By: Donald L Swanson
Here’s a first of its kind: a report about federal judges mediating other judges’ cases.
- It’s a January 22, 2022, report titled, Other Judges’ Cases, authored by Melissa B. Jacoby, Professor of Law, University of North Carolina at Chapel Hill—scheduled to publish in 72 NYU Annual Survey of American Law (2022).
What follows is an attempt to summarize portions of the report, including its description of a can-this-actually-happen case.
Presiding federal judges commonly select other federal judges to “mediate” their cases. Article III judges are among the many who play this role, as are magistrate judges and bankruptcy judges.
82% of bankruptcy judges, for example, have reported using other judges for settlement or mediation.
No statistics are kept on judicial mediation. So, it is difficult to study such efforts.
The report poses this question:
- Assuming trained private neutrals are ready, willing, and able to serve, “what drives lawyers to request [and judges to propose] a mediating judge rather than a private neutral?
The report discusses two theoretical narratives in response to the question: reform and power.
Judges mediating each-others cases address perceived problems:
- Settlement conferences with presiding judges risk coercion, and the judge becomes aware of information that cannot be readily discarded when presiding over a trial; and
- Some parties and lawyers want an evaluation, and getting an evaluation from a sitting judge is perceived as beneficial.
The American adversarial system is premised on party autonomy constraining judicial power. Mediation theory is based even more heavily on party autonomy.
Federal judges have an aura of power and authority, and their presence shifts the dynamics. When a mediating judge is proposed, parties may feel less than free to object, lest a judge becomes offended.
Parties often prefer a mediating judge because, (i) a judge serves at no charge, and (ii) a mediating judge’s implicit power is believed to provide an extra push to close a deal that private neutrals cannot close.
Sitting judges, while serving as mediators, can sign and enter orders controlling all aspects of the mediation, including who is obliged to attend and how long they must stay.
Of concern is the fear that a mediating judge will threaten or impose sanctions for reluctance to settle.
Such things generate confusion over a mixture of roles.
A Concern–Information Leakiness
Private neutrals are bound to confidentiality by mediation standards. Federal judges, typically, are not.
Parties might reasonably worry about the extent to which a mediating judge and the presiding judge talk amongst themselves about the case and the behavior of lawyers:
- If judges are colleagues and known to trade off mediating responsibilities, the appearance of information sharing is inevitable, absent explicit efforts to manage that impression;
- Some judges explicitly endorse private dialogue with the judicial mediator, including about substantive matters, to move cases along; and
- While professional standards prevent private mediators from talking to a presiding judge or to the public or the press—judges may not feel nearly so constrained.
This shifts the dynamics.
Case Study: Harder/Sunwest Management
Jon Harder founds Sunwest Management (which owns and manages nearly three hundred assisted living facilities across the country) and guarantees related debts.
Harder also sells investments in the enterprise to twelve hundred people, who have an average age of 68 years, by promising a stable, tax-deferred investment.
By 2007 Sunwest entities are bleeding money. So, Harder shifts funds around—from one Sunwest entity to another, from one investor to another.
By 2008, Harder stops paying investors—just when a global financial crisis makes it difficult for investors to find other means of support.
Various Sunwest entities default on mortgages, and by late 2008, sixty-five foreclosure sales are pending.
Though Harder eventually goes to jail for financial crimes, he first files a personal bankruptcy to alter the rights and obligations of Sunwest entities and their lenders. And he needs a mediating Article III judge to make that happen.
So, before filing bankruptcy, Harder consults with a federal district judge in Oregon about serving as a mediating judge in Harder’s impending bankruptcy. Upon filing the bankruptcy, Harder asks the bankruptcy court to appoint the Oregon Judge as mediator and to order Sunwest lenders to participate in the mediation (note: the Sunwest entities aren’t in bankruptcy). Lenders opposed these requests.
The presiding bankruptcy judge:
- makes mediation available, with the Oregon judge and another Article III judge as mediators;
- emphasizes that mediation is voluntary; and
- declines Harder’s request to use his bankruptcy to protect the Sunwest entities, which aren’t in bankruptcy.
But the mediating Oregon judge will have a big impact on the case. For example, a settlement the Oregon judge mediates:
- results in “a new governance structure” for various Sunwest entities; and
- gives the Oregon judge a right to rule on disputes about the settlement, with no appellate process.
–Securities and Exchange Commission
A few months after Harder files bankruptcy, the SEC sues Harder and the Sunwest holding company in Oregon for civil securities fraud, seeking a TRO to freeze assets and halt fraudulent activities.
The SEC case is assigned to the same Oregon judge that is mediating Harder’s bankruptcy disputes.
The Oregon judge then oversees a full day of negotiations on whether the SEC should get a preliminary injunction and its impact on various parties, including lenders to Sunwest entities not named in the SEC complaint.
Sunwest lenders, (i) ask the Oregon judge to disqualify himself from presiding over the SEC case, and (ii) challenge the injunction the Oregon judge enters in the SEC case.
The Oregon judge and a magistrate judge both reject the lenders’ request.
–Withdrawal of Bankruptcy Reference
Then, Harder asks the Oregon judge to take over his personal bankruptcy too. Officially, that means Harder asks the Oregon district court to withdraw the reference of his bankruptcy case so the Oregon judge can be the presiding judge in the bankruptcy case too.
Lenders object, and the U.S. Trustee expresses “serious concerns.”
The Oregon judge, nonetheless, agrees to withdraw the reference and preside over Harder’s bankruptcy case, in addition to his other roles.
Lenders renew their requests to disqualify the Oregon judge in the SEC matter—this effort fails. In an unpublished opinion, the Ninth Circuit:
- resists the notion that mediating the bankruptcy precludes impartiality—calling it speculation;
- finds “no authority for the proposition that judges must recuse themselves if they served as mediators in a related proceeding”; and
- lenders are not allowed to present arguments in open court, because “quite enough time and money have been spent on this issue.”
The Oregon judge puts the cases on fast track, declaring: if Chrysler and GM could financially restructure in a just a few weeks, why couldn’t this case go quickly too?
The outcome, approved over objections, is:
- the Oregon judge combines the SEC and bankruptcy matters; and
- a new and consolidated enterprise is created, using federal equity powers.
Sunwest’s press releases tout:
- the input of stakeholders in the mediation;
- case efficiency from avoided litigation; and
- role of the court in achieving resolution and the court’s behind-the-scenes path that got them there.
The outcome allows Harder to retain an equity interest in Sunwest, even though higher priority claimants do not get paid in full or consent to the deal.
Turns out that Harder’s actions are the biggest investment fraud in Oregon history.
- victims of Harder’s securities fraud receive a greater recovery because the Oregon judge took “extraordinary” steps to control assets and compel lender participation; and
- Harder received a generous settlement.
Meanwhile, the Oregon judge retires from the federal bench and opens a private dispute resolution business.
The report goes on to discuss broad issues of concern, like separation of powers and judicial ethics, accountability and impartiality.
A careful read of such discussions is well worth the effort.
Don’t know what to say about all this.
** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.