A Proactive Mediator Role: “Special Settlement Master”

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Antonio Stradivari of Cremona, Italy — A Special Master (Photo by Marilyn Swanson)

By Donald L. Swanson

Mediators are appointed as “special masters” in the U.S. District Courts.  Such appointments are authorized by Fed. R. Civ. P. 53.

Examples of Mediators as Special Settlement Masters

Mediators appointed as special settlement masters are often given a broad range of authority to act proactively on the court’s behalf.

One example is In re Syngenta case, a multi-district case pending in the U.S. District Court for the District of Kansas, where a mediator is appointed as special settlement master (aka mediator) under Fed.R.Civ.P. 53.  This settlement master (aka mediator) is given a broad grant of authority, under Rule 53, to:

–“Order the parties to meet face-to-face and engage in serious and meaningful negotiations”

–“Make recommendations to the court concerning any issues that may require resolution in order to facilitate settlement or to efficiently manage the litigation”

–“Communicate ex parte with the court at any time.”

Another example is the Argentina debt cases, in the Southern District of New York, in which the Court creates a mediator role, appoints a mediator, and dubs the mediator a “special master” under Rule 53.  This mediator/settlement master functions with a high level of autonomy and in a proactive manner.

“Judicial Adjuncts”

Special masters under Rule 53 are “judicial adjuncts,” which means they are appointed to assume some of the functions of a judge.

The special master’s “Handbook” (created by the Academy of Court Appointed Masters) explains the role of a “settlement master” (i.e., a mediator) as follows:

–Historical Development:  “The use of settlement masters to reach global settlements in large-scale tort litigation dates back at least to the Dalkon Shield litigation and Agent Orange litigation beginning in the late 1980s.”

–Authority:  “Courts have come to realize that the appointment of a neutral third-party who is granted quasi-judicial authority to act as a buffer between the court and the parties can provide a useful approach to reaching a settlement.”

–Complex and Multi-Party Cases:  “This [usefulness] is especially true in complex litigation involving numerous parties, or when the dispute has matured and individual settlements become repetitive and time-consuming.”

Special Masters and Bankruptcy

It’s interesting to note that the Federal Bankruptcy Rules expressly reject the office of “special master.”   Fed. R. Bankr. P. 9031 is titled, “Masters Not Authorized,” and specifies: “Rule 53 F.R.Civ.P. does not apply in cases under the [Bankruptcy] Code.”

Nevertheless, at least 70% of all bankruptcy courts have local rules authorizing the appointment of mediators.  And bankruptcy courts have a recent history of investing mediators with a proactive role and function, similar to that of the settlement masters appointed in the In re Syngenta case and the Argentina debt cases.

–The prime example of such proactivity in bankruptcy is, of course, the City of Detroit case and the broad authority granted to and exercised by the mediators in that case.

The Future?

It will be interesting to watch, as time progresses, whether the proactive mediator authority granted and exercised in the In re Syngenta case, the Argentina debt cases and City of Detroit bankruptcy case, will become the norm in bankruptcy proceedings.

–My sense is that proactive mediation (like that of a settlement master under Fed.R.Civ.P. 53) is on-its-way to becoming standard practice for large bankruptcy cases — and for smaller cases as well.

 

 

 

 

“The Walls of the Mediation Room are Remarkably Transparent”: From a Study on Mediation Confidentiality

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Remarkably Transparent Walls

By Donald L. Swanson

“In sum, the walls of the mediation room are remarkably transparent.”

— James Coben & Peter Thompson

The State of California is studying mediation confidentiality in the context of legal malpractice disputes.

Suprise # 1

A surprise of the study is from a 2006 law review article by Coben and Thompson titled,  Disputing Irony: A Systematic Look at Litigation About Mediation.  The surprise is this:

In actual practice, mediation confidentiality is often ignored.

Coben and Thompson reach the following conclusions in their article:

–there is a “large volume” of reported court opinions in which “courts considered detailed evidence of what transpired in mediations without a confidentiality issue being raised—either by the parties or sua sponte by the court.”

–“uncontested mediation disclosures occurred in thirty percent of all decisions in the database, cutting across jurisdiction, level of court, underlying subject matter and litigated mediation issues.”

