Another Demonstration of Uncertainty Over Mediation Confidentiality in Bankruptcy

Uncertainty on what it is, what it means, and how it is to be used

By: Donald L. Swanson

“The court declines to adopt a new mediation privilege under the facts of this case.”

Judge Cynthia A. Norton, U.S. Bankruptcy Judge  — December 19, 2016

The case is In re Lake Lotawana Community Improvement District, a Chapter 9 municipale bankruptcy in the Western District of Missouri (Case No. 16-42357).  The issue is whether the municipal debtor satisfies this Chapter 9 eligibility requirement:

–“the debtor . . . has negotiated in good faith with creditors” (11 U.S.C. § 109(c)(5)(b)).

To evaluate the “negotiated in good faith” requirement, In re Lake Lotawana creditors request discovery of mediation statements from Debtor’s pre-bankruptcy mediation efforts.

Mediation Statements are Protected from Discovery

The Court denies the discovery request on December 19, 2016.  But it takes a 22-page opinion to do so because, (i) there is no “mediation privilege” under Federal law, and (ii) there is no local rule on mediation confidentiality in the Western Missouri Bankruptcy Court.

Here are the legal theories and rationales the judge goes through to prohibit discovery of the mediation statements.

  1. The “ordinary work product” privilege protects a mediation statement submitted to a mediator, because the statement is prepared in “anticipation of litigation.”  And the creditors in this case fail to demonstrate a “substantial need” or “undue hardship” to overcome this privilege.
  2. The “opinion work product” privilege protects the “mental impressions, conclusions, opinions, or legal theories of a party’s attorney.” While not “absolute,” this privilege can only be overcome in “rare and extraordinary circumstances,” which don’t exist in this case.
  3. The § 109(c)(5)(b) “negotiated in good faith” eligibility element is not a statutory waiver of confidentiality protections.  Judge Norton distinguishes these legal authorities:
    1. In re City of Stockton, 475 B.R. 720 (Bankr. E.D. Cal. 2012), authorized disclosure of mediation information to the Court – not to opposing parties.
    2. “Bad faith” claims against insurers, which focus on whether the insurance company “properly processed the insured’s claim,” allow for discovery of private information because the insurance company has a “virtual monopoly over” the evidence required to establish good faith. No such monopoly exists in this case.
  4. The “sword and shield doctrine” provides that “a party who raises a claim that will necessarily require proof by way of a privileged communication cannot insist that the communication is privileged.” The Judge explains the inapplicability of this doctrine to mediation statements in this case as follows:

–The mediation statement “is certainly not necessary to establish good faith negotiation. There is other evidence, including the District’s offers and counteroffers that establish whether the District negotiated in good faith.”

[Editorial Note:  From the foregoing quotation, it’s obvious that the Court intends to allow discovery and receive evidence on offers and counter offers made during the mediation session.  So . . . is other mediation information discoverable or admissible too?]

  1. “Third-party disclosure” of the mediation statement to the mediator and to the Court for in camera review is not a waiver of any privilege because the disclosing parties did not actually intend that an opposing party see the statement.

[Editorial Note:  Under this rationale, a mediating party who voluntarily discloses a mediation statement to an opposing party is waiving this protection.]

Does a Mediation Privilege Exit?

On the question of whether a “mediation privilege” or “settlement privilege” [these two terms are used interchangeably] exists, Judge Norton says:

–“The Eighth Circuit has not addressed the merits of recognizing a federal common law settlement privilege.”  [Note: The Western District of Missouri is part of the Eighth Circuit.]

–“Of the Circuits that have addressed the issue, only the Sixth Circuit has adopted a settlement privilege.”

–“The Seventh Circuit and Federal Circuit have declined to adopt the privilege.”

Should a New Mediation Privilege be Created?

Judge Norton identifies the following four factors for establishing a new privilege under Fed.R.Evid. 501:

–“(1) whether the asserted privilege is ‘rooted in the imperative need for confidence and trust’; (2) whether the privilege would serve public ends; (3) whether the evidentiary detriment caused by an exercise of the privilege is modest; and (4) whether denial of the federal privilege would frustrate a parallel privilege adopted by the states.”

On this new privilege issue, Judge Norton concludes:

–“Here, the District has failed to address the Supreme Court’s factors for recognizing a new privilege. The District has also failed to produce evidence to support why those factors are satisfied in this case. Thus, the court finds that the District has failed to ‘overcome the significant burden of establishing” a new privilege.'”


The absence of a rule on mediation confidentiality (Federal or local) is problematic for the In re Lake Lotawana Community Improvement District case:

–The Bankruptcy Judge goes to great reasoning lengths to keep the mediation statement confidential.

–Yet, in the same opinion, the Bankruptcy Judge offers up other types of information from the mediation session, itself, to be used as evidence.

This is a problem.   And the problem needs to be addressed:

–A Federal rule on mediation confidentiality needs to be adopted; and

–Every bankruptcy court needs to assure that its own local rules provide for mediation confidentiality.



Here’s a big “thank you” to Bill Rochelle of “Rochelle’s Daily Wire” (a publication of the American Bankruptcy Institute) for promptly bringing this new opinion to our attention.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Blog at

Up ↑

%d bloggers like this: