Heavy Penalties for Sabotaging a Court-Ordered Mediation: “Unclean Hands”

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Sabotage?

By Donald L. Swanson

“The purpose of the unclean hands doctrine is not to protect the defendant – it is to protect the court from becoming an aider and abettor of iniquity.” 

Baek v. Halvorson (In re Halvorson), 581 B.R. 610, 637 (Bankry.C.D.Cal. 2018)

Never do this: sabotage a court-ordered mediation.

The Baek v. Halverson case shows why.  It’s a life-is-a-sitcom set of facts in which mediating parties get their adversary arrested by the U.S. Marshall during a court-ordered mediation — in the mediating Judge’s courtroom.  A trial ensues on unclean hands issues, and heavy penalties are imposed.

Here’s what happened.

Life is a Sitcom

–John’s Bad Acts

John Halvorson and Grace Baek marry in 2005. That same year, John begins business dealings with Grace’s brother, Richard.  The business dealings become contentious, and the marriage craters.  

Litigation begins, including a divorce and five other lawsuits between John on one side and Grace and Richard (the “Baeks”) on the other.  The lawsuits become intense and expensive.  And Baeks prevail, getting a “General Judgment of Contempt” against John for such bad acts as forging signatures on a purported prenup (by electronic cutting and pasting from a quitclaim deed) and testifying to their authenticity.

The General Contempt Judgment includes these sanctions against John: (i) dismissal of all his claims and counterclaims, (ii) dismissal of his defenses in one lawsuit; and (iii) an award of $750,000 attorneys’ fees to Baeks.

Baeks also, (i) file police reports against John for forgery and embezzlement, and (ii) ask administrative agencies to revoke John’s real estate licenses.

Then Baeks make a “final show of mercy” offer, requiring John to accept the following terms within 24 hours: sell his residence and pay the proceeds to them, sell his Mom’s 40-years residence (she’s 78 year-old and in declining-health) and pay the proceeds to them, stipulate to a non-dischargeable $600,000 judgment, pay Grace $4,000 per month for 5 years, and pay for detailing his vehicle and deliver it to Grace.  

John rejects the “mercy” offer.  So, Baeks move to enforce the judgment.  

–A New Insider Lien

Meanwhile, John is co-owner of Mom’s residence.  Dan (a brother/son) had been loaning money to both John and Mom.  So, to protect Mom’s residence, John and Mom grant a $125,000 promissory note to Dan secured by a deed of trust on Mom’s residence.  

The Baeks learn of the new deed of trust and file a fraudulent transfer lawsuit to avoid it.

–Bankruptcy & Court-Ordered Mediation

So, John files Chapter 7 Bankruptcy.    

Within the bankruptcy, (i) John’s Chapter 7 Trustee becomes substituted-in as real party in interest on Baeks’ pre-petition claims, (ii) Baeks file suit to deny John’s discharge of their claims, (iii) John receives a discharge of all other claims, and (iv) Grace sues to protect her rights as John’s not-yet-divorced spouse.

The Bankruptcy Judge orders John, Mom, Dan, Baeks and Chapter 7 Trustee into mediation.  The parties sign a stipulation for mediation confidentiality but do not seek Court approval of its terms.

–Baeks Work With Police

Baeks had developed a relationship with police officers and use this relationship to get a grand jury indictment against John.  Then, Baeks want John arrested.  

Four days before the mediation, Baeks’ attorney speaks with a police officer, emphasizing Grace’s desire that John be arrested and informing him that John would be in a Bankruptcy Court for mediation.  Here’s the attorney’ confirmation email:

–“Thanks for talking with me. Please let me know if there is anything you can do to help pick him up.”

Five minutes later, the police officer emails this to his superior:

–Baeks are “willing to pay extradition cost. They would even prepay it”; and “Victim wants him arrested.”

The following emails ensue between the police officer and Baeks’ attorney:

Officer:  “I am only able to do this job because of justice and karma. Let’s touch bases toward the end of the week.”

Attorney:  John “was ordered to appear at a proceeding at the bankruptcy court in Riverside, California. He will be there tomorrow at 10:00 am”; and he emails John’s photo to the Officer.

Officer:  “Alternatively there is Plan B where we let him know that there is a warrant and show him the courtesy of giving him the opportunity to turn himself in”; and “You have a copy of the indictment. I would think that the admin judge or opposing counsel would want to know about it, maybe?”

Attorney:  “I know Grace appreciates everything you are doing in this case”; but he did not reply to the suggestion about informing the Judge.

The Mediation and Arrest 

A Bankruptcy Judge serves as mediator, and the court-ordered mediation is to occur in her chambers and courtroom.

On mediation day, the police officer and Baeks’ attorney exchange these emails:

Officer:  “I have confirmed this morning with the Riverside police that they will go talk to [John] this morning for me, in the federal courthouse”; and “I will ask they inform him of the warrant, to call me, and advise him to turn himself in.”

