Student Loan Crisis: High-Priced Colleges Support Beautiful Campuses (and Other Luxuries) on the Backs of their Students

IMG_0216By:  Donald L. Swanson

“Back when I was in school . . .”

This is a tired-old phrase, usually followed by tales of hardship.

The Olden Days

But here’s an opposite twist:  Back when I was in college (during the 1970s), you could actually pay your way through, with little-to-no debt, by working part-time jobs and summers and getting grants and scholarships; or by taking a semester (or two or three) off from school to make money for finishing.  “Cramming four years into six,” is the common (but not very funny) joke from back then about paying for school.

–For professional schools back then, add in (as in my case) a working spouse to make ends meet: we say that, while I earned my J.D. (“Juris Doctor” degree), she earned her P.H.T. (“Put Hubby Thru” degree).

Those days are gone!

The Student Loan Problem

Because I live in the professional world of bankruptcy, I see every now-and-then the fallout from student loans.  And the fallout is ugly.  It’s a picture of highly-educated people (mostly young) buried under a burden of student loans.  And in many cases it’s a debt they will never be able to repay — ever.  Heck . . . many can’t even keep pace with interest accruals, let alone make a dent in the principal balance!

And student loan debts can’t be discharged in bankruptcy, except for the most difficult of all hardship cases.

What is the culprit causing all this?  It’s the easy availability of student loans for the benefit of high-priced colleges.

Student loan programs developed over time with the best of intentions.  Who can argue with the benefits of making a college education at the best-of-all institutions available to everyone, regardless of financial means?  “No one!” is the unfortunate answer.

But the best of intentions can (and often do) go awry and produce unintended consequences.

A Diagnosis

Here’s what’s gone awry with student loan programs:  the true beneficiaries are high-priced colleges, not students.

The high-priced colleges, who revel in beautiful campuses and other luxuries, create a demand from tuition-paying students for luxuries.  And other colleges must-keep-pace or die.  Who wants to go to a college with low-quality facilities when luxuries can be enjoyed elsewhere?

And then there is the marketing-genius deception.  It seems, in many situations, that neither young college-bound students nor their parents can discern the difference between, (i) a college charging low-prices and offering limited scholarships, and (ii) a college charging outrageously-high prices but giving huge-percentage scholarships that result in a still-outrageously-high actual cost.  Student loans enable students to choose the still-outrageously-high-cost college.  Unfortunately, this marketing-genius deception merely feeds the beast and magnifies the problem.

An Ancient Proverb

Moreover, the following ancient proverb applies in full-force to the student loan crisis:  “The borrower is servant to the lender.”  Here are some real-life examples of how the proverb works for student loan debts:

–How about the young couple who met at a high-priced professional school and have been in the working world for several years.  Both are buried under a mountain of student loans.  One of them really, really wants to pursue a coaching career, instead of the schooled profession—but that’s not possible because student loans require continuation in the higher-paying career.

–How about the graduate from a high-priced school who works at a high-end salary in his/her schooled profession; but even with the high-end salary, the young professional is unable to pay accruing interest on student loans and can’t even begin to pay on principal.

–Or how about the older person who, feeling trapped in a dead-end job, is persuaded to spend large amounts on additional education at a high-priced college, only to learn the hard-way that this additional education provides little-or-no actual improvement in the student’s marketability.

–And what about the graduate who earns a sufficiently-high income to cover monthly student loan obligations but pines: “If I had known what my high-priced education would actually require in servicing student debt, I would never have taken that path!”

An Escalating Problem

But the high-priced schools from which these people graduated continue to charge their students outrageously-high amounts, continue to build gorgeous buildings and provide other luxuries, continue to invest huge sums into athletic teams, scholarships and facilities, and adamantly refuse to pursue an affordable-cost education model.

The upshot is that even traditionally-low-cost colleges (e.g., community colleges) are forced to compete in the luxury realm: are building fabulous campuses, are increasing their visibility, and are raising their tuition.  And the student loan crisis is hitting students even there.  This is a shame!

Dependency

Have you read the book, “The Millionaire Next Door”?  This book argues that adult children need to be economically self-sufficient, and it decries economic dependence of adult children on their parents.  In the student loan crisis, this argument is commonly applied to students and their parents.

I contend, however, that this argument is most-directly applicable to colleges and the providers of student loans.  Student loans have enabled a bent-toward-luxury among colleges—especially among high-priced colleges—and a related dependence of colleges on this economic support.  Most high-priced colleges (and now even low-cost colleges) are utterly dependent on the continued flow of easily-obtained student loans.  Such dependence always has prevented, and continues to impede, the development of affordability-based education models.

The Impact

Easy student loans have enabled and entrenched today’s unaffordable model of higher education.  And today’s higher education schools are dependent on such loans continuing.

Unfortunately, the ones who pay the ultimate price for such dependence are the loan-incurring students—not the dependent colleges.

Any ideas on what can be done about this problem?

Next Steps for a Court with Basic Mediation Rules: Mandated and Early Mediation

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The next steps

By: Donald L. Swanson

Here is a common experience in the bankruptcy courts (and other courts) where mediation is a new or little-used tool:

Attorneys have been practicing for years in this court without using mediation.  And mediation is slow to catch on.  Here’s why:

–Attorneys who practice in this court aren’t accustomed to using mediation, aren’t comfortable with inserting mediation into their case planning habits, and rarely even think of mediation as a possibility; and

–Judges in this court aren’t comfortable with the idea of mandating mediation by local rule or by order in a particular case.

