By: Donald L. Swanson
Mediation needs to be included — explicitly and by name — in the Federal Rules of Bankruptcy Procedure.
Mediation Authorization and Confidentiality
The new mediation provision must cover two specific subject areas: (i) mediation authorization, and (ii) mediation confidentiality.
Authorization. If a city is a Chapter 9 debtor in a jurisdiction without local mediation rules, does authority exist to appoint a mediator? What if the bankruptcy judge wants to appoint a proactive mediator team, like Detroit: does the judge have authority to do so?
Such questions could be resolved affirmatively by a Federal bankruptcy rule.
Confidentiality. If a bankruptcy mediation occurs in a jurisdiction without local mediation rules, what is the source of confidentiality protection?
Such question could be resolved satisfactorily by a Federal bankruptcy rule.
All other areas of mediation practice and procedure can be addressed in local rules. See, e.g., Model Local Rules on mediation proposed by the American Bankruptcy Institute (“ABI”).
Proposed Rule Amendments
A. The title of Fed.R.Bankr.P. 9019 should be amended to read: “Rule 9019. Compromise, Arbitration and Mediation.”
B. The following language should be added as a sub-part (d) to Fed.R.Bankr.P. 9019:
(1) The court may assign to mediation any dispute in a bankruptcy case; and the parties to any dispute may stipulate to mediation, subject to court approval.
(2) The mediator and the mediation participants are prohibited from divulging, outside of the mediation, any oral or written information disclosed by the mediation participants or by witnesses in the course of the mediation.
(3) The mediator shall not testify or be compelled to testify in regard to the mediation or the mediation communications in connection with any arbitral, judicial or other proceeding.”
–Such language is taken from the ABI’s Model Local Rules on mediation.
Five Reasons for Proposed Rule Amendments
REASON NO. ONE: Bankruptcy Courts Are a Rare Mediation-Rules Exception
Every bankruptcy-related court has a Federal rule on mediation, except for the bankruptcy courts themselves. And mediation is a central dispute-resolution tool throughout other Federal courts and all Federal agencies. To illustrate:
U.S. District Courts
Mediation appears in Fed.R.Civ.P. 16(c)(2), which authorizes “using special procedures to assist in resolving the dispute.” And mediation appears in Fed.R.Civ.P. 53, which authorizes the appointment of a mediator as “settlement master.”
[Note: Fed.R.Civ.P. 16 is not included in the Fed.R.Bankr.P. 9014(c) list of incorporated rules. And Fed.R.Bankr.P. 9031 rejects Rule 53 special masters in bankruptcy.]
Bankruptcy Appeals to BAP and to District Court
Fed.R.Bankr.P. 8027 governs appeals from bankruptcy courts to a bankruptcy appellate panel or to a district court. It provides for “notice” to appealing parties of the requirements of the appellate court’s mediation procedure. Rule 8027 is relatively new: adopted in 2014.
U.S. Circuit Courts of Appeals
Fed.R.App.P. 33 provides that the circuit courts “may direct” parties “to participate in . . . a settlement conference.” All of the Circuit Courts of Appeals have adopted local mediation rules. And they are serious about enforcing their mediation confidentiality rules (see, e.g., In re Anonymous, 283 F.3d 627 (4th Cir. 2002); and In re Teligent, 640 F.3d 53, 57-58 (2nd Cir. 2011)).
Other Federal Courts
–The U.S. Tax Court has a Federal mediation rule [Rule 124(b) Tax Court Rules of Practice and Procedure].
–The U.S. Court of Claims has a Federal mediation rule [Appendix H, Rules of the United States Court of Federal Claims].
–The U.S. Court of International Trade has a Federal rule on mediation [Rule 16.1 USCIT Rules, Forms, Guidelines and Administrative Orders].
The entire executive branch of the Federal government is subject to a broad policy favoring mediation and other ADR processes. This is because of the Administrative Dispute Resolution Act of 1996, which provides: “Each agency shall adopt a policy that addresses the use of alternative means of dispute resolution and case management.” For example:
–The General Counsel of the Army reports:
“Stemming from the Administrative Dispute Resolution Acts of 1990 and 1996, federal agencies have introduced ADR processes as a means of resolving just about every type of dispute, in just about every area of endeavor.”
–The Office of Personnel Management’s “Alternate Dispute Resolution Handbook” indicates:
“In the 1990s, Congress passed three statutes . . . which, collectively, required each agency to adopt a policy encouraging use of ADR in a broad range of decision making, and required the federal trial courts to make ADR programs available to litigants.”
REASON NO. TWO: Many Bankruptcy Courts Have No Local Mediation Rules
60% of bankruptcy districts in the U.S. have adopted local rules on mediation. The other 40% have not.
However, the existence of a local mediation rule does not mean the rule is adequate. In Minnesota, for example, the Bankruptcy Court has a one-sentence local rule on mediation (Rule 9019-2) that reads:
“The court may refer any adversary proceeding or contested matter for mediation by any other federal judge or any mediator chosen by the parties.”