[Then, the Officer makes a decision to have John arrested by the U.S. Marshall at the mediation.]

Attorney: “He’s here. 3rd floor Conference room right next to courtroom 301. The conference room is room 346.”

Officer: “Marshalls working on it but I am worried about lunch break for them and target. Is target set to return after lunch?” 

Attorney: “He’s not leaving anytime soon, I do not think. He’s waiting to talk to the judge. . . . I just don’t think he’s going to take off anytime soon.”

Then, the U.S. Marshals Service arrests John at the mediation and in the mediating Judge’s courtroom.

The mediating Judge learns of the arrest plan a very short while before it happens.  She is very upset:  “I’ve never had this happen before,” she says.  Then, “The debtor has just been arrested.”  Baek’s attorney then hands a copy of the indictment to the Judge, whose reaction is described as “flabbergasted.”  Whereupon, she announces, “The mediation is over.”  It ended without any settlement.  

The following “high five-ing” emails ensue between the police officer and Baeks’ attorney:

Officer: “I was informed he is in custody.” 

Attorney: “I was just told by the judge the same thing. We appreciate your work on this. Grace says thanks, and that she is really greatful for the way you’ve approached the whole thing.”

Officer: They “may allow him to post bail. If not, next court date is TUESDAY!” And “I will touch base on Tuesday. It sounds like the therapeutic effect of seeing the handcuffs go on was not observed by you and your client. Perhaps another time.”

Proceedings After the Mediation

Thereafter, a bench trial occurs on the criminal charges against John, resulting in a conviction for forgery and identity theft.

Meanwhile, the Bankruptcy Judge moves the lawsuits between Baeks and John toward trial.  And he raises, on his own initiative, an “unclean hands” defense against the Baeks for their arrest-during-mediation and related shenanigans.

–Baek Maneuvers

So, Baeks pull some other maneuvers to derail the trial process.  For example:

They reach a settlement with John’s Chapter  7 Trustee (subject to Court approval) to purchase John’s claims; and

The settlement contains such oddities as the Baeks purchasing John’s malpractice claims against his attorneys, which claims had not been scheduled or asserted by John or by the Chapter 7 Trustee.

The Bankruptcy Judge speculates that Baeks wanted to purchase the malpractice claims so they could sue John’s attorneys and, thereby, “punish” them “for having the temerity to represent” John.

–Trial on Unclean Hands Issues

The Bankruptcy Judge then bifurcates the case and holds a trial on the unclean hands defense that he raised.

Twenty-five minutes after trial begins, the Baeks file an “Emergency Motion to Recuse” the Bankruptcy Judge. Another Judge hears the Motion and denies it.  So, the Baeks file an appeal, request a stay and take some related-and-aggressive action, all of which is to no avail.

The Unclean Hands Trial

–Unsuccessful Efforts to Exclude Evidence

Before trial, Baeks fought discovery of information on what they did to get John arrested.  At trial, they fought to exclude the same information from evidence.  They failed on both fronts.

Here are three of their arguments for excluding evidence and how the Court dealt with each.

Argument 1. Baeks argue that the Mediation Stipulation makes evidence “regarding what was communicated and occurred at the mediation” inadmissible.  This argument fails for three reasons:

A.  The Court required the Mediation Stipulation to be approved by the Court.  It was never approved and, therefore, never became effective or enforceable.  Moreover, the Mediation Stipulation is “deeply flawed,” the Judge says, and would never have been approved.

B.  Even if the Mediation Stipulation were enforceable, it does not have the evidence-excluding effect advocated by Baeks.

C.  The parties intended the Mediation Stipulation to protect discussions toward settlement—not to protect emails or discussions toward getting John arrested.

Argument 2.  Baeks argue that the California Litigation Privilege provides absolute immunity for their communications with police.  This argument fails because, (i) the privilege is a shield, not a sword, (ii) an unclean hands party “will be held remediless in a court of of equity,” (iii) a court can use unclean hands doctrine to protect itself from a transgressor’s misconduct, and (iv) the state law privilege does not apply in bankruptcy cases.

Argument 3.  Baeks argue that unclean hands doctrine cannot apply because their acts occurred after the filing of both the bankruptcy and the complaint.  In rejecting this argument, the Judge cites history to show the doctrine is wide-ranging and unconfined, granting broad discretion to a judge.

–Applying the Unclean Hands Doctrine

The Law

The Bankruptcy Judge cites these rules of law on unclean hands doctrine:

Parties in a court of equity must come with clean hands and keep those hands clean throughout the course of the litigation;

It is black-letter law that a bankruptcy court is a court of equity;

Courts apply the unclean hands doctrine primarily for their own protection and only secondarily as a matter of defense to the defendant; and 

The doctrine is derived from the unwillingness of a court to give relief to a suitor who in the very controversy has so conducted himself as to shock the moral sensibilities of the judge — it has nothing to do with the rights or liabilities of the parties, the defendant who invokes it need not be damaged, and the court may even raise it sua sponte.

