6 Reasons Why Bankruptcy Mediation is a Process, Not a One-and-Done Session: PART SIX — DIFFERING PRIORITIES

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Differing Priorities

By Donald L. Swanson

Non-bankruptcy cases usually have a different priority than bankruptcy cases: namely painting a picture v. maximizing value.

In non-bankruptcy cases, an event or series of events occur, and the focus is, typically, on (i) painting a clear picture of what happened, and (ii) assigning or absolving liability accordingly.

In non-bankruptcy cases, the picture to be painted might be:

–What happened when a collision occurred at the intersection of Main and 38th Streets?
–What happened when an invasive cervical cancer diagnosis is preceded by five consecutive years of negative Pap test results?
–What happened when a single-engine plane crashes in a cornfield?

There is no particular urgency in non-bankruptcy cases to paint the picture quickly. A leisurely-timed painting process is usually sufficient. So, discovery takes a long time. And mediation often happens as discovery winds down.

In business bankruptcy cases, by contrast, painting an accurate picture is certainly important. But the primary aim is something different: it’s to preserve and maximize value of the business and its assets.

If value is lost or destroyed, the bankruptcy case is a failure.

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A Bankruptcy Failure

Here’s an example of bankruptcy failure:

–A production facility requires $120 million financing to construct and begin production
–The facility then runs out of cash, shuts down and files bankruptcy–at bankruptcy filing, the debtor represents its total debts to be in excess of $138 million
–DIP financing cannot be obtained, so a § 363 auction occurs without a stalking horse bid—professionals assure everyone that bidding will be “robust”
–The highest cash bid at auction is $12.75 million; and the sale is made to the only other bid–the first lienholder’s $36 million credit bid.
–The facility remains idle for a couple years thereafter.

This case is an unmitigated disaster for nearly everyone. Forget what pictures might thereafter be painted. Value has not been preserved or maximized. It’s the worst-possible result: a dirt-cheap sale and an idle facility.

A one-and-done mediation session at the end of discovery may be an adequate model for non-bankruptcy cases, but it is totally non-responsive to the value preservation and maximization needs of business bankruptcy cases.

Action Item. An urgency and an immediacy exist in business bankruptcy cases to preserve and maximize value—otherwise there will be nothing for creditors to fight over. Mediation plans, strategies and models must provide immediate help in these urgent situations.

This is the final post in a series of six articles explaining how and why bankruptcy mediation needs a different model from the one-and-done session commonly used in non-bankruptcy cases.

 

The Monstrous Costs of Mediation Failures (the Nortel Networks Bankruptcy, Part One)

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POT OF GOLD

By Donald L. Swanson

A sale in bankruptcy of assets owned by Nortel Networks Inc. results in a $7.3 billion (yes, that’s $7,300,000,000) pot of gold for creditors.

Guess what: creditors can’t agree on how to divide the pot.

So what do creditors do instead? They spend $2 billion from the pot of gold on professional fees to fight over the pot. And the fight isn’t finished.

It’s not as if the parties have refused to negotiate. They’ve held at least four rounds of mediation. But all mediation rounds fail. So . . . the parties are still battling . . . and using up the pot of gold in the process.

The U.S. bankruptcy case is pending in Delaware at Case No. 09-1018 (yes, the “09” in the case number reveals the 7-year age of the case).

The Bankruptcy Court, in its Opinion dated May 12, 2015 (Doc. 15,544) on how the $7.3 billion sale funds should be allocated and distributed, makes this finding:

–The parties “have submitted widely varying approaches” for deciding the distribution issue, “leaving virtually no middle ground.” Both sides have “strong criticism” of the other’s distribution methodology and are “sparing no expense” in fighting the battle.

How could this using-up-the-pot-of-gold happen? Here are two explanations:

1. Vexing complexity.

Daniel Fischer, Forbes Staff, covering “finance, the law and how the two interact,” writes on April 5, 2016, that the high fees

–“reflect the vexing complexity” of the Nortel bankruptcy that “is taking place across three countries and two continents” and deals with “the increasingly common clash between” bondholders and pensioners.

[Editorial Note:  Many of pension claimants are from the UK.  The Bankruptcy Court explains their situation like this: “There is a deficit in excess of $3 billion in the (UK) pension plan of which they are members.”]

