell and is a CEDR accredited mediator.