            MANDATORY MEDIATION

The Voluntary Mediation Problem

The problem with voluntary mediation, in a new or little-used mediation program, is explained by these two conclusions from a study of empirical data:

–When the goal is to achieve a “regular and significant use” of mediation to resolve court cases, “[v]oluntary mediation programs rarely meet this goal because they suffer from consistently small caseloads.”

–By contrast, “judicial activism in ordering parties into mediation triggers increased voluntary use of the process.”

Moreover, according to the study,  “settlement rates” and a litigant’s perceptions of “procedural justice” are about the same in mandatory mediation as in voluntary mediation.

Three Examples of Mandatory Mediation Rules

Example No. 1.  Circuit Courts of Appeals.  All but one of the U.S. Circuit Courts of Appeals have a mandatory mediation program.  Data from these mandatory programs show them to be highly successful in achieving mediated settlements across all types of cases and regardless of levels of animosity or distrust between the parties.

Example No. 2.  Delaware Bankruptcy Court.  The Delaware Bankruptcy Court, and attorneys who practice there, have extensive experience over many years with using mediation to resolve bankruptcy disputes.  In 2013, the Delaware Bankruptcy Court intensifies its mediation program by adding this mandatory provision to its Local Rule 9019-5(a):

“all adversary proceedings filed in a chapter 11 case . . . shall be referred to mandatory mediation.”

It must be noted that the trajectory of changes to local mediation rules in the Delaware Bankruptcy Court is toward mandated mediation – and away from a voluntary system.

Example No. 3.  New Jersey Bankruptcy Court.  The New Jersey Bankruptcy Court, and attorneys who practice there, also have extensive experience over many years with mediation.  In 2014, the New Jersey Bankruptcy Court expands its mediation program by adding a “presumptive mediation” local rule.  This new rule 9019-2(a) provides:

“Every adversary proceeding will be referred to mediation after the filing of the initial answer to the adversary complaint, except [when a specified exception applies]”; and

“A contested matter . . . may also be referred to mediation . . . by the court at a status conference or hearing.”

In New Jersey, like Delaware, the trajectory of changes to local mediation rules is toward mandated mediation and away from a voluntary system.

EARLY MEDIATION

The Early Mediation Need – Generally

The study of empirical data referenced and linked above observes that mediation “tends to occur late in the life of a case.”  And it issues these findings about mediation timing:

“Holding mediation sessions sooner after cases are filed, however, yields several benefits,” including:

–“Cases are more likely to settle”;

–“Fewer motions are filed and decided”; and

–“Case disposition time is shorter, even for cases that do not settle.”

An Intensified Need for Early Mediation – In Business Bankruptcy

Superimposed over many disputes in a business bankruptcy is an urgent need to maximize value from a debtor’s operations or liquidation.  And this urgency often takes precedence over standard litigation processes like formal discovery and pretrial wrangling.  Accordingly, the need in a business bankruptcy for early and extensive mediation efforts can be particularly intense.

The role of mediation in the early stages of a business bankruptcy case needs to be different from the typical role of mediation that occurs at the end of a lawsuit:

–The role and goal of an early-mediation in a business bankruptcy is to set-the-stage and narrow-the-issues and create-a-direction and a focus for further progression of the case.

–That’s a much different role than a shortly-before-trial mediation in a one-and-done session at the end of a lawsuit, where the goal is to resolve all remaining disputes.

Here’s a link to an example of how mediation can be effectively utilized at the beginning of a Chapter 11 case.

An Example of an Early Mediation Rule

The Delaware Bankruptcy Court recently adopted a provision in its Local Rule 9019-5(j) that allows a defendant to opt for an early mediation of a preference case with less than $75,000 at stake.

Within 30 days after a response to the preference Complaint is due, the defendant in such cases may elect an early mediation of all claims raised in the lawsuit.  In cases where more than $75,000 is at stake, the parties may agree to participate in the early mediation process.

Action Item:

I am passionate about encouraging:

–Bankruptcy courts to adopt local rules on mediation and to expand the role and reach of mediation through mandatory and early mediation requirements; and

–Attorneys who practice is such courts to utilize mediation for resolving their disputes.

And I’d be delighted to discuss such matters with anyone interested in expanding the role and reach of mediation in a local court.

New Supreme Court Justice Neil Gorsuch Will be Good for Bankruptcy Law

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New Supreme Court Justice Neil Gorsuch, with wife Louise (photo from The Denver Post)

By: Donald L. Swanson

The only things I know about Judge (now Justice) Neil Gorsuch are from what I’ve read in two contexts:

  1. His rating by the American Bar Association’s Standing Committee on the Federal Judiciary, which voted unanimously to give its best possible rating to Judge Gorsuch as a Supreme Court nominee; and
  2. Five bankruptcy opinions he authored as a Tenth Circuit Judge.

Based on these five opinions, I can appreciate why the American Bar Association gave him their best possible rating.

By the way, I try to ignore national politics as much as possible because it seems, many days, that national politics is a vicious business, worthy of contempt on all sides of the partisan divides.

Fortunately, bankruptcy issues rarely provide fodder for partisan disputes.  It’s difficult, for example, to get conservatives, moderates or liberals rallying ‘round issues like cash collateral, credit bidding and structured dismissals.

