Mediation: Persisting Despite Early Failures (Kellogg v. Progressive)

By: Donald L. Swanson

“Failure” in a mediation is difficult to define.  For hypothetical examples:

• Is it a “failure” when a lawsuit fails to settle in a mediation session?
• Is it a “failure” when a lawsuit fails to settle in a second mediation session?
• Is it a “failure” when, (i) settlement does not occur, (ii) the case goes to trial, and (iii) the Judge rules on the merits?

All events identified in these three hypotheticals occurred in the case of Kellogg & Kimsey, Inc. v. Progressive Plumbing, Inc. (Case No. 17-AP-00044, Bankry. M.D. Fla.) (see opinion dated September 30, 2019 (Doc. 300)).

Yet, that lawsuit ended with a mediated settlement.

Here’s what happened.  

Parties and Their Construction Project

Plaintiff is the general contractor for constructing two adjacent Marriott-branded hotels—a Residence Inn and a Springhill suites—in Nashville, Tennessee. 

Debtor subcontracts with Plaintiff to provide plumbing services and materials for the project.  And Allied issues its bond to guarantee Debtor’s performance of the subcontract for $1,750, 000.

            –Jinxed

The Project is jinxed from the start:

• Nashville is experiencing a building boom with an inadequate labor pool—skilled construction labor was difficult, if not impossible, to hire due to increased demand;
• Builders compete for talented workers, often settling for inferior labor options;
• Just as the project is about to break ground, Nashville experiences extreme winter weather, causing significant construction delays;
• City of Nashville is a difficult working partner—slow to issue permits or to inspect work and utility service connections are delayed.
• Marriott causes further delays by failing to timely specify design and material requirements, causing change orders and design alterations late in the construction process.

–Inadequate Responses

Neither Plaintiff nor Debtor responds as quickly or professionally as needed to stop the problems from snowballing into a catastrophe—which is what ensues.

But both parties soldier on with the Project:

• Plaintiff is frustrated with the speed and quality of Debtor’s plumbing work (and the work of other subcontractors) but Plaintiff never asks Debtor to leave the site;
• No default is declared by Plaintiff until construction is almost complete;
• Plaintiff obtains a temporary certificate of occupancy for the two hotels, so, the project is completed;
• But Debtor’s outstanding change orders and contract balance are never paid;

Bankruptcy & Mediation

The end-of-project accounting and reconciliation remain unfinished when Debtor filed bankruptcy.

In the bankruptcy, Plaintiff files an unsecured proof of claim for “an outlandishly overstated amount of $813,547.94.”

The parties go to mediation, twice, over their disputes, but settlement talks fail.

Litigation and Failed Mediations

So, Plaintiff files this adversary proceeding, alleging breach of the subcontract and the bond, and seeking $451, 822.60.

Debtor objects to Plaintiff’s proof of claim and counterclaims—alleging breach of the subcontract and seeking $303,087.01 damages.

Debtor and Allied also cross-claim against each other on issues that depend on how claims between Plaintiff and Debtor are resolved.  So, the cross-claim issues are reserved for later resolution.

The Bankruptcy Court identifies the “primary issues” at trial as, (i) who breached the contract between Plaintiff and Debtor, and (ii) what are the damages?

A five day trial occurs, after at least two attempts at mediation fail, on issues between Plaintiff and Debtor, the Bankruptcy Court declares, “the job now falls to the Court to determine who breached the subcontract and what damages are due and by whom.” 

Ruling

The Bankruptcy Court rules:

1. Both Plaintiff and Debtor breached the contract;
2. Plaintiff owes Debtor $175,840.13; but
3. Neither party is entitled to recover attorneys’ fees.

Here is more detail on the Bankruptcy Court’s ruling:

1. Plaintiff breached the subcontract by, (i) failing to maintain a practical schedule, which created chaos on the worksite, and (ii) supplementing Debtor’s labor force without following subcontract requirements;
2. Debtor breached the subcontract by failing to provide an adequate labor force;
3. Neither party is entitled to an attorney fee award, since neither is a “prevailing party”;
4. After netting-out all damages, Debtor is entitled to recover $175,840.12 from Plaintiff;
5. Plaintiff’s proof of claim is disallowed in full; and
6. Allied’s claims, remaining to be resolved, are: (i) it’s attorney fees claim against Plaintiff, and (ii) its cross-claims with Debtor.

Further Mediation

In its ruling, the Bankruptcy Court directs the parties to return to mediation to address, (i) Allied’s claims against Plaintiff for attorney fees, and (ii) Allied’s cross-claims with Debtor.  

The Court also suggests that the parties attempt to mediate a “global settlement,” based on the Court’s rulings.

The Court sets the following deadlines:

1. The parties are to complete their mediation efforts and file any settlement agreements by December 13, 2019;
2. A status conference to discuss future briefing or trial scheduling is set for January 7, 2020; and
3. Entry of any final orders is deferred until mediation efforts are concluded, “to give the parties one last chance to resolve their differences consensually.”

Mediation Results

On November 22, 2019, the parties’ Mediator files a “Disposition Report” (Doc. 312) that, “The case has been completely settled.”  

On December 6, 2019, Debtor files a Motion (Doc. 594) in its Chapter 11 case (Case No. 15-bk-07275) to approve the mediated compromise. 

The Bankruptcy Court approves the compromise on January 22, 2020 (see Doc. 601 in Chapter 11 case), and closes the adversary proceeding on February 11, 2020.

Conclusion

Mediation is a process.  It can be viewed as a one-and-done effort, with success and failure defined exclusively by the results of that single effort.

But every mediation session can also be viewed as a single step in a broader dispute resolution process that includes the parties, the mediator, the court, and the broader litigation process in each case.

The Kellogg v. Progressive case described above is an example of the latter view: the Bankruptcy Judge obviously believes in mediation and continues to call upon its benefits, despite a couple setbacks along the way.     

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