Five Reasons Why Mediation Must be Added to the Federal Bankruptcy Rules

img_1684By: Donald L. Swanson

Mediation needs to be included — explicitly and by name — in the Federal Rules of Bankruptcy Procedure.

Mediation Authorization and Confidentiality

The new mediation provision must cover two specific subject areas: (i) mediation authorization, and (ii) mediation confidentiality.

Authorization.  If a city is a Chapter 9 debtor in a jurisdiction without local mediation rules, does authority exist to appoint a mediator?  What if the bankruptcy judge wants to appoint a proactive mediator team, like Detroit: does the judge have authority to do so?

Such questions could be resolved affirmatively by a Federal bankruptcy rule.

Confidentiality.  If a bankruptcy mediation occurs in a jurisdiction without local mediation rules, what is the source of confidentiality protection?

Such question could be resolved satisfactorily by a Federal bankruptcy rule.

All other areas of mediation practice and procedure can be addressed in local rules.  See, e.g., Model Local Rules on mediation proposed by the American Bankruptcy Institute (“ABI”).

Proposed Rule Amendments

 A.  The title of Fed.R.Bankr.P. 9019 should be amended to read: “Rule 9019.  Compromise, Arbitration and Mediation.”

 B.  The following language should be added as a sub-part (d) to Fed.R.Bankr.P. 9019:

“(d) Mediation

(1) The court may assign to mediation any dispute in a bankruptcy case; and the parties to any dispute may stipulate to mediation, subject to court approval.

(2) The mediator and the mediation participants are prohibited from divulging, outside of the mediation, any oral or written information disclosed by the mediation participants or by witnesses in the course of the mediation.

(3) The mediator shall not testify or be compelled to testify in regard to the mediation or the mediation communications in connection with any arbitral, judicial or other proceeding.”

–Such language is taken from the ABI’s Model Local Rules on mediation.

Five Reasons for Proposed Rule Amendments

REASON NO. ONE:  Bankruptcy Courts Are a Rare Mediation-Rules Exception

Every bankruptcy-related court has a Federal rule on mediation, except for the bankruptcy courts themselves.  And mediation is a central dispute-resolution tool throughout other Federal courts and all Federal agencies.  To illustrate:

U.S. District Courts

Mediation appears in Fed.R.Civ.P. 16(c)(2), which authorizes “using special procedures to assist in resolving the dispute.”  And mediation appears in Fed.R.Civ.P. 53, which authorizes the appointment of a mediator as “settlement master.”

[Note: Fed.R.Civ.P. 16 is not included in the Fed.R.Bankr.P.  9014(c) list of incorporated rules. And Fed.R.Bankr.P.  9031 rejects Rule 53 special masters in bankruptcy.]

Bankruptcy Appeals to BAP and to District Court

Fed.R.Bankr.P. 8027 governs appeals from bankruptcy courts to a bankruptcy appellate panel or to a district court.  It provides for “notice” to appealing parties of the requirements of the appellate court’s mediation procedure.  Rule 8027 is relatively new: adopted in 2014.

U.S. Circuit Courts of Appeals

Fed.R.App.P. 33 provides that the circuit courts “may direct” parties “to participate in . . . a settlement conference.”  All of the Circuit Courts of Appeals have adopted local mediation rules.  And they are serious about enforcing their mediation confidentiality rules (see, e.g., In re Anonymous, 283 F.3d 627 (4th Cir. 2002); and In re Teligent, 640 F.3d 53, 57-58 (2nd Cir. 2011)).

Other Federal Courts

–The U.S. Tax Court has a Federal mediation rule [Rule 124(b) Tax Court Rules of Practice and Procedure].

–The U.S. Court of Claims has a Federal mediation rule [Appendix H, Rules of the United States Court of Federal Claims].

–The U.S. Court of International Trade has a Federal rule on mediation [Rule 16.1 USCIT Rules, Forms, Guidelines and Administrative Orders].

Federal Agencies

The entire executive branch of the Federal government is subject to a broad policy favoring mediation and other ADR processes.  This is because of the Administrative Dispute Resolution Act of 1996, which provides:  “Each agency shall adopt a policy that addresses the use of alternative means of dispute resolution and case management.”  For example:

–The General Counsel of the Army reports:

“Stemming from the Administrative Dispute Resolution Acts of 1990 and 1996, federal agencies have introduced ADR processes as a means of resolving just about every type of dispute, in just about every area of endeavor.”

–The Office of Personnel Management’s “Alternate Dispute Resolution Handbook” indicates:

“In the 1990s, Congress passed three statutes . . . which, collectively, required each agency to adopt a policy encouraging use of ADR in a broad range of decision making, and required the federal trial courts to make ADR programs available to litigants.”

REASON NO. TWO:  Many Bankruptcy Courts Have No Local Mediation Rules

60% of bankruptcy districts in the U.S. have adopted local rules on mediation.  The other 40% have not.

However, the existence of a local mediation rule does not mean the rule is adequate.  In Minnesota, for example, the Bankruptcy Court has a one-sentence local rule on mediation (Rule 9019-2) that reads:

“The court may refer any adversary proceeding or contested matter for mediation by any other federal judge or any mediator chosen by the parties.”

This Local Rule authorizes mediation to occur in Minnesota’s Bankruptcy Court.  But where is the provision for confidentiality?

–A Federal rule would resolve this deficiency.