–Disclosures of mediation information in court include:

forty-five opinions in which mediators offer testimony,

sixty-five opinions where others offer evidence about mediators’ statements or actions, and

266 opinions where parties or lawyers offer evidence of their own mediation communications and conduct

And all of these disclosures are “without objection or comment.”

So much for confidentiality as a highest-priority in mediation cases.

Surprise # 2

Here is another surprising set of findings by Coben and Thompson:

“Courts expressly refused to protect mediation confidentiality in sixty opinions.”

Of those sixty, “few” involve “a reasoned weighing of the pros and cons of compromising the mediation process.”

Instead, the “admissibility or discovery of mediation information” is “routinely justified” on such grounds as:

–waiver and consent

–the information is not “confidential”

–the process is “not mediation”

–the provider of the evidence is “not a mediator”

–the evidence is offered “for a permissible purpose”

–the evidence is “not material” or its introduction “constituted harmless error.”

Conclusion

Total or nearly-complete confidentiality in mediation is far from reality.  Should something be done about this?

 

In re SunEdison: Mandatory Mediation to the Rescue?

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A Rescue

By:  Donald L. Swanson

Whereas, mediation may provide an opportunity to consensually resolve the Mediation Issues . . . It Is Therefore, Ordered” that “Representatives of the following parties and their counsel are directed to attend the Mediation in person: (i) the Debtors, (ii) the Committee, . . . [etc.] . . .

Stuart M. Bernstein, U.S. Bankruptcy Judge (In re SunEdison, Doc. 2795, Case No. 16-10992, S.D.N.Y., 04/18/17).

SunEdison has been in Chapter 11 bankruptcy for a year (since April 21, 2016). One of the major issues in the case involves preference, fraudulent transfer and related avoidance claims against a group of businesses with insider-type connections to SunEdison.

The Official Committee of Unsecured Creditors in the SunEdison case explains the avoidance claims and issues like this (in Doc. 2666):

“It is undisputed that recoveries on account of the Avoidance Actions inure to the benefit of – and may be one of only a very few sources of recovery for – unsecured creditors.”

The avoidance claims are based on this information: “while Debtors were insolvent,” the insider-type entities received valuable assets from SunEdison, consisting of “completed energy projects, services and payments worth hundreds of millions, if not billions, of dollars, for which the Debtors did not receive reasonably equivalent value in exchange.” [Emphasis added.]

SunEdison proposes to resolve the avoidance claims by a settlement with its insider-type businesses and allocating $16.1 million from the settlement funds to unsecured creditors. The Committee objects to this “mere $16.1 million” amount, contending that, (i) additional discovery is needed to fully evaluate the settlement, and (ii) the Committee should be allowed to pursue such claims, rather than allowing SunEdison to dictate the terms of a settlement with its insiders.

Last week, Judge Bernstein orders this set of disputes into mediation.

–Time will tell how this mandated mediation plays out: can it provide a rescue?

–The stakes are high: back on March 7, 2017, during a hearing in open Court, the Judge says, “if there isn’t some resolution of the allocation issue by whatever the deadline is, it may be that’s the end of the case.”

It will be interesting to see whether the mediator, the parties and their counsel are up to the rescue challenge.

Next Steps for a Court with Basic Mediation Rules: Mandated and Early Mediation

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The next steps

By: Donald L. Swanson

Here is a common experience in the bankruptcy courts (and other courts) where mediation is a new or little-used tool:

Attorneys have been practicing for years in this court without using mediation.  And mediation is slow to catch on.  Here’s why:

–Attorneys who practice in this court aren’t accustomed to using mediation, aren’t comfortable with inserting mediation into their case planning habits, and rarely even think of mediation as a possibility; and

–Judges in this court aren’t comfortable with the idea of mandating mediation by local rule or by order in a particular case.

            MANDATORY MEDIATION

The Voluntary Mediation Problem

The problem with voluntary mediation, in a new or little-used mediation program, is explained by these two conclusions from a study of empirical data:

–When the goal is to achieve a “regular and significant use” of mediation to resolve court cases, “[v]oluntary mediation programs rarely meet this goal because they suffer from consistently small caseloads.”

–By contrast, “judicial activism in ordering parties into mediation triggers increased voluntary use of the process.”