Baeks’ Wrongdoing

The Bankruptcy Court cites this rule of law:

–Mediation serves an important public interest in our administration of justice, and one of the relatively-few duties of parties in a court-ordered mediation is to avoid sabotaging it.

The Bankruptcy Court finds that, upon John’s indictment, Baeks wanted him arrested. And they pursued the arrest goal by working with police:

–They offered to pay extradition costs, notified police of the time and location of the court-mandated mediation, provided John’s photo and other identifying details, pressed police for an arrest during mediation, and kept police informed of John’s whereabouts during mediation.  

But what is “most striking,” says the Bankruptcy Judge, is: (i) the Baeks’ lack of “even the slightest effort” to avoid scuttling the mediation, and (ii) the mediating Judge’s “flabbergasted” reaction.

The Bankruptcy Judge declares that Baeks and their attorney: (i) “didn’t care one whit that the mediation was ruined,” and (ii) focused, instead, on their opportunity to “humiliate and embarrass” John in front of his family, his attorneys and others.

Such declarations are “obvious,” says the Judge, from such evidence as “high-fiving” emails, Grace’s gratitude “for the way you’ve approached the whole thing,” absence of “even the smallest bit of concern” over the mediation being “effectively destroyed and ruined,” disappointment at not experiencing “the therapeutic effect of seeing the handcuffs go on,” and glee over possibilities of John staying in jail over Memorial Day weekend.

Effects of Baeks’ Wrongdoing

Baeks scuttled the mediation by their get-John-arrested actions.

Such shenanigans wasted the time of the mediator and of the parties and their attorneys.  And it prejudiced others.  The Trustee, for example, testified to how he shared data and information in the mediation that he otherwise would not have shared, so that Baeks’ actions “absolutely prejudiced our case.”  And it’s likely that John, Dan and Mom were similarly prejudiced.

Comparing Baeks’ and John’s Wrongdoings

John’s Bad Acts and Punishment 

John did some bad things. He forged the prenup, for example, and proffered it as a true and valid document: that’s a felony.   And he’s being punished.  For example:

John is now a felon with a serious criminal record and faces criminal punishment;

John lost his real estate broker licenses and has suffered through years of costly and unrelenting litigation that bankrupted and ruined him;

All his non-exempt assets will be distributed by the Trustee to his creditors; and

His aged and infirm Mom has been dragged into fraudulent transfer litigation and faced loss of her home in the Baeks’ “final show of mercy” offer.

Baeks’ Bad Acts

Baeks pursued John relentlessly through legal systems and sabotaged the court-ordered mediation.

If unclean hands issues were to be resolved in their favor, Baeks will be getting off scot-free from judicial sanctions.

Baeks’ transgressions – the pre-planned and considered sabotage of a court- ordered mediation, along with intentionally humiliating John in front of his attorneys and family – is hardly trivial. Instead, the acts of Baeks’ attorney “shock the conscience of this Court” and, if allowed to stand, would undermine public confidence in mediation.

The Ruling

The Court declares: “the serious nature of the transgression” by Baeks and their attorney “outweighs the substance of the rights they are asserting,” leading the Court to conclude that “Baeks are guilty of unclean hands.”

Remedies

The Bankruptcy Judge provides the following remedies to each of the parties:

–Remedies for Trustee

All of Grace’s claims for relief against the Trustee are dismissed with prejudice.

–Remedies for Mom and Dan

The causes of action alleging conspiracy and aiding and abetting are dismissed with prejudice.

–Remedies for John

The causes of action alleging conspiracy and aiding and abetting and alter ego are dismissed with prejudice.  And all Grace’s claims against John are dismissed with prejudice, while John’s counterclaims against Grace remain intact and are not dismissed. 

Aftermath

The date of the Bankruptcy Court’s Baek v. Halverson ruling is February 14, 2018.  And it’s no surprise that the ruling is on appeal.  The appellate proceeding is Baek v. Halvorson, Case No. CV18-00525 in the U.S. District Court for the Central District of California.

Conclusion

The Baek v. Halverson ruling is a powerful reminder of an important lesson:  that mediation, and other legal processes, are to be used for their intended purposes–and not for retribution or other wrongful purposes.

Kudos to the Bankruptcy Judge for protecting judicial processes and for righting some wrongs from the misuse of such processes.

It will be interesting to see how this case progresses on appeal.

Note:  Here is a link to the Bankruptcy Court’s electronic docket in the Beck v. Halvorson case.

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