How the Mediation Privilege Works, with an “Opened the Door” Exception: a New Bankruptcy Court Ruling

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Opened the Door

By: Donald L. Swanson

Four law firms are squabbling over how to divide a $20 million attorney fees fund in a bankruptcy case.  [Insert your own derisive epithet here.]

The Facts

A two-year and multi-session mediation results in settlements of asbestos-related claims.  One such settlement involves a $90 million payment from an insurance company, $70 million of which goes to asbestos claimants and the remaining $20 million is the attorney fees fund in question.  The Bankruptcy Court approves the settlement and finds the $20 million attorney fees provision to be “fair, equitable and reasonable in light of the complexity of the litigations and the size of the recoveries.”

However, the mediated settlement does not allocate the $20 million fund among the claiming attorneys.  So, the Bankruptcy Court is asked to resolve the $20 million division squabble.

The Bankruptcy Court Ruling

The Bankruptcy Judge from the Southern District of New York rules, in a “Memorandum Decision” dated August 26, 2016, that the $20 million fund is to be divided equally between the four squabbling law firms: $5 million to each firm.

In an interesting twist, the Bankruptcy Judge’s ruling makes two observations about the $20 million amount:

–“This Court has already found the $20 million award to Settlement Counsel to be fair and reasonable.”

–“It is highly unlikely any such award could be sustained as reasonable on the basis of quantum meruit” because:

“that would mean roughly 22 months of compensable work.  Assuming each individual member of Settlement Counsel worked 100 hour weeks dedicated solely to this mediation, never taking any vacation for almost two years, working a constant four weeks a month, totaling a whopping 8,800 hours for 22 months, Settlement Counsel would have to bill at an hourly rate of $568 just to merit an award of $5 million.

To no one’s surprise: this ruling is now on appeal.

The Mediation Privilege

Prior mediation discussions could be relevant and highly significant evidence for the resolution of this $20 million attorney fees dispute.

Yet the parties and the Court, at trial, take the mediation privilege seriously and apply it with force.  The Bankruptcy Court explains:

“The only evidence the Court has is that the mediation sessions took place, and that Settlement Counsel participated in those discussions. Both Plaintiffs and Defendants vociferously objected to the admission of any substantive evidence from the mediation discussions.”

In footnote no. 8, the Court provides some detail on how the mediation privilege worked at trial (emphasis added):

“Q: So your testimony is that Mr. Bogdan agreed that you and Mr. Madeksho should have $20 million to split. Is that correct?

A: That our compensation should be $20 million, yes.

Q: And when did that occur?

A: That happened while we were in mediation negotiating the fee portion of this.

THE COURT: Strike

DUFFY: Move to strike, Your Honor.

        THE COURT: It’s stricken.

MR. DUFFY: Thank you.

Mr. HADDAD: Your Honor, I think he was asked a question –

THE COURT: He was asked a question, but he said what was going on in mediation.

The “Opened the Door” Exception

After trial, however, the Court rules that the above-quoted testimony would be admitted to show that authority to send a significant email had been received “during mediation.”   Such testimony is admissible, the Court rules, because counsel had “opened the door” to such testimony in prior questioning.

Notably, the opened-door does not swing wide-open.  It swings open only a little–allowing a narrow item of information to slip through and into the record of the case.

Unfortunately, the Court’s ruling does not provide any detail of the prior testimony or provide any legal analysis on this exception.  So, I suggest you go to the opinion (it’s linked above) and read footnote no. 8 and the corresponding text of the ruling.

The Conclusion

This ruling provides an excellent example of how the mediation privilege can be given full weight and application, while still subject to limited exception.

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