REASON NO. THREE:  Bankruptcy’s ADR Rules are Antiquated – Having Changed Little Over the Past Century

Alternative dispute resolution provisions (“ADR”) involving arbitration and compromise have been part of U.S. bankruptcy laws since at least 1898.

The U.S. “National Bankruptcy Act of 1898” provides for “Arbitration of Controversies” and for “Compromises” in consecutive sections as follows:

–“§ 26.  Arbitration of Controversies.–(a) The trustee may, pursuant to the direction of the court, submit to arbitration any controversy arising in the settlement of the estate.”

–“§ 27.  Compromises.– (a)  The trustee may, with the approval of the court, compromise any controversy arising in the administration of the estate upon such terms as he may deem for the best interests of the estate.”

Today’s Fed.R.Bankr.P. 9019, similarly, provides:

“(a) Compromise. On motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement. Notice shall be given to creditors, the United States trustee, the debtor, and indenture trustees as provided in Rule 2002 and to any other entity as the court may direct.  . . .

(c) Arbitration. On stipulation of the parties to any controversy affecting the estate the court may authorize the matter to be submitted to final and binding arbitration.”

The compromise and arbitration provisions of today’s Rule 9019 have, obviously, been around in largely-the-same-form for more than a century as next-door-neighbor provisions.  However, in today’s practice:

–Arbitration is an infrequently-utilized ADR tool for resolving bankruptcy disputes, despite being explicitly authorized in the Federal Rules of Bankruptcy Procedure.

–Mediation, on the other hand, is a frequently-utilized ADR tool for resolving bankruptcy disputes, but isn’t even mentioned in the Federal Rules of Bankruptcy Procedure.

Accordingly, bankruptcy’s ADR rule needs to be upgraded from its century-old provisions to include today’s primary ADR tool in bankruptcy – i.e., mediation.

And Fed.R.Bankr.P. 9019 is a logical place to include such a provision.

REASON NO. FOUR:  The Ninth Circuit Says that Local Rules on Mediation Confidentiality are Unenforceable as a Privilege

The vast majority of all U.S. Federal courts have local rules on mediation confidentiality—and they enforce such rules.

But the Ninth Circuit Court of Appeals casts doubt on the enforceability of such local rules:

“A local rule, like any court order, can impose a duty of confidentiality as to any aspect of litigation, including mediation. . . .  But privileges are created by federal common law.  See Fed.R.Evid. 501It’s doubtful that a district court can augment the list of privileges by local rule.”

The Facebook, Inc. v. Pacific Northwest Software, Inc., 640 F.3d 1034, 1040-41 (9th Cir. 2011).

This Facebook, Inc., case involves a mediated agreement — hand-written — that subsequently falls apart.  One party tries to enforce the agreement and offers evidence “of what was said and not said during the mediation.”  The other party objects, based on the District Court’s local rule requiring mediation confidentiality, and the District Court sustains the objection.

The Ninth Circuit, on appeal, affirms the evidence exclusion, based on a confidentiality agreement between the parties.  But it rejects the local confidentiality rule basis for exclusion, as quoted above.

REASON NO. FIVE:  Local Rules on Mediation Confidentiality are Intended by Congress as Interim-Only Provisions

The Alternative Dispute Resolution Act of 1998 clarifies the role of local rules on mediation confidentiality.  28 U.S.C. § 652(d) says:

“(d) Confidentiality Provisions.— Until such time as rules are adopted under [28 U.S.C. §§ 2071 et seq.] providing for the confidentiality of alternative dispute resolution processes . . . , each district court shall, by local rule adopted under section 2071(a), provide for the confidentiality of . . . dispute resolution communications.”

Here’s what this statute is saying:

  1. First, each district court (including it’s bankruptcy unit)  is directed to adopt a local rule on mediation confidentiality, under 28 U.S.C. § 2071(a), as a first-and-interim step in a two-step process; and
  2. Then, Federal rules need to be adopted on mediation confidentiality, under 28 U.S.C. § 2073 (for district courts) and § 2075 (for bankruptcy courts), to complete the two-step process.

A District Court has confirmed the reality of this two-step process with these words (from Olam v. Congress Mortgage Co., 68 F.Supp.2d 1110, 1121 (N.D.Cal. 1999)):

“In § 652(d) of the Act, Congress directed each federal district court (until national rules are adopted under 28 U.S.C. § 2071 — a process not likely to be completed for years) to ‘provide . . . for the confidentiality of [mediation processes].'”

The first step has been completed for many Federal courts.  But the second step has never been completed for any Federal court.

Conclusion

For the reasons stated above, an amendment to Fed.R.Bankr.P. 9019 is needed to add mediation authorization and mediation confidentiality provisions, which would apply to all bankruptcy courts in every district.

 

Proactive Mediation is Becoming Standard: The Syngenta Example

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Proactivity

By: Donald L. Swanson

In a remarkable demonstration of cooperation and coordination, three separate courts (both Federal and State) enter proactive mediation orders and appoint the same mediator in three related cases.

Fact Background

The cases involve a genetically modified strain of corn developed and marketed by Syngenta.  The new strain gets regulatory approval from the U.S. and other countries – but not from China.

Corn prices begin dropping when China begins rejecting U.S. corn shipments that contain even a trace of this new strain.

So, corn farmers begin suing Syngenta in state and Federal courts throughout the Corn Belt.

–Many of these cases are consolidated into a multi-district proceeding in the U.S. District Court in Kansas.

