Mediation Timing And Details: Adjusting To Unique Circumstances (In re Diocese of Buffalo)

Adjustments to unique circumstances? (Photo by Marilyn Swanson)

By Donald L. Swanson

The opinion is from In re The Diocese of Buffalo, N.Y., Case No. 20-10322, Western New York Bankruptcy Court (entered December 27, 2021, Doc. 1487).

The Diocese of Buffalo asks the Bankruptcy Court to refer its Chapter 11 case and related adversary proceedings to mandatory global mediation–it does so twice.  Its first request is denied.  It’s second is granted . . . but with limitations.

The issue in both requests is not whether mediation is appropriate; instead, the issue involves the terms, conditions and limitations for an optimal mediation process.

Procedural Background

In 2019, the State of New York reopens a statute of limitations, allowing victims of child abuse to assert previously-barred claims.

For the Diocese of Buffalo, such legislation presents two challenges:

  1. hundreds of abuse victim claims are anticipated; and
  2. insurance coverage is uncertain, fragmented and disputed.

–First Mediation Request

In response, the Diocese of Buffalo files, (i) its voluntary Chapter 11 Petition, and (ii) a declaratory judgment lawsuit on the coverage obligations of eight insurance companies.

Then, the Diocese asks the Bankruptcy Court to refer the lawsuit to mediation.  The Bankruptcy Court declines, finding mediation premature because:

  • only some of the insurers are included—insurer absence prevents an effective mediation;
  • claims to be resolved cannot be identified until the claims bar date passes; and
  • the Diocese has yet to produce all documents and information needed for a meaningful mediation. 

–Second Mediation Request

Later, the Diocese renews its mediation request.  Mediation is needed, the Diocese argues, to facilitate, (i) development of a reorganization plan, and (ii) resolution of adversary proceedings.

The Diocese contends that reasons for denying the first mediation request no longer apply.  For example:

  • Efforts to identify all insurance carriers are substantially complete;
  • A second lawsuit seeks a judgment declaring the coverage obligations of 68 insurance companies;
  • The proof of claim deadline expired in 2021; and
  • The Diocese has produced tens of thousands of pages of data under a confidentiality agreement.

The renewed mediation motion requests:

  • mandating that all insurance company defendants participate in the mediation;
  • suspending lawsuit activity while mediation proceeds;
  • adopting confidentiality protocols; and
  • directing that either the parties select a mediator or the Court will appoint one.

The Official Creditors Committee supports the renewed motion because of:

  • the complexity of the Chapter 11 case, with its 900+ abuse claims and 70+ insurance policies; and
  • the need for mediator(s) with experience on insurance coverage issues, sexual abuse litigation, rights of not for profit entities, and bankruptcy issues.

Various defendants oppose the motion, alleging that the Diocese still hasn’t produced all information needed for a meaningful mediation.

Counsel for 22 abuse claimants also objects, requesting opportunity to attend mediation sessions on behalf of abuse claimant clients.

Court’s Conclusion

The requested mediation is necessary and proper—under the rationale, terms and conditions set forth below.

Complexity Rationale

The complexities of this case far exceed initial expectations. For example:

  • An early affidavit predicted 400 individuals abuse claimants—whereas, more than 900 individuals have filed proofs of abuse claims; and
  • At bankruptcy filing, the Diocese identified eight companies as insurance providers—since then, the number has risen to more than 70 insurance providers.

The Diocese cannot develop a reorganization plan until it first resolves issues like:

  • How are compensation amounts to be established?
  • What is the extent of insurance coverage for costs of defense and payment of damages?
  • What is excluded from coverage?
  • What resources are available to pay liabilities in excess of insurance?

Full-scale litigation imposes tremendous and untoward delays and financial expenditures.  In this case, for example:

  • The parties are not ready for either a trial or to request dispositive relief in the adversary proceedings;
  • Since bankruptcy courts don’t have jurisdiction over personal injury claims, adjudication of such claims is likely to, (i) occur in state court, and (ii) take years, if not decades, to complete.
  • Legal expenses cannot be estimated—but for a point of reference, the Diocese is already authorized to pay >$6.2 million to attorneys and other professionals for services rendered before August 31, 2021.

Tremendous complexity suggests a need for mediation, provided it is fair to all concerned.  So, mediation is an appropriate tool in this case.

Technical Authorization

Mediation is not prevented by the Bankruptcy Code, bankruptcy rules, or rules of procedure.  In fact, mediation conforms fully with pretrial rules. 

Fed.R.Bankr.P. 7016, for example, authorizes a bankruptcy court to adopt, at any pretrial conference, “special procedures for managing potentially difficult or protracted actions” involving “complex issues, multiple parties, difficult legal questions, or unusual proof problems.”

Mediation is one of those “special procedures” for this complicated case.

Four Limitations

While mediation is a proper tool in this case, there are four important limitations.

One. Pre-Mediation Discovery

The Diocese says the parties have adequate data for a meaningful mediation, because it has produced tens of thousands of pages of documents.

Insurance companies disagree, contending that (i) many documents are heavily redacted, and (ii) the Diocese still hasn’t produced critical documents and information.

So, the Court will allow the parties until January 31, 2022, to file motions to compel a release of further information by the Diocese. Based on the outcome of such motions, the Court will then set a timetable for the start of mediation.

Two. Mediation Participants

–Over-inclusion

The Diocese asks the Court to compel all adversary defendants to participate in mediation.

The Court concludes that the Diocese must explain the basis for its belief that each defendant has a material interest in the outcome of mediation. Upon receipt of such explanation, the Court will issue a further order identifying the parties who must participate in mediation.

–Under-inclusion

The primary stakeholders in a mediation are the abuse victims. Accordingly, the objection filed on behalf of 22 purported victims is sustained and their requested participation is approved.

For the same reason, the Official Creditors Committee is deemed a participating party in the mediation for all purposes.

Three. Selection of Mediator

Two principals govern selection of a mediator under the local ADR Plan:

  • All parties share an equal opportunity for input on mediator selection—thus the parties are to confer and join by stipulation in presenting any recommendation; and
  • The selection process is not to be a cause for delay—in the absence of prompt and unanimous agreement, the Court will appoint the mediator.

Due to the number of defendants and the complexity of issues, negotiations on mediator selection are likely to be cumbersome.  So, the Court is unwilling to invite negotiations on a matter having so little prospect of success.  Therefore, the Court will jump over the first principal, directly to the second principal, and make the initial selection of mediator.

Based on his background and experience, and to avoid the expense of a private mediator, Hon. Michael J. Kaplan (retired but still serving on a limited recall) is appointed mediator, with discretion to set protocols for assuring confidentiality and fairness.

Four. Suspension of litigation

The Diocese requests a suspension of all action in the adversary proceedings. The Court notes that the parties have already suspended activity in those cases, voluntarily.  So, it is unnecessary to impose a suspension at this time.

During the mediation, it’s possible that some defendants might want to seek dispositive relief.  Rather than attempting to address such possibility with a blanket prohibition, the Diocese may renew at a later time its suspension request.

Conclusion

Mediation processes are best-utilized when tailored to unique circumstances in each case.

The In re The Diocese of Buffalo opinion discussed above is a prime example of adjusting mediation timing and processes to the unique circumstances, complexities and details of a case.

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