One of the biggest potential obstacles to resolving employment lawsuits through mediation is financial difficulties faced by a defendant. All too often, financial challenges go undetected or are under-appreciated before mediation, which can sabotage the mediation, prevent settlement, or necessitate a second costly mediation. Indeed, a defendant’s financial challenges can significantly impact the negotiations, the ultimate settlement value, and the timing and nature of settlement payments.
McKelvey Resolution has developed a simple three-step process to help the parties and their counsel spot, evaluate, and address financial challenges before mediation to ensure the best outcomes at mediation.
A defendant’s financial difficulties can be tricky for plaintiff’s counsel, defense counsel, and the mediator to spot and manage, and thus often go undetected until the day of mediation. Meanwhile, a defendant that is experiencing financial challenges and facing a lawsuit often doesn’t fully understand the extent of its financial challenges or how those challenges impact mediation. For this reason, many organizations with financial challenges can be confused, avoidant, or in denial about the lawsuit and their financial difficulties headed into mediation. In fact, the lawsuit and the mediation can feel like the least of defendant’s concerns in the midst of financial turmoil.
Many organizations under financial stress may conceal their financial challenges in the lead-up to mediation given fear over the threat of the pending lawsuit and its impact on their bottom line. Feeling like their organization is under attack from the lawsuit, defendant often distrusts everyone involved in the mediation process, including the plaintiff and their lawyers, the mediator, and even the organization’s own outside counsel. This is why a plaintiff’s standard demand for defendant to share financials (even when encouraged by defense counsel) is often met with skepticism and distrust.
Given the high level of emotions and the financial complexity associated with a business under financial distress, it is important for the mediator to provide a process by which the parties can safely explore the financial challenges at issue. This means both exploring whether there is legitimate financial distress that will impact the mediation/settlement and understanding the extent to which the financials play a role in the amount of the settlement and/or timing of payments. Because such issues can rarely be unpacked and effectively explored the day of mediation, it is important that the exploration process start early and be completed well before mediation.
Following the below three-step process before mediation helps illuminate the financial issues in a way that allows the parties, counsel, and mediator to address these issues proactively and thoughtfully before and during the mediation, which can lead to a better outcome at mediation for all participants.
Step 1
Online Survey
Summary
Each party to mediation (including plaintiffs and defendants) must fill out a short 10-question survey after booking the mediation. This should take no longer than 10 minutes for most participants. The survey will help uncover whether financial challenges are a potential obstacle to mediation. If there are no financial challenges detected, then the mediation will proceed without the next two steps. If, however, the survey reveals financial challenges, then the parties will proceed to the next step to evaluate whether additional work is required before mediation to address financial difficulties.
Importance
The survey is important because it will help counsel spot potential financial difficulties that often go undetected before mediation. This helps all mediation participants to prepare for the mediation and keeps expectations aligned.
Timing
The survey must be filled out within two weeks after the mediation is booked.
Cost
None
Step 2
Zoom Interview
Summary
If the survey indicates financial challenges that could be potential obstacles to mediation, then defendant(s) and their counsel will schedule a one- to two-hour Zoom session with a McKelvey Resolution attorney experienced in financial distress cases. The defendant’s owner(s), CFO(s), and/or CPA(s) should attend this session along with defense counsel. In this Zoom session, the McKelvey Resolution attorney will facilitate a discussion with the organization and defense counsel to better understand and rate the level of potential financial difficulties, explain the impact these have on mediation, and discuss solutions for handling financial challenges in the mediation setting, including possible disclosure of some or all financials, a financial distress review by an independent CFO consultant, etc.
Importance
This interview is a key step in the process as it helps defendant understand how financial challenges may impact the mediation well in advance of the mediation date. This gives defendant and its legal team (A) time to prepare to demonstrate financial challenges at mediation or (B) the knowledge that the financial challenges may play a minor role, thereby putting a focus on identifying the proper authority for mediation.
