Co-Chairs’ Corner

Greetings from the Mediation Committee! As 2023 has now drawn to a close, and we hope all of our members enjoyed a very happy holiday season! Here’s a report of committee events for the last quarter of 2023, and we hope to see all of you at the Annual Spring Meeting in 2024.

2023 Winter Leadership Conference

During the Winter Leadership Conference in December, the Mediation Committee presented a workshop titled, “Making the Mediation: What to Consider When Selecting the Neutral.” Committee Co-Chair Edward Schnitzer moderated this lively discussion with panelists Kara Casteel, Andrew Caine and Derek Abbott. The panelists discussed such topics as the benefits of remote vs. live mediation, how the location of any live mediation and/or the mediator may factor into the choice of mediator, and whether costs (fixed fee, split or otherwise) can affect mediator selection.

The panelists also discussed mediator requirements on participants, and how strategies for engaging the key participants, whether by pre-mediation single-party sessions or otherwise, can help mediation success. The audience actively participated in the workshop, which made for a great session for both the panelists and the audience.

The Mediation Committee also hosted an informal happy hour at the Winter Leadership Conference for members, sponsored by Co-Chairs Edward Schnitzer (Womble Bond & Dickinson (US) LLP) and Connor Bifferato (the Bifferato Firm). In addition to some great conversation, the gathering featured some truly excellent guacamole. Thanks to those that were able to attend!

Calling All Committee Members: Mediation Committee Leadership Positions Open for April 2024-2026

The leadership positions for the Mediation Committee are open for the Apri l 2024-April 2026 term. The current committee leadership warmly welcomes participation from any and all committee members interested in helping lead our committee. Open positions include Co-Chair, Education Director, Communication Manager, Newsletter Editor, Special Projects Director and Member Relations Director. If you are interested in participating in the leadership of the committee, please reach out to Edward Schnitzer at edward.schnitzer@wbd-us.com.

Two Recent Cases on Mediation Highlight the Importance of Heeding Confidentiality Requirements

In In re City of Detroit, Michigan,[1] the Michigan Department of Attorney General found itself in hot water over its disclosure of certain confidential documents to defendants in their criminal cases arising out of the Flint water crisis (the “Flint defendants”). The documents at issue were the subject of several mediation orders in the Detroit bankruptcy case, which prohibited the disclosure of “[a]ll proceedings, discussions, negotiation, and writings incident to mediation…”[2] The Department was a mediation participant in mediations held in the bankruptcy case.

The bankruptcy court recited the elements of civil contempt, which require that (1) a party violated a specific order requiring the party to perform or refrain from performing a particular act; (2) the party did so with knowledge of the order; and (3) there is objectively no doubt over whether the order barred such conduct.[3] The court found that the Department could and should be held in civil contempt of court, as it produced a large number of mediation-related documents to the Flint defendants, despite being a participant in the bankruptcy mediations and having actual knowledge of the mediation orders violated.[4]

The Department defended itself by claiming that the Department had created internal “walls” within the office, and that the division overseeing the criminal prosecution of certain former and current government employees related to the Flint water crisis (the “Flint criminal team”) had obtained the documents by subpoenaing the division responsible for defending the state against civil actions related to the crisis (the “Flint civil team”). According to the Department, while the Flint criminal team produced the documents in violation of the mediation orders, none of the Flint criminal team participated in mediation and/or knew about their prohibitions on disclosure of the relevant documents.[5]

The court found such arguments unavailing, as it noted that the Department is a single organization under Michigan law. The creation of “divisions” within the organization to deal with conflicts of interest did not transmute one organization into two. The court determined that the knowledge of the personnel involved in the mediation could be imputed to the entire Department.[6]

The court imposed a specific injunction prohibiting the Department from disclosing any information or documents covered by the previous mediation orders. In addition, the court ordered monetary relief against the Department, both as a coercive measure and to compensate the movant for the time and costs of preparing a motion to bring the issue to the court’s attention.[7]

Firms that employ the practice of internal walls between practitioners to deal with conflicts of interest should take heed of the Department’s folly; disclosure to an opponent, even an internal one, does not relieve the disclosing party from any disclosure restrictions ordered by a court.

The paramount importance of mediation confidentiality was also at issue in Dunn v. Patriarch Partners LLC (In re Zohar III, Corp.).[8] The Zohar debtor entities were collateralized loan-obligation funds, a type of securitization vehicle in which capital is raised through the issuance of secured notes, the proceeds of which are used to purchase or make loans or other investments that serve as collateral for the repayment of the notes.[9] The debtors collectively had issued approximately $2.5 billion in notes. These special-purpose entities were indirectly owned by Lynn Tilton and managed by certain Patriarch Partners entities that, along with Ms. Tilton and certain intermediary entities, are identified as the “Patriarch stakeholders.”

During the bankruptcy case, mediation was held between various parties, and a settlement agreement was reached wherein a 15-month timeline was established to monetize the debtors’ assets. However, at the end of that 15-month period, less than $150 million in proceeds had been generated by sales. Additional mediation sessions, motion practice and adversary proceedings followed this initial settlement.

The mediation confidentiality dispute related to two consolidated adversary proceedings: one by a litigation trustee, and the other by MBIA Insurance Co. against the Patriarch stakeholder entities. The trustee sought an order quashing certain subpoenas issued by the Patriarch stakeholders requesting documents from third parties related to a failed global restructuring negotiated during mediation. At issue was the Delaware Bankruptcy Court’s Local Rule 9019-5(d),[10] which prohibits the disclosure of information disclosed by participants during mediation. Specifically, the trustee sought to preclude any documents or information concerning settlement proposals, formulation of proposals, the assessment of any proposals, and communications among parties concerning the proposals.

The bankruptcy court agreed with the Patriarch stakeholders that the trustee put the mediation deal at issue by asserting a claim challenging Ms. Tilton’s good faith in complying with the monetization requirements of the settlement. The court also agreed that negotiations during settlement would be relevant to respond to these claims in the trustee’s complaint. However, the court declined to modify the application of the local rule to permit discovery on the mediation negotiations. Instead, the court indicated that the trustee had failed to sufficiently amend the applicable complaint so as not to pursue claims relating to the precluded mediation matters, and ordered the trustee to amend the complaint further to remove claims that put mediation negotiations at issue.

The court noted that this was the proper result because the other parties, including MBIA and the Patriarch stakeholders, also had been required to amend claims and counterclaims to remove claims concerning mediation. As notable to practitioners, it is clear (in Delaware, at least) that the rule of mediation confidentiality is of such paramount importance to ensure meaningful negotiations in all mediations that the court will not allow a breach of confidentiality, even in circumstances where it could bring meaningful recovery to creditors of the estate.

— Ian Connor Bifferato
Edward L. Schnitzer
Co-Chairs