Based on the five Gorsuch bankruptcy opinions I’ve read, here is my first reaction:

Supreme Court Justice Neil Gorsuch will be good for bankruptcy law.

Here’s why.

Six Examples from Five Opinions

First of all, Judge Gorsuch is an engaging writer—and for those of us required by profession to read lots of cases, this is a bonus!  Here’s an example — it’s a summary of an issue on whether the bankruptcy court can decide a particular dispute (from In re Renewable Energy Development Corp.):

“This case has but little to do with bankruptcy. Neither the debtor nor the creditors, not even the bankruptcy trustee, are parties to it. True, the plaintiffs claim they once enjoyed an attorney-client relationship with a former bankruptcy trustee. True, they now allege the former trustee breached professional duties due them because of conflicting obligations he owed the bankruptcy estate. But the plaintiffs seek recovery only under state law and none of their claims will be necessarily resolved in the bankruptcy claims allowance process. And to know that much is to know this case cannot be resolved in bankruptcy court.”

Second, Judge Gorsuch respects and honors the limitations on his authority.  As a Circuit Judge he is subservient to higher authority — to decisions of the U.S. Supreme Court and to enactments of Congress — despite flaws he may see in those decisions and enactments.  In the In re Woolsey case, for example, he writes:

“We do not doubt a strong argument can be made that the language and logic of § 506 permit the Woolseys to void not only Citibank’s lien but any lien to the extent it is unsupported by value in the collateral. But we fail to see any principled way we might, as lower court judges, get there from here. [The Supreme Court’s Dewsnup opinion] may be a gnarled bramble blocking what should be an open path. But it is one only the Supreme Court and Congress have the power to clear away.”

Third, Judge Gorsuch will bring clarity to jurisdiction issues that have been hounding bankruptcy courts.  The following lengthy analysis shows that he understands (and can explain with clarity) this difficult legal problem and its over-arching civic context (from In re Renewable Energy Development Corp.):

The Constitution assigns “[t]he judicial Power” to decide cases and controversies to an independent branch of government populated by judges who serve without fixed terms and whose salaries may not be diminished. U.S. Const. art. III, § 1. This constitutional design is all about ensuring “clear heads … and honest hearts,” the essential ingredients of “good judges.” . . . After all, the framers lived in an age when judges had to curry favor with the crown in order to secure their tenure and salary and their decisions not infrequently followed their interests. Indeed, the framers cited this problem as among the leading reasons for their declaration of independence. . . . And later they crafted Article III as the cure for their complaint, promising there that the federal government will never be allowed to take the people’s lives, liberties, or property without a decision maker insulated from the pressures other branches may try to bring to bear. . . . To this day, one of the surest proofs any nation enjoys an independent judiciary must be that the government can and does lose in litigation before its “own” courts like anyone else.

Despite the Constitution’s general rule, over time the Supreme Court has recognized three “narrow” situations in which persons otherwise entitled to a federal forum may wind up having their dispute resolved by someone other than an Article III judge.  . . . [One of these three situations is] public rights doctrine.

As developed to date, public rights doctrine has something of “a potluck quality” to it. . . . The original idea appears to have been that certain rights belong to individuals inalienably — things like the rights to life, liberty, and property — and they may not be deprived except by an Article III judge. Meanwhile, additional legal interests may be generated by positive law and belong to the people as a civic community and disputes about their scope and application may be resolved through other means, including legislation or executive decision. . . . But the boundary between private and public rights has proven anything but easy to draw and some say it’s become only more misshapen in recent years thanks to seesawing battles between competing structuralist and functionalist schools of thought. . . . Indeed, the Court itself has acknowledged, its treatment of the doctrine “has not been entirely consistent.” . . .

Bankruptcy courts bear the misfortune of possessing ideal terrain for testing the limits of public rights doctrine and they have provided the site for many such battles. . . . Even today, it’s pretty hard to say what the upshot is. Through it all, the Supreme Court has suggested that certain aspects of the bankruptcy process may implicate public rights and thus lawfully find resolution in Article I courts. . . . But the Court has also emphasized time and again that not every “proceeding [that] may have some bearing on a bankruptcy case” implicates a public right amenable to resolution in an Article I tribunal. . . .

That much, of course, hardly decides cases. What most everyone wants to know is which aspects of typical bankruptcy proceedings do and don’t implicate public rights. Yet even Stern, perhaps the Court’s most comprehensive tangle with the question, offered no comprehensive rule for application across all cases. Instead, it invoked a number of different factors to support the result it reached in the particular and rather unusual case at hand.

Fourth, Judge Gorsuch does much more than a grammatical parsing of statutory language.  In the In re Dawes case, Judge Gorsuch deals with farmer-tax issues under Chapter 12, on which the Eighth and Ninth Circuit Courts of Appeals had split. Judge Gorsuch sides with the Ninth Circuit, based on three separate considerations: (i) “the plain language of the statute before us,” (ii) “the larger statutory structure,” and (iii) “Congress’s expressed purposes.”  As to Congressional purposes, Judge Gorsuch says:

Our interpretation as well gives effect and respect to the congressional purpose they identify. Ordinarily, of course, taxes are not dischargeable in bankruptcy; the tax man is rarely avoidable. Yet under our interpretation of § 503(b), income taxes incurred as a result of the pre-petition disposition of certain farm assets are eligible for § 1222(a)(2)(A)’s generous rule allowing them to be treated as unsecured claims, compromised, and discharged. . . . Clearly, then, our reading gives respect to Congress’s wish to provide a substantial form of special assistance targeted to farmers. We only stop short of extending § 1222(a)(2)(A)’s treatment to income taxes incurred post-petition by the debtor rather than the estate.

