Although a municipality must show it attempted before filing to negotiate with creditors in good faith, a debtor is not required to turn over a pre-filing mediation statement during discovery on eligibility for chapter 9, according to a Dec. 19 opinion by Chief Bankruptcy Judge Cynthia A. Norton of Kansas City, Mo.
An improvement district had been created to provide sewers and other municipal improvements such as sidewalks. Before filing, the district participated in mediation with bondholders in an attempt at negotiating a schedule for repaying bonds.
When mediation failed, the district filed a chapter 9 petition. In discovery over the district’s eligibility for chapter 9, the bondholders issued a discovery notice seeking production of the district’s mediation statement, contending it was pertinent to deciding whether the district had negotiated in good faith as required by Section 109(c)(5)(B).
Judge Norton held that the mediation statement provided to the mediator by the district was protected from discovery in the early stages of the chapter 9 case.
Because chapter 9 eligibility litigation raises federal questions, Judge Norton held that the district’s privileges were governed by federal common law under Rule 501 of the Federal Rules of Evidence. She proceeded to rule that the mediation statement was attorneys’ work product, prepared in anticipation of litigation. When the burden shifted to the bondholders, they had not carried their burden to show “substantial and undue hardship” absent production, she said.
The mediation statement was also protected as attorneys’ opinion work product. Judge Norton held that Section 109 “does not provide for a blanket repeal of privileged material,” because the mediation statement would not be the only means for the district to show compliance with the good faith negotiation requirement. In addition, she said that disclosure to the mediator did not waive privileges, because the parties had agreed that the mediator could not be compelled to disclose anything about the mediation in later litigation.
However, Judge Norton did not find a mediation privilege under Rule 501 of the Rules of Evidence, which permits the establishment of new privileges based on “reason and experience.” While the Eighth Circuit to date has not ruled for or against a mediation privilege, she noted that the Sixth Circuit adopted a privilege while the Seventh and Federal Circuits “have declined to adopt the privilege.”
Judge Norton denied the bondholders’ motion to compel production without prejudice. If the district later attempts to use the statement to show good faith negotiations, she allowed the creditors to renew their motion to compel.