Chapter 11 Debtor successfully mediates confirmation disputes with a half-dozen creditors. Now, a hold-out creditor moves for discovery of the mediation communications in an effort to torpedo plan confirmation.
The mediating parties come to realize that their Bankruptcy Court has no local rule requiring mediation confidentiality. And, of course, there is no Federal bankruptcy rule on mediation confidentiality, either.
So, the mediating parties set their sights on the Federal rule of evidence that protects confidentiality of settlement negotiations. Hopefully, they think, Fed.R.Evid. 408 will stand-in-the-gap for arguing that their mediation communications are privileged.
Rule 408 prohibits admissibility of the following types of evidence “to prove or disprove the validity or amount of a disputed claim or to impeach”:
(1) “promising, or offering” to settle; and
(2) “conduct or a statement made during compromise negotiations about the claim.”
Two ideas behind this Rule, according to its official Notes, are:
–Irrelevance. Settlement negotiations may be motivated by a desire for peace or by a multitude of other reasons that have nothing to do with the merits of the case; and
–Policy. Confidentiality promotes the policy that favors the settlement of disputes.
Unfortunately, the evidence privilege, afforded by Fed.R.Evid. 408, leaks like a sieve. Here are some reasons why:
–Enumerated Exceptions. Rule 408 allows the court to admit settlement-related evidence “for another purpose.” Examples provided in the rule include, “proving a witness’s bias or prejudice” or “negating a contention of undue delay.”
–Judicial Exceptions. Settlement discussions have been admitted:
–To establish that the threshold amount-in-controversy exists for Federal diversity jurisdiction;
–To determine when a statute of limitations began to run;
–To determine the reasonableness of an attorney fee award;
–To determine whether a settlement agreement has been performed or breached.
Sieve-like holes in the Rule 408 privilege are even more-pronounced in the context of discovery.
Fed.R.Civ.P. 26(b) authorizes discovery of “any nonprivileged matter that is relevant to any party’s claim or defense.” This Rule 26(b) is incorporated into bankruptcy contexts by Fed.R.Bankr.P. 7026 & 9014(c).
Based on such discovery-rule language, and since Rule 408 “does not provide a blanket ban” on admissibility, “most courts reject a discovery privilege for settlement-related materials.”
Accordingly, “it is wise to assume that settlement-related evidence will be discoverable.”
Unfortunately for these mediating parties, Fed.R.Evid. 408 cannot be relied upon to protect the confidentiality of their mediation information.
Note: I am indebted for information and quotations in this article to Burns, Admissibility of Settlement-Related Evidence at Trial, American Bar Association, July 31, 2013.