–Many of these cases are moving forward in a Minnesota state court, where Syngenta is located.

–And many of these cases are pending in the U.S. District Court for Southern Illinois.

The Kansas proceeding is now certified as a class action, though class certification is on appeal to the Tenth Circuit.  Ag Census data from 2012 counts 2.1 million farms in the U.S., many of which plant corn and would be covered by this class action.

Jury trials in the Syngenta cases are scheduled to begin this Spring on individual farmer cases, as class representative or bellweather trials.

[An interesting / ironic twist: Syngenta is being sold to a company from China, and the proposed sale is wending its way through regulatory scrutiny.]

Proactive Mediation Orders

Back in March of this year (2016), all three Syngenta judges enter similar mediation orders and appoint the same mediator (here are links to their respective mediation orders:  Kansas case, Minnesota case and Illinois case).

–Each order identifies the mediator as a “Special Master for Settlement,” because the mediator is appointed under civil procedure Rule 53 on special masters.

These orders establish an atypical mediation process.

— Typical mediation is passive: a mediator is hired to meet with the disputing parties (usually in a one-and-done session) and help them reach a settlement.

–These orders are highly proactive: it’s more like “mediation on steroids.” [I wish I could take credit for coining this phrase.]

Each of these orders provides that the mediator may:

–Order the parties to meet face-to-face and engage in serious and meaningful negotiations.

–Construct an efficient procedure to engage the parties in settlement negotiations.

–Order production of all necessary information.

–Order the appearance of any persons necessary to settle any claims completely.

–Make recommendations to the court concerning any issues that may require resolution in order to facilitate settlement or to efficiently manage the litigation.

–Direct, supervise, monitor, and report upon implementation and compliance with the Court’s orders, and make findings and recommendations on remedial action if required.

–Require the parties to appear in person, via video conference, or telephonically.

–Pursuant to Rule 53(b)(2)(B), communicate ex parte with the Court at any time.

Next Mediation Steps in Syngenta

It’s difficult, if not impossible, to predict when (or if) the Syngenta cases will become ripe for mediated settlements on ultimate/global/final disputes.  Perhaps such ripeness will occur before jury trials begin in the Spring—or maybe ripeness will await the conclusion of some of those trials.

But it seems safe to assume that the proactive mediator is, meanwhile, working diligently and behind-the-scenes to, (i) resolve interim disputes, and (ii) create a structure and organization for addressing and resolving ultimate/global/final disputes when they become ripe for settlement.

–Interim disputes example:  A recent Order (Doc. 2703) from the Kansas Court reveals that the mediator helped resolve disputes over language in the initial class action notice document.

Application to Bankruptcy Cases

Syngenta is not in bankruptcy.

But the proactive mediation established by the Syngenta courts in Kansas, Minnesota and Illinois is similar to the proactive mediation established, and utilized effectively, in the City of Detroit bankruptcy and in other large bankruptcy cases.

Here’s predicting that proactive mediation will (and should) become standard practice in Chapter 11 reorganization cases and in Chapter 9 municipal adjustment cases.

–Here’s why:  because proactive mediation works.

Seven Reasons Why Mediation Mandates in Federal Statues Apply to Bankruptcy Courts

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The whole includes its parts

By: Donald L. Swanson

Each United States district court shall,” by local rule:

–“authorize . . . the use of alternative dispute resolution processes in all civil actions, including adversary proceedings in bankruptcy”;

–“devise and implement its own alternative dispute resolution program “;

–“encourage and promote the use of alternative dispute resolution in its district”;

–“require that litigants in all civil cases consider the use of an alternative dispute resolution process at an appropriate stage in the litigation”;

–“provide litigants in all civil cases with at least one alternative dispute resolution process, including, but not limited to, mediation.”

–Alternative Dispute Resolution Act of 1998, 28 U.S.C. §§ 651(a) & 652(a) (the “1998 ADR Act”). 

Here are Seven Reasons Why These Statutory Requirements Apply to Bankruptcy Courts

 1.  1984 Statutes — The whole includes its parts.

“In each judicial district, the bankruptcy judges in regular active service shall constitute a unit of the district court to be known as the bankruptcy court for that district.”

“Each bankruptcy judge, as a judicial officer of the district court, may exercise the authority conferred under this chapter.”

28 U.S.C. § 151.

“Bankruptcy judges shall serve as judicial officers of the United States district court established under Article III of the Constitution.”

28 U.S.C.§ 152.

These two statutes, when adopted in 1984, (i) “reconstituted” the bankruptcy courts “as a unit of the district courts,” and (ii) “created the bankruptcy court structure and jurisdictional scheme in force today.”  See Collier on Bankruptcy, 1.02[2] (1998).

It is difficult to imagine that Congress intended in the 1998 ADR Act  (14 years after enacting 28 U.S.C. §§ 151 & 152) to exclude the bankruptcy court “units” from its mediation directives to “district courts.”  If Congress intended such an exclusion, it would have expressly so-provided.

 2.  Responsibility for adopting local bankruptcy rules belongs to the district courts

Under Fed.R.Bankr.P. 9029(a), district courts hold local rule-making responsibility and authority for the bankruptcy courts:

“(a) Local Bankruptcy Rules.

(1) Each district court . . . may make and amend rules governing practice and procedure . . . within the district court’s bankruptcy jurisdiction.

Rule 9029(a)(1) allows for delegation by district courts of such rule-making power to the bankruptcy courts:

–“A district court may authorize the bankruptcy judges of the district . . . to make and amend rules of practice and procedure.”