2. Too much money in the golden pot!

Too-much-money is an explanation by Julie Triedman of The Am Daily, in an article published on January 14, 2016, by The American Lawyer. She says:

–At one time, Nortel’s bankruptcy cases stood as “a shining example of international cooperation in a global insolvency.”

–In 2009 and 2010, Nortel professionals coordinated a sale of all Nortel assets, “rather than allowing” assets to be sold “piecemeal.”

–Such sales are described as “hugely successful” and a “$7.3 billion windfall.”

–The successful sales bring previously inattentive claimants “out of the woodwork,” with everyone wanting a piece of the pot.

–“Close to two dozen” firms are “feasting richly” on this case.

Both explanations appear to be valid. But Ms. Triedman’s cynicism has a certain appeal.

Other professionals who handle every-day cases requiring efficiency and cost-effectiveness will look at this situation with a degree of skepticism . . . and, perhaps, more-than-a-little-scorn.

Moreover, other bankruptcy cases are complex, have billions or millions of dollars at risk and involve a conflict between general creditors (such as bondholders) and pensioners–and the parties and professionals in such cases are able to agree upon resolutions that are beneficial to all (e.g., the Detroit and diocese cases).

Here is a copy of a slightly-redacted (name of firm is omitted) summary page from one law firm’s fee application in the Nortel Networks case for the month of January, 2016:

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Nortel — Summary of One Month’s Fees for One Law Firm

This summary page identifies $503,875.50 to be paid by Nortel to one law firm for fees incurred in a single month — and there are numerous other professional firms with their own fee applications to be paid by Nortel for the same month. Wow!

Other pages of this same fee application identify hourly rates of this law firm for 15 timekeepers:

–4 between $1,325 and $1,050 per hour

–5 between $900 and $700 per hour

–3 between $690 and $580

–3 between $455 and $215 per hour.

The timekeeper who works most on the case in January 2016 is a $1,050 per hour attorney, who logs 137.7 hours.

That’s a pretty sweet gig.

Is Ms. Tiedman’s cynical inclination well-founded?

 

Facilitative v. Evaluative Mediation = It’s Both: A New Study of Mediation in the U.K.

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Mountain Scene v. Lake Scene = It’s Both

By Donald L. Swanson

–Mediators “showed a marked preference toward” a facilitative style of mediation, but

–Mediators “believe that parties and their advisers expect them” to use an evaluative style of mediation.

These findings are recently published (on May 11, 2016) by the Centre for Effective Dispute Resolution (located on Fleet Street in London, England) in its “Seventh Mediation Audit: A survey of commercial mediator attitudes and experience.”

Another finding on facilitative v. evaluative mediation styles reported in the study is this:

“mediators trained in a facilitative doctrine tend to favour that approach and start out using it, but many (although clearly not all) veer towards more evaluative strategies when the going gets tough.”

Such finding is presented with a series of charts showing that mediators use both styles within a single mediation session.  The charts show, generally, that mediators:

–favor the facilitative style in the initial phase of a mediation session (when “uncovering information”)

–but move toward an evaluative style in the second phase (when “trying to get negotiations moving”)

–and move further toward an evaluative style in the third phase (when “everything is stuck”)

–and move back toward facilitative in the final phase of the mediation session (when “closing the deal”).

Interesting information.  It’s not either/or.  It’s both.

A Theory on Application to the U.S. Experience

Here is my theory on how this U.K. information applies to the U.S. mediation experience, including bankruptcy mediation.

First of all, every party to a mediation wants the mediator to be fully- and aggressively-evaluative: but only when dealing with the opposing side.  Every party wants the mediator to go into the opposing party’s caucus room and explain how the mediator believes they are going to lose at trial and how they should be making major concessions.  In fact, many attorneys hope and believe this is exactly what’s going to happen.

–But no one wants a mediator to come into our caucus room and explain to us how the mediator believes we are going to lose at trial and how we should be making major concessions.

–“No, no, no . . . don’t you dare be doing that to us!”