The U.S. Supreme Court ended up siding with Judge Gorsuch and the Ninth Circuit on this farmer-tax issues.

Fifth, Judge Gorsuch respects and applies non-binding precedent.  In the Ardese v. DCT, Inc. case, Judge Gorsuch applies the law and rationale developed in a prior Tenth Circuit case, indicating that “there is little obvious daylight between [the prior case] and Ms. Ardese’s case.”

Finally, Judge Gorsuch shows professional humility in the TW Telecom Holdings, Inc. v Carolina Internet Ltd. case.  The Tenth Circuit had been applying a specific rule of law involving the automatic bankruptcy stay.  Judge Gorsuch notes that at least “nine other circuit courts of appeals disagree” and that the Tenth Circuit rule is based on faulty reasoning.  So, his opinion overrules the Tenth Circuit rule and declares that the Tenth Circuit will thereafter follow the same rule applied in other circuits.

Conclusion

Based upon these five opinion, I like Judge Gorsuch and believe he will be good for bankruptcy law as a Supreme Court Justice.

Puerto Rico Turns to Mediation for Assistance in Solving its Financial Crisis

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There are better ways to handle a crisis than what this artwork suggests.

By Donald L. Swanson

“Puerto Rico’s federally appointed financial oversight board scheduled mediation in debt restructuring talks between the U.S. Territory’s general obligation bondholders and holders [of other debts] backed by sales tax revenue.” The mediation “will run from April 10-13 in New York.”

–Reuters.com, March 31, 2017, at 11:09 a.m.

An hour later, March 31, 2017, at 12:10 p.m., Reuters.com publishes this more-detailed information:

The focus of the proposed mediation is “to resolve strife between” two groups of creditors: one holds $17 billion of general obligation debt, and and the other holds $18 billion of debt backed by sales tax revenue. Both sides claim ironclad legal rights to payment.

The next few weeks will be critical for Puerto Rico, whose $70 billion debt load is pushing its economy toward collapse.” And May 1 “marks the expiration of a freeze on creditor lawsuits.”

Some creditors prefer direct negotiations over mediation, citing delay concerns. Accordingly, the mediation proposal says that “creditors who object to mediation” can submit offers directly to the Oversight Board, which will then be shared with the mediator.

The following information is from an Elnuevodia.com article dated a day earlier — March 30, 2017, at 10:27 a.m.:

The proposed mediation . . . could start this week if the Island’s various creditors and municipal bond insurers agree.”

This mediation development “seems to be a total about-face” after various creditors “criticized” the Government and Oversight Board efforts thus far.

The letter “inviting bondholder groups to enter a mediation process” began receiving positive responses: several bondholder groups, for example, “have already stated their availability to enter a mediation process,” provided such a process is “non-binding.”

But some are skeptical of the mediation effort: “We see it as a delay tactic,” one source said, since the primary bondholders have not yet joined the process—which fact remains true as of “press time.”

Kudos and Congratulations

Kudos and congratulations to Puerto Rico’s Financial Oversight Board for this mediation initiative!!

[Note: Congress recently created the Financial Oversight Board to “provide a method” for Puerto Rico “to achieve fiscal responsibility and access to the capital markets.”]

Puerto Rico is now joining a long line of governmental entities who turn to mediation for assistance in resolving a financial crisis.

Additionally, kudos and congratulations are in order for the Board’s approach, noted above, for dealing with parties who prefer direct negotiations.  The approach is to have such parties submit offers directly to the Board, which then refers the offers to the mediator.  This is creative and clever!

Examples of Proactive Mediation Success for Governments

An example of mediation success for other governmental entities in financial crisis is the country of Argentina, which experienced a $100 billion debt default crisis in 2002.  Argentina reached partial resolutions of that crisis in 2005 and 2010, and it achieved a final mediated settlement in 2016.

The most famous example of mediation success for a governmental entity is the City of Detroit bankruptcy, in which a team of proactive mediators held hundreds of mediation sessions and helped resolve the seemingly intractable financial problems of a large city. Such a mediation process is declared to be “an ideal model” for restructuring efforts by other governmental entities.

Hopefully, Puerto Rico’s Financial Oversight Board will be able to successfully pursue the same types of proactive mediation processes that worked effectively elsewhere!

Can anyone provide further information on what’s happening with this mediation effort?

Structured Dismissal Negotiations are Ripe for Mediation: Until the Supreme Court Upends Precedent (In re Jevic)

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Ripe for eating

By: Donald L. Swanson

We are not final because we are infallible, but we are infallible only because we are final.”

–From concurring opinion of U.S. Supreme Court Justice Robert H. Jackson, in Brown v. Allen, 344 U.S. 443 (1953), on role and function of the U.S. Supreme Court.

Structured dismissals are [correction: were] a rapidly developing field in today’s bankruptcy world.  That all changed on March 22, 2017, when the U.S. Supreme Court puts the kibosh on structured dismissals in its In re Jevic ruling.