But it is still the district courts who hold such power.

 3.  Some district courts include bankruptcy in their local mediation rules

Some U.S. district courts have determined that the 1998 ADR Act applies to their bankruptcy court units and to their judicial officers in bankruptcy.   The U.S. District Court’s Mediation Plan in Nebraska, for example, contains this operative provision:

–“Any district, bankruptcy, or magistrate judge may by order refer a case to mediation.”

 4.  Court opinions include bankruptcy courts, automatically, in statutory references to district courts 

Multiple court opinions are consistent with the idea that a statutory reference to “district court” includes, automatically, the district court’s bankruptcy unit.  For example:

In Browning v. Levy, 283 F.3d 761, 779 (6th Cir.2002), the Sixth Circuit explains:

“[T]he exclusive jurisdiction of the district courts over certain ERISA claims does not preclude such claims from being brought in bankruptcy proceedings, because the ‘bankruptcy court is not a free standing court,’ but rather a ‘unit’ of the district court.”

In In re Gianakas, 56 B.R. 747 (N.D.Ill. 1985), the District Court determines:

28 U.S.C. § 1452(a) allows “in plain language” a “removal to ‘the district court’”; and

–removal “‘to the district court’ implies the corollary, ‘including the bankruptcy “unit” of the district court, as defined in 28 U.S.C. §§ 151 and 157(a).’”

 5.  Bankruptcy cases are explicitly referenced in the 1998 ADR Act

The 1998 ADR Act explicitly references “adversary proceedings in bankruptcy” as one type of “all civil actions” that is included in its mediation directives.

 6.  Mediation authority is granted to bankruptcy courts by the 1998 ADR Act — bankruptcy courts don’t need the general authority of § 105

If the Alternative Dispute Resolution Act of 1998 applies exclusively to district courts, and not to their bankruptcy court “units” or to their bankruptcy “judicial officers,” where does a bankruptcy court get its power to authorize mediation or to require mediation confidentiality by local rule?

Surely, the general authority of 11 U.S.C. § 105 would authorize mediation.  But why rely on the generality of § 105 when the specific grant of authority already exists under the 1998 ADR Act?.

  7.  The 1998 ADR Act requires adoption of local mediation rules under 28 U.S.C. § 2071(a), which is the statute authorizing the amendment of local bankruptcy rules.

The 1998 ADR Act specifies in 28 U.S.C. § 651(b) that “district court” rules are to be amended under the authority of 28 U.S.C. § 2071(a):

“Each United States district court shall authorize, by local rule adopted under section 2071(a), the use of alternative dispute resolution processes in all civil action.”

This section 2071(a) is precisely the authority under which local bankruptcy rules are amended — even though § 2071(a) refers exclusively to “district courts” and makes no mention of bankruptcy courts.

In fact, when local bankruptcy rules are amended, the amending document commonly references the following laws as authority for the amendment:

–28 U.S.C. § 2071;

–Fed.R.Bank.P. 9029; and

–Fed.R.Civ.P. 83, which is incorporated by reference into Fed.R.Bankr.P. 9029.

Conclusion

It seems clear that mediation mandates in the 1998 ADR Act apply to both the district courts and their bankruptcy court units.

 

 

Federal Circuit Leads-the-Way for Holdouts Adopting Local Mediation Rules

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Leading the Way

By: Donald L. Swanson

The U.S. Circuit Court of Appeals for the Federal Circuit has been a maverick.  For decades it was the lone mediation holdout among all U.S. Circuit Courts of Appeals.

In the mid-1970s, a mediation program is pioneered by one of the Circuit Courts.  By 1987, five of the thirteen Circuit Courts have mediation programs.  By 1992, only five holdouts remain.  And by 1996, every single one of the thirteen Circuit Courts has a mediation program – except for the Federal Circuit.

Hold-Out Perseverance

It’s not until 2005, that the Federal Circuit finally adopts a mediation program – which, of course, is similar to that of other Circuit Courts.

That’s a striking record of hold-out perseverance: years of standing apart from the crowd . . . unwavering refusals to be persuaded . . . a steadfast posture against the winds of change!

But . . . I’m not sure that’s a compliment.

It seems more like stubbornness . . . refusals to adjust-with-the-times . . . resistance-to-change.

And it’s not like the Federal Circuit had a solid rationale for its hold-out perseverance:

–Studies of mediation programs in other Circuit Courts had been reporting “spectacular successes” for decades.

–Parties, and their attorneys, appearing before the Federal Circuit had extensive experience with mediation in other judicial contexts.

–A primary hold-out rationale was that the Federal Circuit’s patent cases are highly complex and, therefore, “ill-suited” to mediation.   Such rationale is proven to be spectacularly wrong.  In fact, the existence of complexity points in exactly the opposite direction: to the necessity for utilizing mediation.

An Example to Bankruptcy Courts

The Federal Circuit’s mediation holdout history should serve as an example for our holdout bankruptcy courts that continue in their failures or refusals to adopt local mediation rules.

The Federal Circuit’s example should prompt the holdout bankruptcy courts to action.

–These bankruptcy courts are behind-the-times.

–Their non-action appears to be the result of stubbornness and resistance-to-change: not based on principal.

–They are rejecting a dispute-resolution tool that is being used:

–in nearly all other Federal courts;

–throughout the entirety of the Executive Branch of the Federal Government; and

–throughout the vast majority of all U.S. State courts.