On the other hand, parties and their attorneys fully expect the mediator to explain hard-truths to them about their own positions.  But even in an explain-hard-truths context, the mediator must maintain a position of neutrality:

–The mediator must explain with clarity and precision and skill the opposing party’s positions, making sure everyone has a clear understanding of those positions and their implications.  This is a function and role and duty of a mediator.

–However, it’s quite another matter for the mediator to move into a non-neutral position, like: “You are going to lose this argument!” or “Your position has no legal merit!”  Any explanation of hard truths in such a manner to a mediating party will bring resentment and a perception that the mediator is acting in an improper and unfair manner.

Moreover, there are times when an attorney for a mediating party actually wants the mediator to explain hard-truths to his/her client – and to do so forcefully and thoroughly and well.

–That’s because clients, sometimes, ignore their attorney’s realistic views and concerns: the attorney can’t get the client to abandon unrealistic views and wants the mediator’s assistance in managing the client.

–But even in this situation, the attorney wants and expects the mediator to maintain a position of neutrality, while still conveying hard truths.

So . . . what do you all think about this theory?

ACTION ITEM: From Part Five — Multi-Party Realities

Action Item. Preparation efforts must be made in a multi-party mediation before the parties will be ready for final mediation sessions.

 

6 Reasons Why Bankruptcy Mediation is a Process, Not a One-and-Done Session: PART FIVE — MULTIPLE PARTY REALITIES

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Multip-Party Kaneko Art

By Donald L. Swanson

Two-party and three-party mediations can fit well into a one-and-done session model.

But four and more parties are difficult to manage in a one-and-done. Consider this: in a four-party mediation that begins at 9:30 a.m. with a 30 minute joint meeting and a 30 minute caucus with each party, it’ll be noon before the mediator concludes the first round of caucuses.

Many bankruptcy disputes are inherently multi-party, such as (i) plan confirmation disputes in the reorganization chapters: 9, 11, 12 and 13, and (ii) priority disputes among all types of competing claims.

Additionally, many bankruptcy cases tee-up a cluster of disputes that are interrelated, intertwined and collectively multi-party.

Extensive preparation efforts are needed in multi-party situations, before the parties can be ready for final mediation sessions.

Such preparation efforts must bring structure and organization to the mediation process. There’s no sense having multiple parties show up at a mediation session, with a one-and-done expectation, only to find confusion about what all the disputes might be—let alone trying to find middle ground for them all.

Such preparation efforts must identify and immediately address disputes that are ripe for prompt resolution. Some parties will want to settle quickly, while others want to continue fighting. The ripe-for-settlement disputes need to be identified and addressed as quickly as possible.

Such preparation efforts must narrow the issues in dispute. It’s often surprising what some advance discussions can accomplish toward finding common ground and minimizing the scope of disputed issues.

Once a structure and organization are established, once early settlements are accomplished and once disputed issues are narrowed, the multiple parties will be ready for final mediation sessions to resolve remaining disputes.

Action Item. Preparation efforts must be made in a multi-party mediation before the parties will be ready for final mediation sessions.

This post is Part Five in a series of six articles explaining how and why bankruptcy mediation needs a different model from the one-and-done session commonly used in non-bankruptcy cases.

 

Multi-Party Mediation: How it Can Work Well — Detroit and Archdiocese Examples

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How to manage lots of people

By Donald L. Swanson

Multi-party mediation can work effectively in bankruptcy, especially on plan confirmation issues.  Such effectiveness is apparent in the City of Detroit and the Archdiocese of Milwaukee bankruptcy cases.

Keep in mind that these Detroit and Archdiocese mediation efforts aren’t merely multi-party in the sense of five or six parties.  These mediation efforts involve many, many parties.

The following are a listing of some similarities and a primary difference in these two mediation efforts.  Presumably, such information can be helpful and instructive for future mediation efforts in other cases.

Some Similarities

Both have large numbers of people involved in the mediation.  For example:

–Detroit has 40 people in the conference room at the initial mediation session on pension issues.

–The Archdiocese of Milwaukee has 23 parties and their professionals in the conference room at the initial mediation session [“It was like the Paris Peace talks,” says James Stang, legal counsel to the Official Creditors Committee].

Both hold many mediation sessions over long periods of time.