Negotiations in this rapidly developing field would be ripe for mediation.  But, alas, that will not happen, because of the In re Jevic ruling.  Now, the rule is simple:  distribute sale proceeds through the Bankruptcy Code’s priority scheme.

Necessity Produces Creativity

Creative processes, like structured dismissals, arise out of a need in bankruptcy to maximize value and distribute proceeds in an efficient and prompt manner.  Plan confirmation processes are, often, inefficient and expensive in the extreme.  So, when an opportunity arises to maximize value and distribute proceeds in a way that is quick, efficient and effective, practitioners gravitate to that opportunity.  Structured dismissals provide one of those opportunities.

Some History

Bankruptcy courts have been struggling for as long as I can remember with how to handle asset sales and the distribution of sale proceeds.  My first recollection of a bankruptcy sale issue relating to today’s structured dismissals is from 1982:

–a bankruptcy judge rules in 1982 that a bankruptcy trustee may not “serve as the handmaiden” of secured creditors in liquidating collateral.  Accordingly, a sale of assets should not occur in a Chapter 7 case, the judge says, when the only persons to benefit are secured creditors.

–The judge in 1982 explains: “Secured creditors by consent and the trustee by acquiescence cannot impose upon the [Bankruptcy] Court the duty to serve as a foreclosure or collection forum.”

The “handmaiden” phrase from 1982 stands the test of time.  It’s still good law today, especially in Chapter 7 liquidation cases: if all debtor’s nonexempt assets are fully encumbered, the Chapter 7 trustee must issue a “no asset” report.

But a bankruptcy sale of fully-encumbered property can still provide benefits to the bankruptcy estate in a business reorganization.  Such benefits might include keeping a business alive under new ownership, which will continue providing jobs and business activity and tax payments in the local community.

Additionally, parties in a bankruptcy often negotiate for ways to create benefits to the bankruptcy estate from a sale of fully-encumbered property.  One way is to carve-out a portion of the funds the secured creditor would receive from a sale and then gift that portion to priority wage claims or to unsecured creditors.

A Long-Standing Precedent

That’s what happened, for example, in the case of  In re SPM Manufacturing Corp., 984 F.2d 1305 (1st Cir. 1993).

–In the In re SPM case, a secured creditor would get all proceeds from the sale of debtor’s assets.  So, the secured creditors enters into a pre-plan settlement agreement for distributing proceeds from a bankruptcy sale.  The agreement would gift to unsecured creditors a portion of sale proceeds the secured creditor would otherwise receive.

–The bankruptcy court rejects this agreement because tax claims have a higher priority, aren’t receiving any of the gift, and remain unpaid.  The District Court affirms, and the case is appealed to the First Circuit Court of Appeals.

–The First Circuit reverses and approves the agreement.  Here is part of the First Circuit’s rationale:

The Bankruptcy Code’s distribution scheme “does not come into play until all valid liens on the property are satisfied.  . . .  Because [the secured creditor’s] claim absorbed all of SPM’s assets, there was nothing left for any other creditor in this case.  . . . creditors are generally free to do whatever they wish with the bankruptcy dividends they receive, including to share them with other creditors.”  [984 F.2d at 1312-13.]

This In re SPM ruling has been the law-of-the-land in the First Circuit for fourteen years.  And the ruling makes sense, as reflected by this fact: an online research tool [Casemaker] says this In re SPM decision, (i) has been cited 183 times, and (ii) has been “criticized” only once on unrelated grounds.

Overruled?

So . . . did the U.S. Supreme Court decide to overrule this long-standing In re SPM rule in its In re Jevic decision . . . without even mentioning it?!  Perhaps not: the In re SPM decision might be distinguishable (arguably, at least).  But In re Jevic’s “simple answer” of “no” suggests otherwise.

This result is unfortunate in the extreme for bankruptcy practitioners and judges striving to maximize and distribute value in an efficient and effective manner!!

How Frequently Does Malpractice Occur in Mediation?

By Donald L. Swanson

California has been studying this question: should a malpractice exception be added to California’s mediation confidentiality laws?

If, for example, a mediating party sues his/her/its attorney for malpractice committed during a mediation session, should statements made during the mediation session be admissible evidence in the malpractice lawsuit?

Or should such statements remain confidential, as currently required by California law?

Here is a 2015 report from that study.

One suggestion in the study report is to leave confidentiality laws as-is on this malpractice question, unless there is “some reliable research” showing that “a substantial problem” exists.  A related conclusion is that there is “scant evidence” of “a systemic problem created by mediation confidentiality.”

Infrequent Misconduct

The study identifies some empirical data on mediation misconduct.  And here is a finding from such data:

Mediation misconduct is relatively infrequent,

–but allegations of such misconduct do occur occasionally, and

–at least a few of those allegations “appear to have some merit.”

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Hear no evil, see no evil . . .

Any Remedy?

So . . . what is to be done for the “few” whose claims “appear to have some merit”?

Are we to pretend that we hear no evil, see no evil . . . ?

Are we to tell them something like, “Too bad, so sad . . . you have no redress”?

Such responses would be like a scene from that cinematic masterpiece [sarcasm intended] called, “Dumb and Dumber”:

–One of the dumb guys has just been saved by a bullet-proof vest supplied by the FBI, when he says, “Hey, what if he shot me in the head?!”  To which the FBI agent responds, “That’s a risk we were willing to take.”