There is no excuse for continued inaction by the bankruptcy courts on adopting local mediation rules.  Model Local Rules on mediation are available from the American Bankruptcy Institute.

A Final Step to Uphold Mediation Confidentiality in Federal Courts

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Completing the steps

By: Donald L. Swanson

 

(d) Confidentiality Provisions.— Until such time as rules are adopted under [28 U.S.C. §§ 2071 et seq.] providing for the confidentiality of alternative dispute resolution processes . . . , each district court shall, by local rule adopted under section 2071(a), provide for the confidentiality of . . . dispute resolution communications.”

–Alternative Dispute Resolution Act of 1998 (28 U.S.C. § 652(d)).

Here’s what this 1998 statute is requiring:

  1. First, each district court is directed to adopt a local rule on mediation confidentiality, under 28 U.S.C. § 2071(a), as a first-and-interim step in a two-step process; and
  2. Then, a Federal rule needs to be adopted on mediation confidentiality, under 28 U.S.C. § 2072, to complete the two-step process.

This two-step requirement is confirmed by Olam v. Congress Mortgage Co., 68 F.Supp.2d 1110, 1121 (N.D.Cal. 1999)):

–In 28 U.S.C. § 652(d), “Congress directed each federal district court” to provide “for the confidentiality” of mediation processes by local rule; and

–Such local rules will operate, “until national rules are adopted under 28 U.S.C. § 2071 — a process not likely to be completed for years.”

The first step has been completed for nearly all of the Federal district courts and courts of appeals and for many of the bankruptcy courts.

Unfortunately, however, the second step has never been completed for any of these courts.  And nearly two decades have passed since Congress established the Federal confidentiality rule requirement.

The necessity for this two-step process is demonstrated by the Ninth Circuit Court of Appeals from this ruling in The Facebook, Inc. v. Pacific Northwest Software, Inc., 640 F.3d 1034, 1040-41 (9th Cir. 2011):

“A local rule, like any court order, can impose a duty of confidentiality as to any aspect of litigation, including mediation. . . .  But privileges are created by federal common law. See Fed.R.Evid. 501. It’s doubtful that a district court can augment the list of privileges by local rule.”

[Note:  See this article for further information on the Facebook, Inc., case.]

Conclusion

Mediation confidentiality is, obviously, crucial to the viability and effectiveness of mediation processes.  But confidentiality is in jeopardy under the Ninth Circuit’s Facebook, Inc., quote above.

–So . . . if we want to assure that mediation confidentiality is firmly established, the Federal-rule step (in the two-step process established by 28 U.S.C. § 652(d)) needs to be completed.

–And the completion of such final step needs to occur in both the Federal Rules of Civil procedure and the Federal Rules of Bankruptcy Procedure.

Six Illusions that Restrict Mediation

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Illusions

By: Donald L. Swanson

We all make assumptions — every day — about many things.  Our false assumptions are our illusions.

There are many illusions about mediation, most of which place restrictions on the role and effectiveness of the mediation process.  We all have them.  Fortunately, we now have solid evidence to dispel some of them — courtesy of the U.S. Circuit Courts of Appeals.

The U.S. Circuit Courts of Appeals have been conducting formal mediation programs for decades.  The earliest began in the mid-1970s.  And the Circuit Courts have been studying the impact and effectiveness of those programs for years.

Based on such studies, we now know that some of our mediation assumptions are mere illusions.

Here are six of such illusions that limit the role and effectiveness of mediation.

   1.  Mediation is a voluntary process that cannot be mandated.

Mediation programs in nearly-all of the U.S. Circuit Courts of Appeals feature mandated mediation.  Parties can request mediation in such Courts.  But mediation is going to happen in many, many cases whether the parties request it or not.  The Courts simply assign cases to mediation.

This mandatory feature has been around for a very-long time: i.e., it hails back to the earliest experimental program of the 1970s in the Second Circuit.

Studies of mediation programs in the Circuit Courts conclude, uniformly, that these programs are achieving great success.  And much of the success is attributed to the mandatory-assignment feature.

  2.  Mediation by telephone is inadequate – the mediation must occur in-person.

Conventional wisdom says that mediating parties must all be in the same room – or in the same suite of conference rooms – or at least in the same building.  Such wisdom seems to hold sway, even when the mediation consists exclusively of a mediator shuttling between conferences rooms in a caucus format, with the parties never laying eyes on each other.

A report from the Sixth Circuit Court of Appeals lays this conventional wisdom to rest:

“The Sixth Circuit’s mediation program . . . settles about 40% of appeals that participate in mediation.  . . . most of those resolutions were agreed to over the telephone.  Unlike most circuits, over 90% of the Sixth Circuit’s mediations are held by telephone – which is certainly appreciated by attorneys and parties.  Most other circuits use telephone mediations just 20-50% of the time.”

  3.  Every Federal judge and every Federal court is free to decide whether to approve of or utilize mediation.

Congress and the Courts have established mediation and other ADR processes as official policy of the U.S. Government.

In the Alternative Dispute Resolution Act of 1998, Congress directed each U.S. District Court “to encourage and promote” ADR use “in its district.”  Each Bankruptcy Court and Judge is, by statute, a “unit” and a “judicial officer” of the U.S. District Court.

By 1996, nearly all U.S. Circuit Court of Appeals had their own mediation programs—today, all of them do.  Such programs preceded Congressional action on the subject – and perhaps prompted such action by Congress.