Moreover, according to the study,  “settlement rates” and a litigant’s perceptions of “procedural justice” are about the same in mandatory mediation as in voluntary mediation.

Three Examples of Mandatory Mediation Rules

Example No. 1.  Circuit Courts of Appeals.  All but one of the U.S. Circuit Courts of Appeals have a mandatory mediation program.  Data from these mandatory programs show them to be highly successful in achieving mediated settlements across all types of cases and regardless of levels of animosity or distrust between the parties.

Example No. 2.  Delaware Bankruptcy Court.  The Delaware Bankruptcy Court, and attorneys who practice there, have extensive experience over many years with using mediation to resolve bankruptcy disputes.  In 2013, the Delaware Bankruptcy Court intensifies its mediation program by adding this mandatory provision to its Local Rule 9019-5(a):

“all adversary proceedings filed in a chapter 11 case . . . shall be referred to mandatory mediation.”

It must be noted that the trajectory of changes to local mediation rules in the Delaware Bankruptcy Court is toward mandated mediation – and away from a voluntary system.

Example No. 3.  New Jersey Bankruptcy Court.  The New Jersey Bankruptcy Court, and attorneys who practice there, also have extensive experience over many years with mediation.  In 2014, the New Jersey Bankruptcy Court expands its mediation program by adding a “presumptive mediation” local rule.  This new rule 9019-2(a) provides:

“Every adversary proceeding will be referred to mediation after the filing of the initial answer to the adversary complaint, except [when a specified exception applies]”; and

“A contested matter . . . may also be referred to mediation . . . by the court at a status conference or hearing.”

In New Jersey, like Delaware, the trajectory of changes to local mediation rules is toward mandated mediation and away from a voluntary system.

EARLY MEDIATION

The Early Mediation Need – Generally

The study of empirical data referenced and linked above observes that mediation “tends to occur late in the life of a case.”  And it issues these findings about mediation timing:

“Holding mediation sessions sooner after cases are filed, however, yields several benefits,” including:

–“Cases are more likely to settle”;

–“Fewer motions are filed and decided”; and

–“Case disposition time is shorter, even for cases that do not settle.”

An Intensified Need for Early Mediation – In Business Bankruptcy

Superimposed over many disputes in a business bankruptcy is an urgent need to maximize value from a debtor’s operations or liquidation.  And this urgency often takes precedence over standard litigation processes like formal discovery and pretrial wrangling.  Accordingly, the need in a business bankruptcy for early and extensive mediation efforts can be particularly intense.

The role of mediation in the early stages of a business bankruptcy case needs to be different from the typical role of mediation that occurs at the end of a lawsuit:

–The role and goal of an early-mediation in a business bankruptcy is to set-the-stage and narrow-the-issues and create-a-direction and a focus for further progression of the case.

–That’s a much different role than a shortly-before-trial mediation in a one-and-done session at the end of a lawsuit, where the goal is to resolve all remaining disputes.

Here’s a link to an example of how mediation can be effectively utilized at the beginning of a Chapter 11 case.

An Example of an Early Mediation Rule

The Delaware Bankruptcy Court recently adopted a provision in its Local Rule 9019-5(j) that allows a defendant to opt for an early mediation of a preference case with less than $75,000 at stake.

Within 30 days after a response to the preference Complaint is due, the defendant in such cases may elect an early mediation of all claims raised in the lawsuit.  In cases where more than $75,000 is at stake, the parties may agree to participate in the early mediation process.

Action Item:

I am passionate about encouraging:

–Bankruptcy courts to adopt local rules on mediation and to expand the role and reach of mediation through mandatory and early mediation requirements; and

–Attorneys who practice is such courts to utilize mediation for resolving their disputes.

And I’d be delighted to discuss such matters with anyone interested in expanding the role and reach of mediation in a local court.

Puerto Rico Turns to Mediation for Assistance in Solving its Financial Crisis

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There are better ways to handle a crisis than what this artwork suggests.

By Donald L. Swanson

“Puerto Rico’s federally appointed financial oversight board scheduled mediation in debt restructuring talks between the U.S. Territory’s general obligation bondholders and holders [of other debts] backed by sales tax revenue.” The mediation “will run from April 10-13 in New York.”