Both utilize every conceivable type of mediation session: joint sessions for all or many parties; caucus sessions for one or a few parties; shuttle diplomacy by the mediator; direct communications between the parties; sessions by email and other electronic means; sessions by telephone or video conference; etc.

The mediators in both cases are proactive and manage the mediation process.  For example:

–Mediators decide which parties to meet with next and when.

–Mediators decide which issues to prioritize and which to defer.

–Mediators decide when to recess a session and when to call a new one.

–Mediators decide which parties are invited (or not invited) to a particular session.

The mediations in both cases are prodded toward settlement by critical judicial rulings:

–The Bankruptcy Judge in the Detroit case rules that “state law cannot reorder the distribution priorities of the bankruptcy code” and that the City’s bankruptcy filing “does not violate the pension clause of the Michigan Constitution” (Doc. 1945, at 93).  This ruling prompts pension claimants to focus on negotiating the best possible deal in mediation.

–The Seventh Circuit Court of Appeals in the Archdiocese of Milwaukee case rules that neither the Religious Freedom Restoration Act nor the First Amendment to the U.S. Constitution makes the Cemetery Trust funds off-limits to claims of sex abuse claims.  This ruling prompts the Archdiocese to focus on providing substantial benefits to sex abuse claims in mediation negotiations.

The total amount of professional fees incurred in both cases is incredibly high.

The Primary Difference

A critical judicial ruling in the Detroit case occurs early — within five months after the bankruptcy filing.

–Although an appeal is taken from this ruling, the parties seem to accept the validity of this ruling (or, at least, the possibility that it might be upheld on appeal) for mediation purposes.

–Accordingly, the mediation process moves forward with dispatch.

The critical judicial ruling in the Archdiocese case occurs on appeal to the Seventh Circuit — more than four years after the bankruptcy filing.

–Rulings on the matter by lower courts reach conflicting decisions (the Bankruptcy Court rules in favor of the Official Creditors Committee; while the U.S. District Court rules in favor of the Archdiocese).

–And it appears that neither party held much respect for (or gave much credence to) a lower-court’s decision in favor of the other party.  And their positions in the case reflect that fact for more than four years.

–Accordingly, the Archdiocese mediation process languishes until the Seventh Circuit issues it’s ruling.

***Note:  Much of the foregoing information comes from interviews with two people:  (1) Eugene Driker, a mediator in the City of Detroit bankruptcy, and (2) James I. Stang, legal counsel to the Official Creditors Committee in the Archdiocese of Milwaukee bankruptcy.

 

Compelling a Mediator to Testify: Here’s How it’s Done

 By: Donald L Swanson

“Testimony from the mediator would be crucial . . . and . . . refusing to compel that testimony posed a serious threat.”

“It became clear that the mediator’s testimony was essential to doing justice here–so we decided to use it.”

Wayne Brazil, Magistrate Judge, U.S District Court for Northern California

imageThe case is Olam v. Congress Mortgage Co., et al., 68 F.Supp.2d 1110 (N.D. Cal. 1999).

Plaintiff files suit against her lender for violating the federal Truth in Lending Act and related standards.

Before trial, the parties agree to mediate their disputes.  A mediation session occurs, and a binding settlement agreement is signed.

Thereafter, plaintiff suffers settler’s remorse and wants to back out of the deal.

Defendants insist on enforcing the deal, and they file a Motion with the Court to do just that.

Plaintiff hires a new attorney and files an Opposition to the enforcement Motion. The Opposition document identifies two grounds for setting aside the settlement agreement:

–the agreement is unconscionable; and

–plaintiff signed the agreement under undue influence.

All parties to the enforcement dispute agree to waive mediation confidentiality and privilege restrictions.  And they all want to use testimony from the mediator.

A major issue in the case is this:

Should the mediator be compelled to testify?

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Olam v. Congress Mortgage Co.

The Magistrate Judge writes his opinion on the matter.  The opinion is long.

No . . . that’s an understatement: “long” does not do the opinion justice.  The opinion’s length is massive:

–it has more than 25,000 words; and

–it covers 42 pages in the F.Supp.2d Reporter — this set of books has large pages, small type, single spacing, and no pictures.

The Magistrate Judge agonizes in his opinion over such issues as these:

–Which law controls, California’s or Federal?

–What is the factual background?