Additionally, all Federal agencies have adopted ADR rules and procedures as a result of the Administrative Dispute Resolution Act of 1996.

Some bankruptcy courts and judges, apparently, believe they’ve fallen through the Federal-policy-cracks on mediation and are exempt from the broad-based Federal policy favoring mediation.

But they haven’t: they are subject to this Federal policy.

  4.  Cases with high-levels of complexity are ill-suited to resolution though mediation.

The last hold-out, among the U.S. Circuit Courts of Appeals, to establish a mediation program is the Federal Circuit: it finally got around to adopting a mediation program in 2005.

The Federal Circuit’s caseload includes patent cases, which tend to have high levels of complexity.  This complexity became a primary rationale for the Federal Circuit’s holdout against mediation: because of complexity (the rationale says), patent cases are “ill-suited” to mediation.

The error of such rationale is demonstrated by this finding:

“More and more IP cases are being successfully mediated at the district court level.  One federal magistrate judge . . . had mediated over 200 patent cases . . . The settlement rate approached 90% for mediations during the last 12 months of the reporting period . . . The message: IP cases are more amenable to successful mediation than previously thought.”

  5.  Settlements will occur at the same rate, whether mediation happens or not.

Here is a finding from a 1983 study by the Federal Judicial Center of the Second Circuit’s mediation program:

“The [mediation] program does result in the settlement or withdrawal of appeals that would otherwise have to be considered by three-judge panels . . . The program almost certainly results in faster disposition, not only of appeals that are settled or withdrawn . . . but also of appeals that would have been settled in any event; it probably results in faster disposition of appeals that are argued.”

   6.  Mediation in an appellate court will impair the law-making function of that court.

This assumption is, actually, a primary argument used back in the 1970s, 1980s and 1990s in opposition to the development of mediation programs in the Circuit Courts.

According to a 2002 Report:

The concern is that mediated settlements of Circuit Court cases “would deprive the courts of their ability to expand the corpus of the law.”  The concern is about their role of clarifying the law and enhancing its predictability by issuing precedential opinions: this role would be impaired by mediated settlements, the argument goes.

Actual results, however, are to the contrary.  In the Third Circuit, for example:

“It is clear in retrospect that the mediation program has had no adverse effect on the development of Circuit law. The Court writes precedential opinions in only 15% of its cases. That number has remained consistent since the inception of the Appellate Mediation Program.

Conclusion

The foregoing identifies six assumptions about mediation that restrict its use and scope and effectiveness.  Each of these six assumptions is demonstrably false . . . wrong . . . illusory.

There are many, many other limiting assumptions about mediation that are, similarly, false . . . wrong . . . illusory.  Unfortunately, the restrictive hold of such illusions is difficult to overcome.

There’s No-Such-Thing as a “Mediation Privilege” in Federal Court?!

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A beautiful scene

By: Donald L. Swanson

It’s a beautiful scene:  Federal courts applying and enforcing their local rules on mediation confidentiality.

–Nearly all U.S. District Courts and U.S. Circuit Courts of Appeals, and many Bankruptcy Courts, have such local rules.

But then the Ninth Circuit Court of Appeals comes along with a bombshell.  It suggests that local rules on mediation confidentiality cannot be enforced in the Federal courts:

“A local rule, like any court order, can impose a duty of confidentiality as to any aspect of litigation, including mediation. . . .  But privileges are created by federal common law.  See Fed.R.Evid. 501.  It’s doubtful that a district court can augment the list of privileges by local rule.”

The Facebook, Inc. v. Pacific Northwest Software, Inc., 640 F.3d 1034, 1040-41 (9th Cir. 2011).

Say what?!

There is no Federal mediation privilege?!  . . . even when a Federal court has a local rule requiring mediation confidentiality?!

–Apparently not, according to the Ninth Circuit.

[Note:  An evidentiary privilege means that a person cannot be compelled, as a witness, to disclose certain (“privileged”) information — as more fully discussed here.]

Facebook Facts and Ruling

The Facebook case involves a mediated settlement agreement – a hand-written document — that subsequently falls apart in negotiations over the final deal document.  One party tries to enforce the hand-written agreement and offers evidence “of what was said and not said during the mediation.”

–The other party objects because the District Court’s local mediation rules require confidentiality of mediation communications.  The District Court sustains the objection.

The Ninth Circuit, on appeal, affirms the evidence exclusion.  But it does so on the basis of a confidentiality agreement between the parties — not on the basis of the District Court’s local rule requiring mediation confidentiality.

–As quoted above, the Ninth Circuit explicitly rejects the idea that the District Court’s local rule on mediation confidentiality can exclude mediation-related evidence.  And it basis this rejection on the Federal Evidence Rule on privileges: Rule 501.

–Granted, the quote above is mere dicta, since the Court bases its ruling on another legal standard, but the quote is still authoritative for trial courts in the Ninth Circuit.  The broader question is whether the dicta is persuasive for other courts.

Two Legal Standards

1.  Federal Evidence Rule 501

Fed.R.Evid. 501 is the Federal rule on evidentiary privilege.  It is titled, “Privilege in General,” and reads:

“The common law — as interpreted by United States courts in the light of reason and experience — governs a claim of privilege unless any of the following provides otherwise:

–the United States Constitution;

–a federal statute; or

–rules prescribed by the Supreme Court.

But in a civil case, state law governs privilege regarding a claim or defense for which state law supplies the rule of decision.”