This Local Rule authorizes mediation to occur in Minnesota’s Bankruptcy Court. But where is the provision for confidentiality?
–A Federal rule would resolve this deficiency.
REASON NO. THREE: Bankruptcy’s ADR Rules are Antiquated – Having Changed Little Over the Past Century
Alternative dispute resolution provisions (“ADR”) involving arbitration and compromise have been part of U.S. bankruptcy laws since at least 1898.
The U.S. “National Bankruptcy Act of 1898” provides for “Arbitration of Controversies” and for “Compromises” in consecutive sections as follows:
–“§ 26. Arbitration of Controversies.–(a) The trustee may, pursuant to the direction of the court, submit to arbitration any controversy arising in the settlement of the estate.”
–“§ 27. Compromises.– (a) The trustee may, with the approval of the court, compromise any controversy arising in the administration of the estate upon such terms as he may deem for the best interests of the estate.”
Today’s Fed.R.Bankr.P. 9019, similarly, provides:
“(a) Compromise. On motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement. Notice shall be given to creditors, the United States trustee, the debtor, and indenture trustees as provided in Rule 2002 and to any other entity as the court may direct. . . .
(c) Arbitration. On stipulation of the parties to any controversy affecting the estate the court may authorize the matter to be submitted to final and binding arbitration.”
The compromise and arbitration provisions of today’s Rule 9019 have, obviously, been around in largely-the-same-form for more than a century as next-door-neighbor provisions. However, in today’s practice:
–Arbitration is an infrequently-utilized ADR tool for resolving bankruptcy disputes, despite being explicitly authorized in the Federal Rules of Bankruptcy Procedure.
–Mediation, on the other hand, is a frequently-utilized ADR tool for resolving bankruptcy disputes, but isn’t even mentioned in the Federal Rules of Bankruptcy Procedure.
Accordingly, bankruptcy’s ADR rule needs to be upgraded from its century-old provisions to include today’s primary ADR tool in bankruptcy – i.e., mediation.
And Fed.R.Bankr.P. 9019 is a logical place to include such a provision.
REASON NO. FOUR: The Ninth Circuit Says that Local Rules on Mediation Confidentiality are Unenforceable as a Privilege
The vast majority of all U.S. Federal courts have local rules on mediation confidentiality—and they enforce such rules.
But the Ninth Circuit Court of Appeals casts doubt on the enforceability of such local rules:
“A local rule, like any court order, can impose a duty of confidentiality as to any aspect of litigation, including mediation. . . . But privileges are created by federal common law. See Fed.R.Evid. 501. It’s doubtful that a district court can augment the list of privileges by local rule.”
—The Facebook, Inc. v. Pacific Northwest Software, Inc., 640 F.3d 1034, 1040-41 (9th Cir. 2011).
This Facebook, Inc., case involves a mediated agreement — hand-written — that subsequently falls apart. One party tries to enforce the agreement and offers evidence “of what was said and not said during the mediation.” The other party objects, based on the District Court’s local rule requiring mediation confidentiality, and the District Court sustains the objection.
The Ninth Circuit, on appeal, affirms the evidence exclusion, based on a confidentiality agreement between the parties. But it rejects the local confidentiality rule basis for exclusion, as quoted above.
REASON NO. FIVE: Local Rules on Mediation Confidentiality are Intended by Congress as Interim-Only Provisions
The Alternative Dispute Resolution Act of 1998 clarifies the role of local rules on mediation confidentiality. 28 U.S.C. § 652(d) says:
“(d) Confidentiality Provisions.— Until such time as rules are adopted under [28 U.S.C. §§ 2071 et seq.] providing for the confidentiality of alternative dispute resolution processes . . . , each district court shall, by local rule adopted under section 2071(a), provide for the confidentiality of . . . dispute resolution communications.”
Here’s what this statute is saying:
- First, each district court (including it’s bankruptcy unit) is directed to adopt a local rule on mediation confidentiality, under 28 U.S.C. § 2071(a), as a first-and-interim step in a two-step process; and
- Then, Federal rules need to be adopted on mediation confidentiality, under 28 U.S.C. § 2073 (for district courts) and § 2075 (for bankruptcy courts), to complete the two-step process.
A District Court has confirmed the reality of this two-step process with these words (from Olam v. Congress Mortgage Co., 68 F.Supp.2d 1110, 1121 (N.D.Cal. 1999)):
“In § 652(d) of the Act, Congress directed each federal district court (until national rules are adopted under 28 U.S.C. § 2071 — a process not likely to be completed for years) to ‘provide . . . for the confidentiality of [mediation processes].'”
The first step has been completed for many Federal courts. But the second step has never been completed for any Federal court.
For the reasons stated above, an amendment to Fed.R.Bankr.P. 9019 is needed to add mediation authorization and mediation confidentiality provisions, which would apply to all bankruptcy courts in every district.