–Reuters.com, March 31, 2017, at 11:09 a.m.

An hour later, March 31, 2017, at 12:10 p.m., Reuters.com publishes this more-detailed information:

The focus of the proposed mediation is “to resolve strife between” two groups of creditors: one holds $17 billion of general obligation debt, and and the other holds $18 billion of debt backed by sales tax revenue. Both sides claim ironclad legal rights to payment.

The next few weeks will be critical for Puerto Rico, whose $70 billion debt load is pushing its economy toward collapse.” And May 1 “marks the expiration of a freeze on creditor lawsuits.”

Some creditors prefer direct negotiations over mediation, citing delay concerns. Accordingly, the mediation proposal says that “creditors who object to mediation” can submit offers directly to the Oversight Board, which will then be shared with the mediator.

The following information is from an Elnuevodia.com article dated a day earlier — March 30, 2017, at 10:27 a.m.:

The proposed mediation . . . could start this week if the Island’s various creditors and municipal bond insurers agree.”

This mediation development “seems to be a total about-face” after various creditors “criticized” the Government and Oversight Board efforts thus far.

The letter “inviting bondholder groups to enter a mediation process” began receiving positive responses: several bondholder groups, for example, “have already stated their availability to enter a mediation process,” provided such a process is “non-binding.”

But some are skeptical of the mediation effort: “We see it as a delay tactic,” one source said, since the primary bondholders have not yet joined the process—which fact remains true as of “press time.”

Kudos and Congratulations

Kudos and congratulations to Puerto Rico’s Financial Oversight Board for this mediation initiative!!

[Note: Congress recently created the Financial Oversight Board to “provide a method” for Puerto Rico “to achieve fiscal responsibility and access to the capital markets.”]

Puerto Rico is now joining a long line of governmental entities who turn to mediation for assistance in resolving a financial crisis.

Additionally, kudos and congratulations are in order for the Board’s approach, noted above, for dealing with parties who prefer direct negotiations.  The approach is to have such parties submit offers directly to the Board, which then refers the offers to the mediator.  This is creative and clever!

Examples of Proactive Mediation Success for Governments

An example of mediation success for other governmental entities in financial crisis is the country of Argentina, which experienced a $100 billion debt default crisis in 2002.  Argentina reached partial resolutions of that crisis in 2005 and 2010, and it achieved a final mediated settlement in 2016.

The most famous example of mediation success for a governmental entity is the City of Detroit bankruptcy, in which a team of proactive mediators held hundreds of mediation sessions and helped resolve the seemingly intractable financial problems of a large city. Such a mediation process is declared to be “an ideal model” for restructuring efforts by other governmental entities.

Hopefully, Puerto Rico’s Financial Oversight Board will be able to successfully pursue the same types of proactive mediation processes that worked effectively elsewhere!

Can anyone provide further information on what’s happening with this mediation effort?

Structured Dismissal Negotiations are Ripe for Mediation: Until the Supreme Court Upends Precedent (In re Jevic)

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Ripe for eating

By: Donald L. Swanson

We are not final because we are infallible, but we are infallible only because we are final.”

–From concurring opinion of U.S. Supreme Court Justice Robert H. Jackson, in Brown v. Allen, 344 U.S. 443 (1953), on role and function of the U.S. Supreme Court.

Structured dismissals are [correction: were] a rapidly developing field in today’s bankruptcy world.  That all changed on March 22, 2017, when the U.S. Supreme Court puts the kibosh on structured dismissals in its In re Jevic ruling.

Negotiations in this rapidly developing field would be ripe for mediation.  But, alas, that will not happen, because of the In re Jevic ruling.  Now, the rule is simple:  distribute sale proceeds through the Bankruptcy Code’s priority scheme.

Necessity Produces Creativity

Creative processes, like structured dismissals, arise out of a need in bankruptcy to maximize value and distribute proceeds in an efficient and prompt manner.  Plan confirmation processes are, often, inefficient and expensive in the extreme.  So, when an opportunity arises to maximize value and distribute proceeds in a way that is quick, efficient and effective, practitioners gravitate to that opportunity.  Structured dismissals provide one of those opportunities.