Fortunately, the Commission appears to be exploring ways to provide recourse for mediation malpractice claimants while still preserving confidentiality to the greatest extent possible.

Good for them!

What do you think about a malpractice exception to mediation confidentiality?

 

In re Jevic: Once Again, the Supreme Court Screws Up Our Bankruptcy World — And Justice Thomas is Wise in His Dissent

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U.S. Supreme Court Opinion

By: Donald L. Swanson

I think it is unwise for the Court to decide” this issue because: (i) “Experience shows that we would greatly benefit from the view of additional courts of appeals on this question,” and (ii) “We also would have benefited from full, adversarial briefing.”

–Justice Clarence Thomas, dissenting in Czyzewski v. Jevic Holding Corp. (In re Jevic)., Case No. 15-649 in United States Supreme Court (March 22, 2017).

On March 22, 2017, the United States Supreme Court issues its ruling in the In re Jevic case that, once again, screws up our bankruptcy world.

The U.S. Supreme Court has a history of rulings that screw up everyday life for bankruptcy practitioners and judges. One example is Stern v. Marshall, 564 U.S. 462 (2011). Who would’ve ever guessed that a minor pop-culture celebrity (Vicki Lynn Marshall, aka Anna Nicole Smith) could wreak such havoc in our bankruptcy world. In a case with a long history of bizarre facts and procedural wrangling, the Supreme Court in Stern v. Marshall puts extreme limitations on the jurisdiction and role of the U.S. Bankruptcy Courts. The Supreme Court, in Stern v. Marshall, made a narrow and inflexible ruling about bankruptcy court jurisdiction. And it did so on constitutional grounds, which means that Congress is incapable of changing (or minimizing the impact of) the decision. We’ve all been struggling with the result ever since.

Here is the essence of the majority decision in the new In re Jevic case, penned by Justice Stephen Breyer:

“We turn to the basic question presented: Can a bankruptcy court approve a structured dismissal that provides for distributions that do not follow ordinary priority rules without the affected creditors’ consent? Our simple answer to this complicated question is ‘no.’”

Yikes! Therein lies the problem for bankruptcy practitioners and judges: the Supreme Court is providing a “simple answer” to a “complicated question.”

Here is some griping:

–None of the Supreme Court Justices has any significant experience in practicing under the Bankruptcy Code, which is a specialized area of the law. Perhaps that’s why they fall back on a simple answer to a complicated bankruptcy question. And, perhaps, that’s why they keep screwing things up for us.

–And the Supreme Court had to ignore some technical rules for getting to this In re Jevic decision: hence, Justice Thomas’s statement that rues the absence of “full, adversarial briefing.” Here’s my translation of his absence-of-full-briefing statement: “The Supreme Court doesn’t have adequate information or an adequate understanding to make this decision.”

So, what are we supposed to do with the Supreme Court’s simple – and simplistic – answer? Keep in mind that structured dismissals commonly arise in large and complex reorganization cases. There is nothing simplistic about such cases. A simple answer is not merely unhelpful . . . it’s harmful. Perhaps the Supreme Court Justices, in the bankruptcy context, could follow the words of the medical profession: “First do no harm.”

Justice Thomas is precisely correct in his comment that the Supreme Court would “greatly benefit” from an opportunity for additional courts of appeals to weigh-in on the question. Structured dismissals are a relatively new development in the bankruptcy world and apply only in exceptional circumstances. There are lots of smart judges out there in the Federal system: bankruptcy judges, district court judges, bankruptcy appellate panel judges, and court of appeals judges. One of the benefits of those many and multi-layer judges is that many smart judges can evaluate and address and explain and rule upon issues and facts relating to an important legal question before the question ever gets to the U.S. Supreme Court. Then, the Supreme Court Justices can draw on the words and wisdom of those other smart judges in reaching a decision. For the Supreme Court to jump-in at this early stage, without the benefit of a fully-developed multi-layer analysis of this In re Jevic question, is unfortunate in the extreme.

As a result, this new In re Jevic opinion creates major questions about basic bankruptcy practice that are hugely important to the administration of bankruptcy cases.  For example:

What about first day orders and early/interim distributions mentioned in the majority opinion (which also violate the Code’s distribution priorities)?

–Are they actually okay or merely cited as a point of reference?

–Did the Court actually intend to bless critical vendor orders?

And what about an under-secured creditor gifting a portion of its collateral to the unsecured class as part of a structured dismissal–is that now prohibited . . . seriously?!

And how is the essence of this “simple answer” going to spill over into other complex contexts?

Ok. I’m done. Sorry about this rant!

A PricewaterhouseCoopers Déjà Vu: Mediation, Then Trial, Then Settlement During Trial

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Mediator’s report to the Court

By: Donald L. Swanson

The case is MF Global Holdings LTD. v. PricewaterhouseCoopers LLP, Case No. 14-cv-2197 in the U.S. District Court for the Southern District of New York.  Hon. Victor Marrero is the presiding Judge.

This case concludes by settlement, last week, in the middle of trial.

Claims Asserted

Plaintiff asserts in this lawsuit that PricewaterhouseCoopers, as auditor, failed to detect and report a financial scheme that ruined the business of MF Global.

