By: Donald L Swanson
“the specter of sanctions and contempt spawns ancillary litigation that often eclipses the issues at the heart of the underlying dispute.”
—From In re A.T. Reynolds & Sons, Inc., 452 B.R. 374, 376 (S.D.N.Y. 2011), reversing a Bankruptcy Court order of contempt and sanctions for lack of “good faith” in a mandated mediation.
What follows is an attempt at summarizing what happened and why the District Court reversed the Bankruptcy Court’s contempt and sanctions order.
During the bankruptcy proceeding, a dispute arises among Debtor, Wells Fargo and a third party. The Bankruptcy Court orders that the issue be mediated. [Fn. 1]
Wells Fargo asks the Mediator for the topics of discussion at the mediation. Debtor responds with a list of topics that concludes with this: “And, any other issues anyone wants to discuss.” Wells Fargo does not like the catch-all item and wants to limit discussion to specific issues. The Mediator responds that he has “no clue what the case is about” and that “we will go where the river takes us.”
Unsatisfied, Wells Fargo replies: “before we can prepare any statement for you [about our legal position] we need to know what it is that is being submitted to mediation…. Nothing productive can be achieved from a ‘free for all’ mediation.” Wells Fargo also expresses concern that the third party would fail to send a client representative and states that “neither Wells Fargo nor its counsel will attend any mediation where Wells Fargo is the only party with client presence.”
The mediator responds: “It is my understanding that all parties will have a party representative present” but declines “to provide any further assurances.”
According to the Bankruptcy Court, the mediation reaches an impasse soon after it begins.
The impasse begins like this: as one party summarizes its position, Wells Fargo expresses disagreement. The Mediator asks Wells Fargo to reserve its point, but Wells Fargo persists. The Mediator speaks to Wells Fargo alone in a side session for more than an hour, to circumvent a “complete roadblock.” And Wells Fargo insists to the Mediator that it will not agree to any solution involving a monetary payment.
The Mediator asserts that, during such side session, Wells Fargo “did not go through risk analysis” and simply reiterated “the position they walked into the room with.”
After the side session, the Mediator informs the Bankruptcy Court that one party is not participating in good faith. Then, Wells Fargo representatives spends “an extended period” on the phone with an unidentified person, out of the presence of the mediator. Then, the mediation reconvenes, and Wells Fargo makes a settlement offer deemed “unacceptable” by the other parties.
Wells Fargo’s Explanation
Wells Fargo does not dispute the foregoing chronology but characterizes events differently, as follows:
- Wells Fargo approached the mediation with an open mind, intending to “listen to the parties that were attending the mediation, see what relevant facts were going to be brought up, [and] to make a decision one way or the other”;
- Wells Fargo considered its exposure to risk and concluded that the claim against it “did not make sense” and that Wells Fargo’s exposure “was zero”; and
- Wells Fargo denies that an interruption occurred during the mediation.
The Mediator submits a report to the Bankruptcy Court detailing allegations of bad faith, including:
- Wells Fargo objected to including any issues “anyone wants to discuss”;
- Wells Fargo demanded to know the identities of the individuals who would attend the mediation;
- Wells Fargo expressed concern about a “free for all” mediation that would “waste everybody’s time”;
- Wells Fargo attended the mediation “prepared only to repeat a pre-conceived mantra” that Wells Fargo “was not open to any compromise that would involve ‘taking a single dollar out of their pocket’”;
- Wells Fargo’s only offer came after, (i) the hearing in which the Court stated the consequences of bad faith, and (ii) Wells Fargo spent “an extended period on the phone with an unidentified person”; and
- Wells Fargo’s offer was “unacceptable” to the other parties.
Show Cause Order
Based on the Mediator’s report, the Bankruptcy Court sua sponte orders that Wells Fargo show cause why it should not be sanctioned for failure to comply with the Mediation Order. Such order precipitates a voluminous submission from Wells Fargo and a contentious evidentiary hearing “that drew all of the participants in the mediation into its vortex.”
Bankruptcy Court Decision
The Bankruptcy Court finds that Wells Fargo failed to participate in the mediation in good faith. As an initial matter, the Bankruptcy Court holds:
- Passive attendance at mediation is inadequate because mediation requires listening, discussion and analysis; and
- Adherence to a predetermined resolution, without further discussion or other participation, is irreconcilable with risk analysis and is a “failure to participate in good faith.”
In the Bankruptcy Court’s view (the appellate court concludes), Wells Fargo exhibited bad faith for three reasons.
- It failed to participate meaningfully by insisting on “the supremacy” of its legal position, “in lieu of participating in discussion and risk analysis”;
- Its representative, (i) only had authority to settle for a ” predetermined amount,” despite the “very real possibility that the amount in controversy might have turned out to be in excess of $35,000,” (ii) was only prepared to discuss predetermined legal issues, (iii) did not “appear to have had the authority to enter into creative solutions that might have been brokered by the Mediator,” and (iv) delegated “a pivotal decision” to “an absent person”; and
- It “sought to control the procedural aspects of the mediation by resisting filing a mediation statement and demanding to know the identities of the other party representatives.”
Based on these findings, the Bankruptcy Court sanctions Wells Fargo and holds it in contempt for violating the terms of the Mediation Order.
Legal Standards for Sanctions
Under Fed.R.Civ.P. 16(f), a court may sanction a party for failure to obey a pretrial order. A bankruptcy court’s award of sanctions may be set aside only for abuse of discretion. A court abuses its discretion “if it based its ruling on an erroneous view of the law or on a clearly erroneous assessment of the evidence.”