Timing
The Zoom interview should occur within two weeks of a survey revealing potential financial challenges and at least six weeks prior to the mediation date.
Cost
$2,000
Step 3
Evaluation
Summary
If the Zoom interview reveals financial challenges that are beyond moderate financial challenges (e.g., significant to severe financial distress), defendant(s) will have the option of undergoing a financial difficulties evaluation by a McKelvey Resolution financial consultant who is a CPA and outside CFO. The financial consultant will confidentially review the financials of defendant(s), interview the relevant stakeholders, and provide an easy-to-understand report for defendant(s), their counsel, and the mediator that describes the nature and severity of the financial challenges and evaluates the organization’s ability to pay a settlement in a lump sum or on a payment plan.
After reviewing the report, defendant and its counsel can decide whether and to what extent this report should be shared with plaintiff’s counsel (under a strict confidentiality agreement) and whether to further share other financial information and documents with plaintiff’s counsel based on this report.
Importance
Having a clear understanding of how the organization’s financial condition can potentially impact the negotiations at mediation is critical for a defendant to be properly prepared for mediation. The question of whether and what financial information to share at mediation is often a complex business question that takes weeks (if not longer) to decide. Some organizations do not have a CFO or qualified accountant who can unpack these issues. And even for organizations with a CFO or accountant it can be valuable to have an outside second opinion.
Sharing Financial Information
The defendant can decide whether to share the financial consultant’s report and/or other financial information with plaintiff’s counsel. Sharing a financial consultant’s report and/or further financial information will allow defendant to argue for a financial distress discount or payment plan.
Meanwhile, opting not to share financial information makes a financial distress discount or payment plan less likely. The key for mediation is to make these decisions early in the process so that the table is properly set the day of mediation.
Timing
The evaluation and report will be completed within three weeks of the Zoom interview and should be completed at least one month before the mediation date.
Cost
$5,000 (for consult and report up to a total of five hours)
Following this three-step process does not determine the outcome at mediation or presume that a defendant’s financial challenges will automatically lead to a discount or payment plan. Instead, the process helps the parties and the mediator rule out, narrow, and better understand the financial issues to facilitate the mediation. Regardless of the ultimate determination on financial distress, there are many positive outcomes that may result from this process, including the following:
Ruling Out Financial Distress
The financial survey may quickly rule out any financial distress, and the parties can proceed through the traditional mediation process confident they won’t be surprised by financial issues the day of mediation.
Spotting Financial Challenges
The financial survey may reveal some financial issues that are worth exploring further through a Zoom interview, but the Zoom interview may ultimately reveal that these issues won’t play a significant role in mediation, leaving the parties better prepared for a traditional mediation without financial distress in play.
Understanding Financial Distress
The survey and Zoom interview may help defendant better understand that, although they are experiencing some financial challenges, the nature and extent of those challenges are not severe enough to justify a discount or a payment plan. This might help defendant and their counsel prepare for mediation without hoping for something (a discount) that isn’t a realistic possibility based on the financial challenges at issue.
Sorting Out Financial Distress
The Zoom interview may reveal that defendant does not have a good handle on the extent of its financial distress and defendant may realize that the organization needs to further evaluate their financials to determine whether they will impact their ability to pay and the timing of payment. In this case, a financial difficulties evaluation may help defendant unpack its financials in a way that assists the organization and their counsel to understand the role their financials will play at mediation.
Addressing Significant Financial Distress
The Zoom interview may reveal that defendant is under extreme financial distress and that an evaluation of this distress will likely support a discount at mediation and/or a payment plan. Going through the interview process and evaluation may help the organization understand why sharing and disclosing financials can help the organization navigate through the lawsuit.
Utilizing this three-step process before mediation helps the parties and mediator proactively unpack any potential financial difficulties and prepares everyone for productive mediation. This process also eliminates any surprises and prevents the mediation from being rescheduled, derailed, or doomed as a result of financial difficulties.