Some History

Bankruptcy courts have been struggling for as long as I can remember with how to handle asset sales and the distribution of sale proceeds.  My first recollection of a bankruptcy sale issue relating to today’s structured dismissals is from 1982:

–a bankruptcy judge rules in 1982 that a bankruptcy trustee may not “serve as the handmaiden” of secured creditors in liquidating collateral.  Accordingly, a sale of assets should not occur in a Chapter 7 case, the judge says, when the only persons to benefit are secured creditors.

–The judge in 1982 explains: “Secured creditors by consent and the trustee by acquiescence cannot impose upon the [Bankruptcy] Court the duty to serve as a foreclosure or collection forum.”

The “handmaiden” phrase from 1982 stands the test of time.  It’s still good law today, especially in Chapter 7 liquidation cases: if all debtor’s nonexempt assets are fully encumbered, the Chapter 7 trustee must issue a “no asset” report.

But a bankruptcy sale of fully-encumbered property can still provide benefits to the bankruptcy estate in a business reorganization.  Such benefits might include keeping a business alive under new ownership, which will continue providing jobs and business activity and tax payments in the local community.

Additionally, parties in a bankruptcy often negotiate for ways to create benefits to the bankruptcy estate from a sale of fully-encumbered property.  One way is to carve-out a portion of the funds the secured creditor would receive from a sale and then gift that portion to priority wage claims or to unsecured creditors.

A Long-Standing Precedent

That’s what happened, for example, in the case of  In re SPM Manufacturing Corp., 984 F.2d 1305 (1st Cir. 1993).

–In the In re SPM case, a secured creditor would get all proceeds from the sale of debtor’s assets.  So, the secured creditors enters into a pre-plan settlement agreement for distributing proceeds from a bankruptcy sale.  The agreement would gift to unsecured creditors a portion of sale proceeds the secured creditor would otherwise receive.

–The bankruptcy court rejects this agreement because tax claims have a higher priority, aren’t receiving any of the gift, and remain unpaid.  The District Court affirms, and the case is appealed to the First Circuit Court of Appeals.

–The First Circuit reverses and approves the agreement.  Here is part of the First Circuit’s rationale:

The Bankruptcy Code’s distribution scheme “does not come into play until all valid liens on the property are satisfied.  . . .  Because [the secured creditor’s] claim absorbed all of SPM’s assets, there was nothing left for any other creditor in this case.  . . . creditors are generally free to do whatever they wish with the bankruptcy dividends they receive, including to share them with other creditors.”  [984 F.2d at 1312-13.]

This In re SPM ruling has been the law-of-the-land in the First Circuit for fourteen years.  And the ruling makes sense, as reflected by this fact: an online research tool [Casemaker] says this In re SPM decision, (i) has been cited 183 times, and (ii) has been “criticized” only once on unrelated grounds.

Overruled?

So . . . did the U.S. Supreme Court decide to overrule this long-standing In re SPM rule in its In re Jevic decision . . . without even mentioning it?!  Perhaps not: the In re SPM decision might be distinguishable (arguably, at least).  But In re Jevic’s “simple answer” of “no” suggests otherwise.

This result is unfortunate in the extreme for bankruptcy practitioners and judges striving to maximize and distribute value in an efficient and effective manner!!

How Frequently Does Malpractice Occur in Mediation?

By Donald L. Swanson

California has been studying this question: should a malpractice exception be added to California’s mediation confidentiality laws?

If, for example, a mediating party sues his/her/its attorney for malpractice committed during a mediation session, should statements made during the mediation session be admissible evidence in the malpractice lawsuit?

Or should such statements remain confidential, as currently required by California law?

Here is a 2015 report from that study.

One suggestion in the study report is to leave confidentiality laws as-is on this malpractice question, unless there is “some reliable research” showing that “a substantial problem” exists.  A related conclusion is that there is “scant evidence” of “a systemic problem created by mediation confidentiality.”

Infrequent Misconduct

The study identifies some empirical data on mediation misconduct.  And here is a finding from such data:

Mediation misconduct is relatively infrequent,

–but allegations of such misconduct do occur occasionally, and

–at least a few of those allegations “appear to have some merit.”

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Hear no evil, see no evil . . .

Any Remedy?

