By: Donald L Swanson
The timing of mediation efforts in litigation is important (and can be tricky).
Studies show that early is better than late. But in early mediation efforts, a tension exists between, (i) acting promptly, and (ii) assuring that parties have adequate information to make informed decisions.
A recent example of a Court dealing with this tension is The Diocese of Buffalo, N.Y. v. The Continental Insurance Co., et al., AP 20-1009, Doc. 172 (Bankry.W.D.N.Y, decided 9/11/2020).
Here’s what happened.
On February 28, 2020, the Diocese of Buffalo, N.Y., files Chapter 11 to deal with multiple sexual abuse claims.
On that same day, the Diocese files an adversary proceeding in the Bankruptcy Court against eight insurance companies, seeking a declaration of the extent to which insurance policies are property of the bankruptcy estate.
On June 5, 2020, the Diocese files a motion in the adversary proceeding for “Entry of an Order Referring this Adversary Proceeding to Mediation” (Doc. 106). This mediation motion:
- Alleges that “mediation is warranted” because “achieving certainty” on “the scope and extent of the Diocese’s insurance coverage” will facilitate the Diocese’s ability to “propose and confirm a plan of reorganization”; and
- Seeks a suspension of “all further proceedings” in the adversary “pending further order of the Court,” so the parties can “concentrate their efforts on the mediation.”
At a hearing on July 15, 2020, the Bankruptcy Judge offers observations about the need for efficiency and concerns about a suspension of discovery.
On July 24, 2020, the eight insurance company defendants file a “Joint Response” (Doc. 123) to the mediation motion, (i) saying that negotiations are already in process, and (ii) supporting a suspension of discovery while negotiations occur.
By mid-August, however, progress is breaking down. Five of the eight insurance defendants now want discovery efforts to proceed:
- One files a “Response” (Doc. 132) to the mediation motion, contending that (i) significant discovery and investigation are needed before mediation can be useful, and (ii) mediation and litigation need to move forward on parallel tracks;
- Another files an “Objection” (Doc. 133) to the mediation motion, contending that (i) “substantial documentation” is needed, which the Diocese has been withholding “for nearly 11 months,” (ii) this withholding leaves parties “completely in the dark” on critical fact issues, (iii) a meaningful mediation cannot occur until the Diocese provides requested information, and (iv) assistance from the Court will be needed to compel production of needed information; and
- Similar responses are filed by three other insurance defendants (see Doc. 134, 135 & 139).
Bankruptcy Court Ruling
On September 11, 2020, the Bankruptcy Court denies the mediation motion “without prejudice to a future application for similar relief.”
What follows is a summary of the Court’s rationale.
Mediation can be useful in cases like this, where legal costs threaten to dissipate resources that might otherwise be available to creditors.
But mediation provides no guarantee of settlement. So, it must be used with discretion and in ways that minimize risks of delay.
In its mediation motion, the Diocese states its desire to achieve a “global resolution of underlying insurance coverage issues.” However, the Court finds that mediation is premature, under this goal, for at least three reasons.
- More parties need to be included in the proposed mediation. The Court accepts the Diosese’s argument that “the full extent and scope of the Diocese’s insurance coverage” must be determined, but such a determination cannot be made without the involvement of all insurance carriers.
- No settlement is likely until the parties can determine the identity and general nature of all abuse claims. A claims bar process is needed “to determine the potential exposure of each particular insurance company.”
- A matter is ripe for mediation only when litigants have shared essential information. Here, (i) the sharing of information has not happened, (ii) the disputes in question are complicated, involving hundreds of claims that allegedly occurred decades ago, and (iii) the adversary proceeding is still in its earliest stages (some answers are yet to be filed, initial disclosures have not occurred, and discovery is yet to begin).
Parallel Tracks: Litigation and Mediation
The Court says, generally:
- All parties must work expeditiously toward the development of a confirmable plan; and
- The parties must not procrastinate in working for a just and fair resolution of rights.
More specifically, the Court says:
- The Diocese “must strive to place the adversary proceeding into a posture for resolution, whether by dispositive motion, trial, or settlement with the assistance of mediation”;
- These parallel paths are not inconsistent—by responding to appropriate discovery demands, the Diocese will provide information that parties in mediation would require; and
- By directing that discovery move forward and setting timetables, the Court aims to advance the exchanges of essential information.
The Bankruptcy Court’s Diocese ruling provides an excellent illustration of the tension between prompt mediation action and the need for gathering information—and how that tension can be addressed.
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