–To what extent is a waiver of confidentiality by all parties effective?

–What legal standards control the analysis?

–To what extent is the mediator’s privilege inviolable?

–How should competing interests of justice be evaluated and weighted?

–What procedural safeguards should be instituted when a mediator is compelled to testify?

–What merit, if any, do plaintiff’s unconscionability and undue influence claims hold in light of available evidence?

The Magistrate Judge, ultimately, decides to compel the mediator to testify and receives other evidence from the mediation session.  The Magistrate Judge then announces his decision in the opinion.  He, (1) rejects plaintiff’s unconscionability and undue influence claims, and (2) grants defendants’ Motion to enforce the mediation agreement.

According to the Casemaker research tool, this Olam v. Congress Mortgage Co. opinion has been cited 25 times as authoritative, with no negative cites.

What do you all think about this?

 

ACTION ITEM: from Part Four — The Freshness of the Fight

Action Item. In every bankruptcy mediation where the fight is still fresh, we need to recognize that a one-and-done session expectation is probably unrealistic—and adjust our expectations accordingly.

6 Reasons Why Bankruptcy Mediation is a Process, Not a One-and-Done Session: PART FOUR — FRESHNESS OF THE FIGHT

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Image is from Kuriositas.com

By Donald L. Swanson

I’m in a mediation session for a state court commercial case. The parties have been at it for a couple years. And everyone’s expectation is that this will be a one-and-done session.

One of the first things Plaintiff’s president says to me is, “Can you believe we’ve paid over [$xxx] in attorney fees?!”

One of the first things Defendant’s president says to me is, “I absolutely hate sitting through depositions!”

Additionally, it’s obvious from the beginning that everyone grasps this concept: “Our case will be a close-call at trial, and we might lose.”

And I’m thinking, “The parties are weary of the fight and want to get it over.  This case will settle today—100% certainty.”

Sure enough, both parties are highly motivated to settle—and they get it done.

By contrast, I’m in another mediation session over Chapter 11 plan confirmation disputes between two parties.

Denial of confirmation, with opportunity to amend, occurred recently.  And trial on the amended plan is scheduled in about a month.

The confirmation battle has been running for several months. But the battle has been limited:

–no written discovery, no depositions, no inspection of property, no preliminary motions, no pretrial motions; and

–fees incurred to date are relatively small on both sides.

In the mediation session, no one is complaining about fees or about depositions. No one is weary of the fight. Gloves are up!

Yet, it’s clear that expectations are for a one-and-done session.

And I’m thinking, “This could be a tough day. Is a successful one-and-done session possible? . . . I don’t know . . .”

Sure enough: one-and-done doesn’t work. The fight is too fresh.

So . . . here is where the one-and-done model breaks down.  In a one-and-done, the mediation is now over.  And the parties are not going to reconvene the session.

A conscientious mediator might follow-up informally with the attorneys to encourage additional discussions.  But such follow-up is, typically, a gratuity: the mediator’s follow-up is without additional charge.

Such a freebie follow-up model is inadequate in bankruptcy — for the various reasons discussed in this series of articles.

Action Item. In every bankruptcy mediation where the fight is still fresh, we need to recognize that a one-and-done session expectation is probably unrealistic—and adjust our expectations accordingly.

This post is Part Four in a series of six articles explaining how and why bankruptcy mediation needs a different model from the one-and-done session commonly used in non-bankruptcy cases.

 

Don’t Let This Happen to You: Milwaukee Archdiocese Bankruptcy – Part Four, Overplaying Their Hand

 “Do not go out hastily to argue your case;
Otherwise, what will you do in the end,
When your neighbor puts you to shame?”
–Prov. 25:8

By: Donald L. Swanson

It now seems obvious that the Archdiocese of Milwaukee overplays its hand after receiving a favorable ruling from the U.S. District Court in Milwaukee.

Here is a chronology:

–On January 4, 2011, the Archdiocese of Milwaukee files its voluntary Chapter 11 Petition.

–On June 28, 2011, the Archdiocese of Milwaukee files a lawsuit asking the Bankruptcy Court for a declaration that it’s $55 million Cemetery Trust fund is off-limits from creditor claims.