So . . . what is to be done for the “few” whose claims “appear to have some merit”?

Are we to pretend that we hear no evil, see no evil . . . ?

Are we to tell them something like, “Too bad, so sad . . . you have no redress”?

Such responses would be like a scene from that cinematic masterpiece [sarcasm intended] called, “Dumb and Dumber”:

–One of the dumb guys has just been saved by a bullet-proof vest supplied by the FBI, when he says, “Hey, what if he shot me in the head?!”  To which the FBI agent responds, “That’s a risk we were willing to take.”

Fortunately, the Commission appears to be exploring ways to provide recourse for mediation malpractice claimants while still preserving confidentiality to the greatest extent possible.

Good for them!

What do you think about a malpractice exception to mediation confidentiality?

 

A PricewaterhouseCoopers Déjà Vu: Mediation, Then Trial, Then Settlement During Trial

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Mediator’s report to the Court

By: Donald L. Swanson

The case is MF Global Holdings LTD. v. PricewaterhouseCoopers LLP, Case No. 14-cv-2197 in the U.S. District Court for the Southern District of New York.  Hon. Victor Marrero is the presiding Judge.

This case concludes by settlement, last week, in the middle of trial.

Claims Asserted

Plaintiff asserts in this lawsuit that PricewaterhouseCoopers, as auditor, failed to detect and report a financial scheme that ruined the business of MF Global.

The case begins on March 28, 2014, with the filing of a Complaint asserting three separate claims against PricewaterhouseCoopers and requesting the following relief: “a money judgment” in amounts “to be determined at trial but not less than,” (i) $1 billion on a professional malpractice claim, (ii) $1 billion on a breach of contract claim, (iii) $10.9 million on an unjust enrichment claim, plus (iv) related costs and expenses, including attorney fees.

Mediation, Trial and Settlement

On February 6, 2017, Judge Marrero reschedules the start of trial from February 13, 2017, to March 6, 2017 (Doc. 136), so the parties can engage in mediation.

The mediation fails to achieve a settlement.  And the mediator’s letter to the Court dated February 21, 2017, (a photo of this letter is above) says:

“I write to inform the Court that the parties have engaged in private mediation.  The mediation was unsuccessful.  At this time, the parties are planning to proceed with trial as scheduled on March 6, 2017.”

Trial begins on March 6, 2017.

On Thursday, March 23, 2017, as trial is still in process, the parties announce a settlement of this lawsuit on undisclosed terms that are to “the mutual satisfaction of the parties.”

Déjà Vu

Last year, PricewaterhouseCoopers is being sued in a State Court in Miami, Florida.

This Florida lawsuit alleges that PricewaterhouseCoopers provided clean audit opinions to a company for six years until that company collapsed, and the lawsuit claims $5.5 billion in damages plus punitives.  This suit is reported to be “the biggest accounting negligence lawsuit ever to go to trial.”

As in MF Global, this lawsuit settles in the middle of trial for a confidential sum that is “to the mutual satisfaction of the parties.”  The settlement occurs on August 26, 2016.

Although I can’t access records in a Florida State Court, I’m confident this Florida case went through mediation before trial began.

Summary

Accordingly, we see a two-in-a-row déjà vu, where PricewaterhouseCoopers settles the same types of cases in the same way: through a mediation that fails to achieve a settlement, then trial begins and progresses for a time, with settlement occurring in the middle of trial.

Fundamental Proposition

I suggest that these two déjà vu cases illustrate a fundamental proposition: that mediation can provide meaningful progress toward a consensual resolution of a lawsuit, even when the settlement comes after mediation concludes and while the parties are battling-it-out in trial.

What do you think about this proposition?

Note: Information in the déjà vu section of this article is from a Financial Times news report dated August 26, 2016..

How Mediation Confidentiality is Waived — A Ninth Circuit Decision

img_1628By: Donald L. Swanson

Can mediation confidentiality be waived?

The answer is, “Yes.”

–That’s according to the U.S. Ninth Circuit Court of Appeals, from an unpublished “Memorandum” decision in Milhouse v. Travelers Commercial Insurance Co., Case No. 13-56959, 13-57029 (9th Cir., Feb. 23, 2016).