A finding is clearly erroneous when evidence exists to support it, but “the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.”
A court abuses its discretion “if its decision—though not necessarily the product of a legal error or a clearly erroneous factual finding—cannot be located within the range of permissible decisions.”
While contempt orders are reviewed for abuse of discretion, the review of such an order “is more exacting than under the ordinary abuse-of-discretion standard because a [bankruptcy] court’s contempt power is narrowly circumscribed.”
Good Faith Participation
In a mandatory court-ordered mediation, adverse parties are forced to participate in a collaborative process that one or both parties may not desire. As a result, some states and commentators adopt a “good faith” participation requirement.
Courts have not developed clear standards for evaluating good faith in court-ordered mediation. Nevertheless, “courts have interpreted good faith narrowly,” requiring compliance with objective details like attendance and pre-mediation memoranda.
Advocates of a good faith standard argue that it forces adversary parties to take the mediation seriously and avoids the risk of participation only to the minimal extent needed to fulfill the court’s requirements. On the other hand, a good faith standard poses problems, such as:
- It is an intangible and abstract quality with no technical meaning or statutory definition;
- A tension exists between inquiring into good faith and preserving the confidentiality of a mediation—when allegations of bad faith arise, a court’s investigation endangers the mediation’s confidentiality; and
- Inquiry into the parties’ conduct in a mediation, backed by the threat of sanctions, may coerce the parties toward settlement.
Sufficiency of Participation
Court findings of insufficient “participation” in a mediation are rare; and the Court “is guided by considerations of litigant autonomy and confidentiality in mediation.”
Autonomy. It is well-settled that (i) a court cannot force a party to settle, nor may it invoke “pressure tactics” designed to coerce a settlement; and (ii) a party is within its rights to adopt a “no-pay” position. Thus, Wells Fargo was within its rights to:
- enter the mediation with the position that it would not make a settlement offer; and
- predetermine that it was not liable and to insist on the supremacy of its legal position.
Where parties do not want to settle, inquiries beyond objective criteria (such as attendance, exchange of pre-mediation memoranda, and settlement authority), backed by threat of sanctions, are improper.
Certain disputes cannot be resolved in mediation, and it should not be a surprise when attempts to mediate them quickly deteriorate.
Confidentiality. Inquiring into a parties’ level of participation imperils the confidentiality of mediation.
The Bankruptcy Court consistently admonished the witnesses to refrain from discussing specific details of the mediation. But, ultimately, confidential information was communicated to the Court (e.g., the Bankruptcy Court said, “Even though I have now sort of become of aware of this stuff, I’m trying my best not … to be”).
Moreover, the necessary exclusion of confidential information from the hearing had the unintended—but unavoidable—effect of excluding relevant facts.
The appellate Court holds that confidentiality precludes a court from inquiring into the level of a party’s participation in mandatory court-ordered mediation (i.e., the extent to which a party discusses the issues, listens to opposing viewpoints and analyzes its liability). This holding:
- provides a clear and objective standard with minimal intrusion into confidentiality and a party’s right to refuse to settle; and
- is consistent with the general pattern of courts to interpret good faith narrowly to requiring compliance with objective details like attendance.
Accordingly, the Bankruptcy Court’s determination that Wells Fargo did not “participate” in the mediation in good faith is clearly erroneous.
The Bankruptcy Court also found that Wells Fargo failed to send a representative with sufficient settlement authority. While such conduct may constitute a lack of good faith, it doesn’t exist here:
- the Bankruptcy Court applied an unworkable and overly stringent standard for determining “settlement authority”;
- There is rarely a need for a mediating party to have settlement authority beyond the amount in controversy;
- A party need not be prepared to discuss every possible legal theory, especially theories about which it had no prior notice; and
- Large corporations operate under divisions of labor and authority so that a given “creative solution” may require approval of any number of corporate officers.
Here, (i) Wells Fargo had authority to settle for up to the full amount in controversy, (ii) Wells Fargo’s attorney was prepared to advise on issues identified in advance by Debtor, and (iii) the finding that “a pivotal decision was made by an absent person” is conjecture and clearly erroneous.
Control of Mediation Procedures
The finding that Wells Fargo attempted to “control the procedural aspects of the mediation” is clearly erroneous.
Wells Fargo submitted a mediation statement and attended the mediation, as required by the order, and issues raised by Wells Fargo in pre-mediation exchanges with the Mediator were legitimate.
Accordingly, The Bankruptcy Court’s sanctions order is an abuse of discretion and is reversed.
To hold a party in civil contempt, a court must find, (1) the order is clear and unambiguous, (2) proof of noncompliance is clear and convincing, and (3) the party has not diligently attempted to comply in a reasonable manner.
The finding that Wells Fargo violated the terms of the Mediation Order was clearly erroneous. Accordingly, the Bankruptcy Court’s contempt order was an abuse of discretion and is reversed.
Contempt and sanctions are always a difficult thing. The foregoing case illustrates difficulties in addressing “good faith” issues, in a mandatory mediation context, by ordering contempt and sanctions.
Footnote 1. The Mediation Order incorporates the Bankruptcy Court’s following General Order provision (emphasis added): “Mediation Conference. A representative of each party shall attend the mediation conference, and must have complete authority to negotiate all disputed amounts and issues. The mediator shall control all procedural aspects of the mediation. The mediator shall also have the discretion to require that the party representative or a non-attorney principal of the party with settlement authority be present at any conference…. The mediator shall report any willful failure to attend or to participate in good faith in the mediation process of conference. Such failure may result in the imposition of sanctions by the court.
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