2.  28 U.S.C. § 652(d)

The Alternative Dispute Resolution Act of 1998, in 28 U.S.C. § 652(d), reads:

“(d) Confidentiality Provisions.— . . . each district court shall, by local rule adopted under section 2071(a), provide for the confidentiality of the alternative dispute resolution processes and to prohibit disclosure of confidential dispute resolution communications.”

Questions

–What’s the effect of a district court’s local rule requiring mediation confidentiality, adopted under the Congressional mandate of 28 U.S.C. § 652(d)?

–How does Rule 501, as explained in the Facebook case, square with the confidentiality directive in 28 U.S.C. § 652(d)?

Putting it Together

Here’s what appears to be happening:

–Federal trial and appellate courts prohibit discovery of information and exclude evidence under their own mediation confidentiality rules.  And they do so seriously, vigorously, and with regularity.  They also evaluate (and sometimes grant) exceptions to confidentiality, based on a balancing of competing interests.

–The Ninth Circuit, in Facebook, is saying that local confidentiality rules do not rise to the level of an evidentiary “privilege” under Rule 501.

It’s difficult to see how these two positions can be reconciled.

–Perhaps it’s merely a question of degree between “confidentiality” and “privilege”?

–Perhaps the enforcement of local confidentiality rules by Federal courts is rising to the level of Federal common law under Rule 501?

–Perhaps 28 U.S.C. § 652(d) qualifies as “a federal statute” that “provides otherwise,” as required by Rule 501?

Regardless, here’s guessing that all Federal courts, of every stripe, will continue applying and  enforcing their own local rules on mediation confidentiality—except for trial courts in the Ninth Circuit.

[Note:  For a skeptical view of the Ninth Circuit’s position, see footnote # 15 in this case.]

Suggestions

A Federal bankruptcy rule on mediation confidentiality needs to be adopted by the U.S. Supreme Court – as authorized in 28 U.S.C. § 2075.  Such a rule would satisfy the “rules prescribed by the Supreme Court” provision in Fed.R.Evid. 501.

And . . . it looks like a mediation confidentiality provision also needs to be added to the Federal Rules of Civil Procedure, under 28 U.S.C. § 2072, to overcome the Ninth Circuit’s no-mediation-privilege opinion in The Facebook, Inc. v. Pacific Northwest Software, Inc.

 

Mortgage Modification Mediation (“MMM”) . . . A Program Worth Adopting

By: Matthew Gillespie

For many, if not most of us, our homes are our biggest assets. The inverse of this is also true – our mortgages are often our biggest liabilities.

It makes sense, then, that in Chapter 13 consumer bankruptcies, a debtor’s mortgage can have a major impact on the success (or lack thereof) of a plan. For some, the advantages provided to a Chapter 13 debtor are not enough, and meeting the terms of the mortgage itself is untenable. What is a debtor to do?

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Addressing an underwater mortgage in bankruptcy can leave you navigating through the weeds.

A number of bankruptcy courts throughout the country have created a program around one commonsense answer: mortgage modification mediation (called ‘MMM’ for short). This program creates a set of procedures for qualifying debtors to begin a mediation process with their mortgage lenders for loan modification. The lender can also initiate the mediation.  Neither party is obligated to reach an agreement – all that’s required is good faith negotiation.

Now, renegotiation of the terms of a mortgage (‘mortgage modification’) is nothing new. But for many, mortgage modification through procedures established by a lender can be arduous and painful in the best of times – for both sides. The MMM program seeks to ease this process for debtor and lender alike.

While each court has adopted slightly different procedures for its MMM program, the basics are the same:

–First, either the Chapter 13 debtor or the lender petitions the court for MMM. Each district I’ve found that’s adopted such a program requires debtors to dedicate 31% of their gross income to a modified mortgage (or, for some, 75%-100% of the current monthly mortgage payment).

–Second, if and when the motion is approved, each party pays an amount (typically between $200-$400) for the mediation fees, and agrees to split any additional costs evenly.

–Finally, a successful modification agreement is then approved by the court.

That’s it! In the words of the United States Bankruptcy Court for the Northern District of Florida:

The [MMM] program is streamlined to reduce costs, save considerable time, and make it easier for the parties to facilitate a loan modification.

While these courts have taken a bold step to encouraging the efficient and mutually beneficial resolution of Chapter 13 mortgage modifications, both debtors and lenders can take a leaf from these courts’ books by encouraging voluntary mortgage modification mediation in Chapter 13 bankruptcies.

Adopting the MMM program should be considered by every jurisdiction that doesn’t already have it.

To learn more about MMM programs, take a look at a few of the bankruptcy courts that have chosen to support mortgage modification mediation: N.D. Cal., D. Nev.,  E.D.W.I.

Court Rejects “Fraud” Exception to Mediation Confidentiality!

Guest Article

By John G. Loughnane, Partner
Nutter McClennen & Fish LLP

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John G. Loughnane

The Massachusetts Appeals Court recently issued an opinion in ZVI Construction Co. v. Levy, et al., 90 Mass. App. Ct. 412 (2016)refusing to override the terms of a written confidentiality agreement entered into between parties to a mediation.  The opinion is noteworthy because it refuses  to recognize a fraud exception to the confidentiality of mediation.  In addition, the opinion emphasizes the need for careful strategy when dealing with distressed situations – including agreements arising out of the mediation of disputes with distressed companies.