Facts

The Milhouse residence, located in California, had been destroyed in a fire – a total loss. Disputes arose with Travelers over their home insurance policy, which resulted in a lawsuit and a jury trial.

The jury rules in favor of Mr. and Mrs. Milhouse on breach of contract. But the jury rejects their bad faith claim and their request for punitive dames.

Mediation Confidentiality Issues

–Trial Court Ruling

The trial court enters a final post-trial order (dated November 5, 2013) on multiple issues, from which both parties appeal to the Ninth Circuit.

Here is what the trial court says, in such order, about mediation confidentiality:

1. “At trial, evidence was presented regarding statements made during the course of the mediation proceeding between Dr. and Mrs. Milhouse and Travelers.”

–Such evidence includes this: “the Milhouses made a $7 million demand of payment” in mediation and “asked for nearly a million dollars of attorney’s fees when their attorney had only worked on the case for a few weeks.”

2. “The Milhouses now challenge the admissibility of such evidence, and argue that it resulted in prejudicial error that warrants a retrial on the issue of bad faith.” Such argument “fails on two independent grounds”:

–Waiver.  “First, the Milhouses failed to raise the issue with the Court at or before trial, and therefore waived their right to claim any privilege.”

–As to the mediation confidentiality agreement between the parties, the trial court says, “the Milhouses never presented” such an agreement as evidence and “incorrectly assume” that the court “can exclude testimony on the basis of a confidentiality agreement it has never seen.”

–Due Process.  “Second, to find evidence of statements made at the mediation proceeding inadmissible at trial would violate the due process right of Travelers to provide a complete defense to its alleged liability for bad faith and punitive damages.”

–Ninth Circuit Ruling

One of the Milhouse arguments on appeal is that the trial court (the U.S. District Court for the Central District of California) “erred” when it “admitted mediation communications at trial.”

The Ninth Circuit evaluates and rules on mediation communications issues in the following manner:

–Procedural Background Evaluation:

–Pretrial.  Initially, both parties file pre-trial motions to preserve mediation confidentiality and exclude mediation evidence. But both parties end up withdrawing those motions.

–Trial.  The Milhouse attorney does not object at trial, on mediation confidentiality grounds, to any evidence, nor does he alert the trial court to the requirements of California’s mediation privilege law.

–Post-Trial.  The Milhouse attorney raises mediation confidentiality issues for the first time in a post-trial request for new trial.

–Ninth Circuit Ruling:

“We therefore consider the [mediation confidentiality] issue waived.”

Editorial Comments

1.  I understand the waiver finding by both the trial court and the Ninth Circuit. Waiver seems to make sense:

–The Milhouse attorney apparently forgets about the confidentiality objection at trial.  Or . . . perhaps he has a strategic reason for abandoning the objection, and he fails to raise the objection intentionally?  We’ll never know.

2.  But the District Court’s “due process” finding is a concern – for two reasons:

–California’s mediation privilege law is about as strict as they come, with exceptions being almost non-existent. And California law would probably not recognize the Court’s “due process” exception to its mediation privilege.

–The District Judge appears to be saying that a mediation confidentiality objection, if raised at trial, would have been overruled and the evidence admitted anyway.

The Ninth Circuit does not even mention the trial court’s due process ruling and bases it’s “affirmed” decision on waiver alone.

3.  In this diversity jurisdiction case, the courts wonder whether mediation confidentilaity is governed by California state law or by Federal Evidence Rule 408.  Why the U.S. District Court doesn’t reference its own Local Rule 16-15.8 on mediation Confidentiality is mentioned: but the probable reason is discussed here.

What do you think about the waiver issue?

Mediator Neutrality: An “I believe . . . ” Test

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No neutrality here — she’s on their side

By Donald L. Swanson

A mediator is, by definition, a “neutral.”

Neutrality seems to be a straight-forward concept: it means not-taking-sides.

But not-taking-sides is, apparently, not all that simple. Check out this excellent article and this fine series of essays on the subject.

Efforts to define or explain “neutrality” often get bogged down. Sometimes, new explanations of what “neutral” means create more ambiguity or uncertainty than already exist.

Non-Neutral Behavior

Here are some examples of behavior that run afoul of the neutrality standard.