The case begins on March 28, 2014, with the filing of a Complaint asserting three separate claims against PricewaterhouseCoopers and requesting the following relief: “a money judgment” in amounts “to be determined at trial but not less than,” (i) $1 billion on a professional malpractice claim, (ii) $1 billion on a breach of contract claim, (iii) $10.9 million on an unjust enrichment claim, plus (iv) related costs and expenses, including attorney fees.

Mediation, Trial and Settlement

On February 6, 2017, Judge Marrero reschedules the start of trial from February 13, 2017, to March 6, 2017 (Doc. 136), so the parties can engage in mediation.

The mediation fails to achieve a settlement.  And the mediator’s letter to the Court dated February 21, 2017, (a photo of this letter is above) says:

“I write to inform the Court that the parties have engaged in private mediation.  The mediation was unsuccessful.  At this time, the parties are planning to proceed with trial as scheduled on March 6, 2017.”

Trial begins on March 6, 2017.

On Thursday, March 23, 2017, as trial is still in process, the parties announce a settlement of this lawsuit on undisclosed terms that are to “the mutual satisfaction of the parties.”

Déjà Vu

Last year, PricewaterhouseCoopers is being sued in a State Court in Miami, Florida.

This Florida lawsuit alleges that PricewaterhouseCoopers provided clean audit opinions to a company for six years until that company collapsed, and the lawsuit claims $5.5 billion in damages plus punitives.  This suit is reported to be “the biggest accounting negligence lawsuit ever to go to trial.”

As in MF Global, this lawsuit settles in the middle of trial for a confidential sum that is “to the mutual satisfaction of the parties.”  The settlement occurs on August 26, 2016.

Although I can’t access records in a Florida State Court, I’m confident this Florida case went through mediation before trial began.

Summary

Accordingly, we see a two-in-a-row déjà vu, where PricewaterhouseCoopers settles the same types of cases in the same way: through a mediation that fails to achieve a settlement, then trial begins and progresses for a time, with settlement occurring in the middle of trial.

Fundamental Proposition

I suggest that these two déjà vu cases illustrate a fundamental proposition: that mediation can provide meaningful progress toward a consensual resolution of a lawsuit, even when the settlement comes after mediation concludes and while the parties are battling-it-out in trial.

What do you think about this proposition?

Note: Information in the déjà vu section of this article is from a Financial Times news report dated August 26, 2016..

How Mediation Confidentiality is Waived — A Ninth Circuit Decision

img_1628By: Donald L. Swanson

Can mediation confidentiality be waived?

The answer is, “Yes.”

–That’s according to the U.S. Ninth Circuit Court of Appeals, from an unpublished “Memorandum” decision in Milhouse v. Travelers Commercial Insurance Co., Case No. 13-56959, 13-57029 (9th Cir., Feb. 23, 2016).

Facts

The Milhouse residence, located in California, had been destroyed in a fire – a total loss. Disputes arose with Travelers over their home insurance policy, which resulted in a lawsuit and a jury trial.

The jury rules in favor of Mr. and Mrs. Milhouse on breach of contract. But the jury rejects their bad faith claim and their request for punitive dames.

Mediation Confidentiality Issues

–Trial Court Ruling

The trial court enters a final post-trial order (dated November 5, 2013) on multiple issues, from which both parties appeal to the Ninth Circuit.

Here is what the trial court says, in such order, about mediation confidentiality:

1. “At trial, evidence was presented regarding statements made during the course of the mediation proceeding between Dr. and Mrs. Milhouse and Travelers.”

–Such evidence includes this: “the Milhouses made a $7 million demand of payment” in mediation and “asked for nearly a million dollars of attorney’s fees when their attorney had only worked on the case for a few weeks.”

2. “The Milhouses now challenge the admissibility of such evidence, and argue that it resulted in prejudicial error that warrants a retrial on the issue of bad faith.” Such argument “fails on two independent grounds”:

–Waiver.  “First, the Milhouses failed to raise the issue with the Court at or before trial, and therefore waived their right to claim any privilege.”

–As to the mediation confidentiality agreement between the parties, the trial court says, “the Milhouses never presented” such an agreement as evidence and “incorrectly assume” that the court “can exclude testimony on the basis of a confidentiality agreement it has never seen.”

–Due Process.  “Second, to find evidence of statements made at the mediation proceeding inadmissible at trial would violate the due process right of Travelers to provide a complete defense to its alleged liability for bad faith and punitive damages.”

–Ninth Circuit Ruling

One of the Milhouse arguments on appeal is that the trial court (the U.S. District Court for the Central District of California) “erred” when it “admitted mediation communications at trial.”

The Ninth Circuit evaluates and rules on mediation communications issues in the following manner:

–Procedural Background Evaluation:

–Pretrial.  Initially, both parties file pre-trial motions to preserve mediation confidentiality and exclude mediation evidence. But both parties end up withdrawing those motions.

–Trial.  The Milhouse attorney does not object at trial, on mediation confidentiality grounds, to any evidence, nor does he alert the trial court to the requirements of California’s mediation privilege law.

–Post-Trial.  The Milhouse attorney raises mediation confidentiality issues for the first time in a post-trial request for new trial.

–Ninth Circuit Ruling:

“We therefore consider the [mediation confidentiality] issue waived.”

Editorial Comments

1.  I understand the waiver finding by both the trial court and the Ninth Circuit. Waiver seems to make sense:

–The Milhouse attorney apparently forgets about the confidentiality objection at trial.  Or . . . perhaps he has a strategic reason for abandoning the objection, and he fails to raise the objection intentionally?  We’ll never know.

2.  But the District Court’s “due process” finding is a concern – for two reasons:

–California’s mediation privilege law is about as strict as they come, with exceptions being almost non-existent. And California law would probably not recognize the Court’s “due process” exception to its mediation privilege.

–The District Judge appears to be saying that a mediation confidentiality objection, if raised at trial, would have been overruled and the evidence admitted anyway.

The Ninth Circuit does not even mention the trial court’s due process ruling and bases it’s “affirmed” decision on waiver alone.

3.  In this diversity jurisdiction case, the courts wonder whether mediation confidentilaity is governed by California state law or by Federal Evidence Rule 408.  Why the U.S. District Court doesn’t reference its own Local Rule 16-15.8 on mediation Confidentiality is mentioned: but the probable reason is discussed here.

What do you think about the waiver issue?

If I Were a Bankruptcy Judge, I’d be Promoting Mediation Now

 

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By: Donald L. Swanson

A Staffing/Caseload Problem

We have a staffing and caseload problem that’s waiting-to-happen in the bankruptcy world:

The number of bankruptcy filings is down, systemwide, and has been for several years. And budget pressures are on the increase.  As a result, bankruptcy vacancies (e.g., for judgeships, clerkships, panel trustee positions, clerk  of court positions, etc.) are not being filled.

So, when an economic recession recurs, we’ll have a staffing problem of major proportions throughout the entire bankruptcy system.  And this problem will manifest itself in burgeoning caseload pressures.

A Mediation Solution

Mediation is a time-honored and proven tool for dealing with caseload pressures.

About a year ago, I published a two-part article titled, “If I Were a Bankruptcy Judge, I’d be Promoting Mediation Now.” In light of the developing problem described above, I thought we should revisit the article. So, here it is.

Part One

If I were a bankruptcy judge [I’m not and have no aspirations to become one], I’d be doing everything in my power to promote mediation in my court—right now.

For example, I’d adopt local rules on mediation, establish mediation requirements for adversary proceedings and Chapter 11 plans, look for cases where mandatory mediation orders might be helpful–and issue such orders, etc. Here’s why: to manage my future workload when bankruptcy filings pick back up again.

Granted, we are currently in an off-season for bankruptcy cases—filings are at low levels—and we’ve been here for a while. During this off-season, bankruptcy court support staff numbers are declining throughout the system, and judge vacancies are remaining unfilled.

However, history shows that this off-season will not last forever. The day will come [and, perhaps, soon] when bankruptcy court workloads will return to heavy levels. When that day arrives, support staff hirings and new judge appointments will take time to ramp back up.

So, I’d be promoting mediation now and getting attorneys accustomed to mediation as a standard dispute resolution tool in my court. Then, I’ll be ready for an increased work load when the season changes.

My view on this point is intense because I’ve seen bankruptcy seasons change before—okay, okay, I’ve been at this bankruptcy thing long enough to have seen seasons change many times.

Action Item. We should all be encouraging our local bankruptcy courts to adopt local rules on mediation, establish mediation requirements for adversary proceedings and Chapter 11 plans, look for cases where mandatory mediation orders might be helpful–and issue such orders, and get the local bar accustomed to using mediation as a standard dispute resolution tool.

Part Two

Here’s how a season change worked, as I recall, in the early 1980s: we are at the early stages of an economic recession, back then. The local Bankruptcy Court has one judge, one secretary and a few people in the Clerk’s office.

As the economic recession intensifies, the local Court’s workload explodes. Motion days occur frequently and are filled with a dozen-or-so hearings scheduled for every hour, all day long. To deal with case-load pressures, the local Bankruptcy Judge takes to ruling from the bench on affidavit evidence, without written opinion, at the end of every hearing. He simply issues and explains his ruling orally and moves on to the next matter, with a terse “Motion granted” or “Objection overruled” journal entry to document the action. He rarely takes a motion day issue under advisement for writing an opinion. He simply doesn’t have time to do so.

The Judge takes occasional grief from appellate courts for lack of written explanations, but he continues doing what’s needed to keep pace with workload demands.

During those days, a mediation-ish process develops among attorneys in this Judge’s Court. All attorneys in a dispute must appear at a hearing—if you don’t show, you lose. So, we all spend lots of standing-around time at every motion day, which leads to hallway discussions among opposing attorneys, who start settling their disputes while waiting for their hearing.

As time moves forward, most disputes scheduled for hearing on a motion day actually resolve by settlement in this way. There’s no sense waiting who-knows-how-long for a hearing and a ruling from the bench on a dispute the Judge will know nothing about until we explain it to him at the hearing.

Ironically, the judge actually serves a mediator-type role during this time: he brings disputing parties together, gets them talking about their disputes, helps them recognize a need to settle, and encourages them toward settlement (albeit, he does so in an indirect and round-about sort of way). Let’s call this old process, “hallway mediation.”

The hallway mediation days are gone. Telephone hearings and electronic filings killed them. While shortcomings in the hallway mediation circumstances are obvious, those of us who practiced there have a respect and nostalgia for the mediation-ish processes that flourished in that environment.

Action Item. We should all be encouraging every bankruptcy judge to promote bankruptcy mediation now, as a way to prepare for future days when the bankruptcy season arrives again.

What do you think about this developing problem and about mediation as a solution?