The decision stemmed from claims  originally made by a construction  company against a financially distressed chain of pizza restaurants known as The Upper Crust.   Those claims were resolved as part of a mediated settlement agreement.   Pursuant to  the agreement,  the chain agreed to pay  to the construction company  within thirty days certain funds due to the chain from a third party.   Within a month of the mediation’s conclusion, however, The Upper Crust chain commenced a chapter 11 proceeding.  Although The Upper Crust received the expected funds from the third party, it did not pay the funds over to the construction company but rather used the funds to cover other expenses including legal fees and payroll.

Thereafter, the  construction company filed suit against counsel for The Upper Crust and others alleging misrepresentation and other wrongdoing in connection with the mediated settlement.  The trial court dismissed all claims and the construction company appealed.   The Massachusetts Appeals Court affirmed the ruling of the lower court.

The construction company’s claims were based on allegations that at the mediation, counsel for The Upper Crust represented that “he would pay the funds” to the construction company once his client received payment  from the third party.   Counsel denied the allegation.   The opinion notes that the mediated settlement agreement “did not contain an escrow provision or otherwise call for or obligate [counsel to The Upper Crust] to act as escrow agents.   [Counsel] were never specifically asked, nor did they expressly agree, to act as an escrow agent for [the construction company’s] benefit.   [Counsel] were not parties to or signatories to the … settlement.”

The opinion notes that the funds paid by the third party were  deposited into the  Interest on Lawyers Trust Account  (IOLTA) maintained by counsel to The Upper Crust.   Massachusetts law is clear that the principal amount of funds held in a lawyer’s IOLTA account belongs to the relevant client and can only be transferred elsewhere as instructed by the client.   For that reason, the Appeals Court held that the construction company’s claims of conversion by the law firm in honoring its clients’ payment instructions could not be considered conversion.

More importantly, the Court refused to allow the construction company to introduce communications allegedly made during mediation in support of its claims against counsel for The Upper Crust.   The Court noted that plain language of Section 23C of  Chapter 233 of the Massachusetts General Laws which provides in pertinent part:  “Any communication made in the course of and relating to the subject matter of any mediation and which is made in the presence of such mediator by any participant, mediator or other person shall be a confidential communication and not subject to disclosure in any judicial or administrative proceeding; provided, however, that the provisions of this section shall not apply to the mediation of labor disputes.”

Further, the Court noted that the parties to the mediation had also executed a confidentiality agreement which provided: “The parties further agree that the mediation, including all communications, documents and other materials, used during said mediation, including all communications between and among the parties and their counsel, shall be confidential and shall not be used for any purpose other than for said mediation.”   The Court declined to ignore  this plain language and ruled that the trial court properly blocked the introduction of allegedly fraudulent statements made at the mediation session.  In addition, the Court went on to cast skepticism of the significance of any such statement in light of the sophistication of the parties, their representation by counsel, and the terms of the mediated agreement ultimately reached.

In sum, the opinion is of interest  in two respects.  First, the decision  upholds the bedrock principle of confidentiality that is fundamental to the success of any mediation process.   The promise of confidentiality is found not only in Massachusetts state law  (and other states such as those enacting the Uniform Mediation Act)  but also in the  written agreements of  parties at the outset of mediation.  Secondly, the opinion emphasizes the need for careful strategy and attention to detail in reaching any agreement – especially an agreement involving a distressed party.   Many parties, of course, were affected by the chapter 11 filing of The Upper Crust.   The construction company thought it had reached a mediated solution which would allow it to be paid.  Unfortunately the documentation executed was not sufficient to transform that belief into reality.   When it comes to mediating with a distressed party, it is important not just to reach a general agreement on the underlying dispute but  to include provisions resolving  the critical question of payment.

Mediating Plan Confirmation Issues: ABI’s “Bankruptcy Mediation” Book

Bankruptcy Mediation-FINAL-SM

By: Donald L. Swanson

“Chapter 11 plans are inherently suitable for mediation. After all, chapter 11 success is generally defined as a confirmed consensual plan of reorganization, not a contested confirmation battle; that is, it is a settlement, not a victory. ”

     –Hon. Lisa Hill Fenning, retired bankruptcy judge and Partner at Arnold & Porter

Judge Fenning contributes a chapter to “Bankruptcy Mediation,” a book recently published by the American Bankruptcy Institute.

She provides unusual and creative insights in this book, including the following:

–Bankruptcy “is inherently a structured settlement process, with the bankruptcy judge as the ‘neutral’ third party.”

–“[T]he entire chapter 11 process is actually a form of alternative dispute resolution–specifically, a form of mediation and/or arbitration.”

–“Although presiding judges rarely ‘mediate’ in any direct sense with respect to the plan process, the most effective bankruptcy judges use the tools of case management” to set the stage for settlements.

–What a judge can’t do, of course, is mediation by “shuttle diplomacy.”

–“Some chapter 11 cases are so inherently complex or riddled with conflicts of interest and high levels of distrust that the presiding judge (or more rarely, the parties) views the appointment of a plan mediator as a virtual necessity from the outset.”

In this chapter of the book, Judge Fenning deals with multi-party and multi-dimensional issues for chapter 11 plan mediation, including:

(a) when issues are ripe for mediation,
(b) tools available to a judge to facilitate settlements,
(c) types of cases in which plan mediators have been particularly helpful, and
(d) procedural matters to be considered.

This is a must-read!

The book can be ordered here.