–On January 17, 2013, the Bankruptcy Court rules against the Archdiocese on summary judgment, and the Archdiocese appeals to the U.S. District Court.

–On July 29, 2013, the U.S. District Court reverses, ruling in favor of the Archdiocese, and the Official Creditors Committee appeals to the Seventh Circuit Court of Appeals.

–On March 9, 2015, the Seventh Circuit Court of Appeals agrees with the Bankruptcy Court and reverses the U.S. District Court.  The Archdiocese begins its appeal process to the United States Supreme Court

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James I. Stang — founding partner of the Pachulski, Stang, Zeihl & Jones law firm of Los Angeles

  James I. Stang, is legal counsel to the Official Creditors Committee in this Archdiocese case and in at least a half-dozen similar cases.  Mr. Stang says the negotiating position of the Archdiocese of Milwaukee is always minimal-benefits to sex abuse claimants . . . until the Seventh Circuit Court of Appeals rules against the Archdiocese on appeal.  Only then does the Archdiocese change its negotiating position toward providing substantial-benefits to sex abuse claimants.

What was the Archdiocese thinking?

–Did they not realize the Seventh Circuit might agree with the Bankruptcy Court?

–Did they not realize a reversal by the Seventh Circuit would put them in an incredibly weak mediating position?

–Why not immediately use the District Court’s favorable ruling as leverage in pursuing a mediated settlement?

–And why not commit the millions of dollars of professional fees to be incurred between July 29, 2013 and March 9, 2015, towards paying sex abuse claims instead?

In retrospect, these questions are difficult to answer.

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“Overplay your hand,” is defined by Merriam-Webster online like this:

“to make a mistake because you believe your position is stronger or better than it really is.”

It looks like that’s what the Archdiocese did—and thereby missed a prime settlement opportunity immediately following the District Court’s favorable ruling.

A Plausible Rationale?

Perhaps a rationale for the Archdiocese’s position arises from the Committee’s demonstration at all times that it gives little, if any, credence to the District Court’s ruling.  Here’s why such an explanation is plausible:

–Beginning on August 12, 2013, the Official Creditors Committee files motions, in both the District Court and the Seventh Circuit, seeking a post-ruling recusal of the U.S. District Court Judge and an order vacating his ruling.

–Mr. Stang explains that, after the District Court Judge issues its reversal ruling, the Committee discovers that the District Court Judge holds previously-undisclosed conflicts of interest: namely,

(i) the Judge’s parents, two sisters, a brother-in-law, an uncle, an aunt and his parents-in-law are all interred in cemeteries owned by the Archdiocese,

(2) the Judge purchased his parents’ burial rights under a contract that obligates the Archdiocese to maintain their crypts, and

(3) maintenance costs for his parents’ burial site are being paid by the Cemetery Trust funds in question in the lawsuit.

The Committee asserts that “a reasonable person would question the judge’s impartiality” in such a situation because the Judge “would be emotionally attached to the well-being of his family members’ resting places.”

The Seventh Circuit Court of Appeals reverses and vacates the District Court’s ruling on the merits.  The Seventh Circuit also rules that the undisclosed involvements of the Judge’s close relatives in the case is “problematic.”

Nevertheless, the Seventh Circuit does not grant the recusal motion for the limited reason that the District Judge would no longer be involved in the case:

–since the Seventh Circuit “vacated the summary judgment order” and since the case “shall be assigned to a new judge on remand,” the Seventh Circuit rules that it “need not reach the merits of the Committee’s [recusal] motion.”

Ouch!!

Back to the plausible rationale:  perhaps the seemingly-intractable mediating position of the Archdiocese (prior to the Seventh Circuit’s ruling) is a reflection of the Official Committee’s contrary position that is equally intractable?  The Committee’s position is intractable, perhaps, because:

–The Committee views the District Judge’s conflict-of-interest position and the viability of his order on appeal with a degree of contempt.

–So the Committee gives no no credence, whatsoever, to the District Court ruling for mediation purposes.

Perhaps the Archdiocese had no choice but to either surrender (which it ultimately did after the Seventh Circuit issues its ruling) or see the fight through to a Seventh Circuit ruling?  Regardless, the Archdiocese chose the latter (i.e., seeing the fight through) for better or worse . . . turns out it was for the worse.