Mediation Confidentiality Protection: A “Very High Bar to Overcome”

By: Donald L. Swanson

The legal opinion is In re Residential Capital, LLC, 536 B.R. 132 (Bankr. S.D.N.Y.  2015).

The Facts, Including Mediation

ResCap bought residential mortgage loans and sold those mortgage loans to others.

When a mortgage loan crisis hits, a decade or so ago, many of these mortgage loans go bad.  Those who bought mortgage loans from ResCap experience heavy losses and demand indemnification from ResCap, forcing ResCap into bankruptcy.

In the Bankruptcy, ResCap gets its Chapter 11 plan confirmed, using a confidential mediation process.  Then, to recover its losses, ResCap begins suing the businesses from whom it bought the mortgage loans.

To recover in such lawsuits, ResCap must prove that its mediated settlements for plan confirmation were “reasonable.”  So, defendants in such lawsuits insist that mediation communications are “critical” to this issue, and they ask the Bankruptcy Court to allow discovery of mediation information.  ResCap objects.

The Mediation Confidentiality Law

Judge Martin Glenn, Bankruptcy Judge for the Southern District of New York, describes the governing legal standard, like this:

“In the Second Circuit, a party seeking disclosure of confidential mediation communications must demonstrate,

(1) a special need for the confidential material,

(2) resulting unfairness from a lack of discovery, and

(3) that the need for the evidence outweighs the interest in maintaining confidentiality.”

“A movant seeking to modify a protective order has a very high bar to overcome and must establish all three elements of this three-part test to warrant disclosure of otherwise non-discoverable documents.”

–First Factor: “Special Need”

The Defendants claim a “special need” because the mediation communications “are the most probative evidence of what was known to the Debtors at the time of settlement.”

However, Judge Glenn rules that defendants “have not established a special need,” because the legal standard of  “reasonableness” is “an objective test” that focuses on objective standards, rather than on anyone’s subjective expressions.

Judge Glenn determines that objective “reasonableness” can be resolved without relying on confidential communications evidencing “subjective beliefs and opinions” about the settlements.

–Second Factor: “Unfairness”

Judge Glenn concludes that defendants “have not established that it would be unfair to deprive them of the mediation communications” because:

defendants can rely on “other relevant evidence” to address objective reasonableness;

denying defendants access to mediation communications “does not prejudice their ability” to challenge the reasonableness of the settlements;

defendants “remain free to challenge the merits of the claims” based on defenses available at the time; and

defendants “can challenge the methodologies and conclusions in the publicly available expert reports” offered in support of the settlements.

–Third Factor: “Need Outweighs Confidentiality”

Judge Glenn concludes that defendants failed to prove that “their need” for mediation information “outweighs” the need to protect mediation confidentiality, observing that mediating parties hold a confidentiality expectation that must not be “frustrated.”

Additional Issues: “Scope” of Confidentiality

Judge Glenn also addresses three other issues.  Based primarily on confidentiality language in the mediation confidentiality order, he rules as follows:

1. Confidentiality protections extend to communications that occur “outside the geographical and temporal limits of the actual mediation sessions.”
2. Information that “can be gleaned” from non-protected sources or through independent research may be freely used.
3. Mediation confidentiality covers communications made prior to “the close of mediations,”  which occurred in this case at the date of plan confirmation.

Editorial Note:

The Second Circuit’s three-factor test for mediation confidentiality, as applied by Judge Martin Glenn of the S.D.N.Y. Bankruptcy Court, seems to be a wise and well-reasoned and sensible approach.

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