–Mediator: “My law partner is an expert in this area. So I’ve asked him to critique your expert’s report. Here’s how he says your expert’s opinion is faulty.”

–Mediator: “Here’s a list of terms that everyone else has agreed upon. This is a great deal, and you must accept these terms.”

–Mediator: “Your legal position is way off base on this issue, and you are going to lose at trial.”

Each of these examples is from an actual anecdote from attorneys talking about bad experiences in mediation.  In each of these examples, the mediator is viewed as taking the other party’s side.

An “I believe …” Test for Mediator Neutrality

Whenever a mediator says something like the following quote, the mediator’s neutrality is compromised:

“Here’s what I believe about the merits of your case: [___fill in blank____].”

An expression of personal opinion on the merits of the dispute is “taking-sides.”

There are probably a million-or-so ways a mediator can convey the same type of message, while still maintaining position of neutrality: i.e., without giving a personal opinion on the merits.

For example, a mediator could say:

–“The other side’s position is . . . [then fully and faithfully explain that position].”

–“The other side says this about your expert’s opinion: . . . ”

–“Here’s one of the risks you run–that the judge will accept the other side’s version of the facts. And here is the evidence they’ve identified . . . ”

–“If you lose on that issue, here are the range of results that have been identified . . .”

–“I know you are confident in your case at trial. But your opponent is also confident. And here’s why . . .

–“Here is a risk that each side runs: that the judge will get it wrong, from your perspective. And ‘getting it wrong’ happens, as reflected by reversals that commonly occur on appeal.”

All of these examples are neutral responses that don’t take sides.

A mediator might even say to a party in caucus something like: “My experience is that judges rarely . . . ”

–Such a statement can be a neutral observation that helps the parties but doesn’t take sides: it’s talking about objective experiences, and not about the mediator’s opinion.

Such responses can be used by a mediator to clearly and effectively convey hard truths, without the mediator injecting his/her own opinion on the merits of the dispute.

Analogies

The following are some analogies that illustrate neutrality (good analogies) or provide a contrast with neutrality (bad analogies).

Good Analogies

The best analogies for what mediator “neutrality” means are from informal contexts. For example:

–a parent handling a squabble between siblings, when the parent avoids taking sides in the spat, is a good neutrality analogy.

–a friend trying to help solve a misunderstanding between two buddies, without taking sides, is also a good analogy.

Bad Analogies

Judges, referees and umpires, however, are bad analogies for mediator neutrality.  Here’s why:

–because the job of every judge, referee and umpire is to make decisions on the merits of disputes, and every decision on the merits favors one side over the other

Hopefully, every judge, over the course of a bench trial, will leave an impression of impartiality, even-handedness, and good judicial temperament.  But it won’t be an impression of neutrality.

–At the end of trial, the judge will make a decision that is anything but neutral.  A judge’s judgment will almost always favor one side over the other.

Similarly, every basketball referee will make decisions on who fouled whom.  None of such calls is neutral.

–Some of the decisions will be close calls: e.g., when a violent collision occurs during a drive to the rim.  Is that a charge on the offense, a foul on the defender, or a no-call?

–Hopefully, over the course of a game, the cumulative effect of a referee’s calls will leave an impression of impartiality and consistency, but every call favors one side over the other.

Likewise, every strike / ball call by an umpire favors one team over the other.  It’s not a neutral call.

–But consistency on the location of the strike zone will leave an impression of impartiality and fairness.

Mediator Neutrality

A mediator makes many decision and many communications over the course of a mediation. Most of such decisions and communications are about handling the mediation process and managing the parties, their conflict, and their negotiations.  And some decisions and communications will convey hard truths to the parties.

But a neutral mediator must not convey an impression of taking-sides by offering an “I believe . . . ” opinion on the merits of the dispute.

An  often-perceived exception occurs when a party asks, in caucus, for the mediator’s candid opinion on the merits of the dispute. But even in this context, the mediator who weighs-in with such an opinion is on dangerous ground.  See, e.g., this article.

Conclusion

Neutrality is an essential quality of a mediation. A mediator can be active and forceful and convey hard truths– and still remain neutral. It’s the “I believe…” input on the merits of the dispute that compromises neutrality.

What do you think about this “I believe . . . ” test?