Five Lessons From A New Court Ruling: How a Mediated Settlement Creates Further Disputes

By: Donald L. Swanson

The Court’s opinion is new: entered December 23, 2016. The case is In re Hunt, Case No. 14-13109, in the New Mexico Bankruptcy Court.

The dispute is between the Chapter 13 Debtor and his home mortgage lender. Scheduled value of the home is $155,000, and the mortgage lien balance is $223,631 at bankruptcy filing (October 10, 2014).

Debtor’s Chapter 13 plan is confirmed on January 15, 2016, while Debtor’s objection is pending to various fees and costs included in the mortgage lender’s proof of claim.

Mediation and Preliminary Rulings

Debtor and the mortgage lender agree to mediate all disputes over the claim objection. The mediation session occurs on May 3, 2016. A Mediation Agreement is signed that day, which provides:

–Lender will pay Debtor’s attorney “the sum of $3,000.00”; and
–Lender will allow Debtor’s attorney “to continue to pursue her claim” for recovering attorney fees of approximately $24,000 from the mortgage lender.

A Motion to approve the Mediation Agreement is filed by the mortgage lender on May 31, 2016. On the same day, Debtor files his “Amended Motion for Determination of True Party in Interest and Application for Attorney Fees and Costs.” In this document Debtor:

–Seeks a determination of “which entity is true party in interest with standing”; and
–Claims a right to recover legal fees from the mortgage lender because they “have unnecessarily caused Mr. Hunt to incur substantial legal costs as a consequence of their actions and bad faith.”

Debtor also files, on the same day, an objection to the Motion to approve the Mediation Agreement.
Thereafter, the Court approves the Mediation Agreement and reserves Debtor’s fee requests for later resolution. And Debtor’s attorney files an updated request for fees in the sum of $67,235.34 (and counting).

Ruling of December 23, 2016

On December 23, 2016, the Bankruptcy Judge enters his ruling denying Debtor’s request to recover legal fees from the mortgage lender. The opinion itemizes each of Debtor’s numerous legal theories for recovery — and rejects them all.

Here is Debtor’s litany of now-rejected legal theories:

–Breach of the duty of good faith and fair dealing, under the bad faith exception to the “American Rule” that ordinarily disallows legal fees
–28 U.S.C. § 1927, which allows a federal court to sanction a party for vexatious litigation
–Fed. Rule of Bankr. P. 9001, which allows a court to sanction a party or attorney for filing papers for improper purposes and/or without suitable legal or factual foundation
–Fair Debt Collection Practices Act (15 U.S.C. § 1692 et seq.), which allows recovery of legal fees against a debt collector incurred in “any successful action to enforce” the Act
–Equal Credit Opportunity Act (15 U.S.C. § 1691 et seq.), which makes a lender who fails to comply with the Act liable to the borrow for legal fees
–New Mexico Unfair Practices Act (N.M.S.A. § 57-12-1 et seq.), which allows legal fees to a prevailing party
–The Mediation Agreement makes the losing party liable for legal fees of legal fees of the prevailing party
–Bankruptcy Rule 7054, which authorizes the court to “allow costs to the prevailing party”
–Pre-Judgment Interest (N.M.S.A. § 58-8-4), which provides for a 10% interest addition to a money judgment
–The Mortgage, which authorizes the lender to recover reasonable attorney fees in certain circumstances
–11 U.S.C. § 105, which authorizes an award of attorney fees when a person is sanctioned for contempt
–Discovery Sanctions (Fed. Rule of Bankr. P. 7037), which authorizes an attorney fee award if a motion to compel discovery is granted

The Bankruptcy Judge’s opinion has some less-than-favorable words for Debtor’s counsel, such as:

“The extent of litigation that has occurred over Debtor’s $223,000 home mortgage is extraordinary. . . . some of the fault must be laid at the feet of Debtor’s counsel. . . . the Court has formed the distinct impression that the result achieved . . . could have been accomplished much more easily and cheaply had Debtor’s counsel approached the matter differently.”

“Nothing Debtor’s counsel settles ever seems to stay settled. She settled the objection to Lender’s proof of claim, but now asks the Court to set the claim objection for final hearing. She negotiated the LMA, but now seeks to reform it. She signed the Mediation Agreement but immediately challenged Lender’s ownership of the subject note and mortgage.”

“[T]he jump in claimed fees from $27,000 on May 31, 2016 (after the matter had been settled!) to approximately $67,000 on September 12, 2016 is remarkable.”

Five Lessons

There should be many hard-knocks lessons from the foregoing circumstances. How about these five lessons for starters:

1. Never leave an issue for later resolution in a mediated settlement agreement when the opposition has already demonstrated a dogged persistence in pursuing litigation.

2. Never underestimate the capacity of a determined opponent to carry-on a fight beyond the realm of reasonableness.

3. When one of the mediating parties doesn’t want to settle, the mediation effort is doomed.

4. When the dispute is about legal fees claimed by one side from the other and is based on allegations of wrongful conduct, the degree of difficulty in reaching a mediated settlement increases.

5. Unreasonable positions aggressively pursued are a death-knell of mediation efforts.