About 15 months after becoming the largest U.S. city to file for bankruptcy, Detroit is on track to begin rebuilding and growing stronger. On November 7, a federal judge approved a plan aimed at ridding the city of its $7 billion in debt and investing about $1.7 billion in city services, the New York Times reports.
As compared to recent bankruptcies of smaller cities, the decision was reached relatively quickly. The towns of Vallejo and Stockton, California, for example, spent about three years and 27 months, respectively, in bankruptcy.
What enabled Detroit to navigate the bankruptcy process with less difficulty than had been anticipated? In a word, mediation. The prospect of a long and rancorous court battle was defused when the major players involved, including the city’s retired workers and financial creditors, agreed, at the bankruptcy judge’s urging, to hash out the terms of a deal in a private mediation process.
Months of mediation sessions led to an “exit plan that was more a deal than a court-imposed solution,” according to the Times.
That plan didn’t come cheap: lawyers, experts, and other costs related to the bankruptcy proceedings mounted to $150 million. However, most observers agree the financial toll likely would have been much higher if the parties had battled out their differences in court rather than negotiating in a more private setting.
Relative to a court battle, mediation is often successful at ending business disputes in a timely and cost-efficient manner. In mediation, a neutral third party with specialized training in dispute resolution works with the parties to explore the interests underlying their positions. Meeting with parties together and sometimes separately, mediators aim to help them reach a mutually satisfactory and voluntary resolution. If the process breaks down, disputants are free to pursue or continue litigation.
What about court-sponsored or court-ordered mediation? Notably, not all court-affiliated mediation is created equal. When court programs are poorly funded and understaffed, mediation can become just another bureaucratic hoop to jump through to get to the litigation stage. By contrast, some jurisdictions commit serious resources to mediation; they also intervene earlier, before disputants close off beneficial avenues to resolution. The biggest benefits of mediation come early, when parties are spared the time and expense of protracted litigation.
In the Detroit mediation, the city’s retirees became amenable to agreement thanks to a so-called “grand bargain” in which foundations, the state of Michigan, and the Detroit Institute of the Arts promised to chip in millions to bolster the city’s pension system. As for the city’s creditors, they had to accept low recovery rates on Detroit’s debt during mediation, though some were promised opportunities to make up their losses through future real estate and infrastructure projects in the city.
Detroit’s challenges are hardly over. To make sure it doesn’t slide back into bankruptcy, the city still needs to come up with a recovery plan that addresses job creation and its population decline. Overall, though, the relatively low-fuss mediation process has given civic leaders and residents a renewed sense of hope that a brighter future awaits the city.
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