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| Melanie Cyganowski |
Rules governing bankruptcy-related mediation are separately adopted by individual jurisdictions. Bankruptcy Rule 9019 speaks of compromise and arbitration but does not mention mediation. Instead, it outlines the procedures for ratifying a compromise and authorizes arbitration. Building upon Rule 9019, courts have issued their own mediation rules to help resolve not only general disputes but also special disputes such as those involving mortgage modifications and pro se parties.
Numerous jurisdictions require good faith participation in mediation. At the same time, they do not define what exactly is good faith, or what is bad faith. Other jurisdictions have rules governing mediation but lack any mention of good faith — even when their rules contain the threat of sanctions.
For example, Rule 9019-1(e) of the U.S. Bankruptcy Court for the Eastern District of New York mandates parties to a mediation participate in good faith. It also authorizes the court to sanction bad conduct. For its part, Standing Order M-390 for the U.S. Bankruptcy Court for the Southern District of New York mandates that mediation parties participate in good faith. But neither Rule 9019-1 nor Standing Order M-390 define good faith.
The U.S. Bankruptcy Court for the District of New Jersey has adopted an extensive set of rules to govern court-annexed mediation but has omitted the words good faith. The rules, however, make clear that mediation is not a haphazard process.
The New Jersey Bankruptcy Court’s rules spell out who must attend the mediation sessions: trial counsel; individual parties; corporate parties, by a representative possessing settlement authority; and other “interested parties, such as insurers or indemnitors, whose presence is necessary or beneficial to reaching a full resolution of the matter.”[1]
Significantly, while the rules of the New Jersey Bankruptcy Court make clear that willful failure to attend mediation may be sanctioned, they do not otherwise tie sanctions to a parties’ failure to participate in good faith. However, the New Jersey Bankruptcy Court’s rules provide that a lawyer representing a client at a mediation session is subject to the Rules of Professional Conduct of the American Bar Association as revised by the New Jersey Supreme Court.[2]
In New Jersey and elsewhere, the lack of an express requirement of good faith participation does not block a court from imposing sanctions where the offending conduct blatantly goes over the line. Just as failing to appear at a pretrial conference may trigger sanctions, so too does going AWOL from mediation.
All these rules lack uniformity. But even without a rule defining good faith, conduct that blatantly demonstrates patent bad faith will likely be met with sanctions. For example, a litigant who fails to appear at mediation or storms out of a mediation session after just a few minutes is likely to be sanctioned, regardless of the text of the rule. Offensive conduct is usually sanctionable.
Separately, Civil Rule 16 expressly addresses pretrial conferences for the purpose of, among other things, facilitating settlement. It also contains a provision that allows courts to impose sanctions when a party fails to participate in good faith or appear at a court conference. On that score, Civil Rule 16 has become a focal point in mediation.
Although Civil Rule 16 does not mention mediation, it does mention that a court may take appropriate action in “settling the case and using special procedures to assist in resolving the dispute when authorized by statute or local rule,” and courts have not hesitated to rely on the rule as a basis for sanctioning a defiance in mediation.
But beyond that, what other types of conduct merit sanctions is unclear. At least one court has held that good faith in the context of mediation requires that a participant actively involve itself in the mediation. In another instance, just showing up and staying awake was found to be legally inadequate.
Although mediation is an effective tool to move parties away from their positions, and towards a resolution, a party’s failure to come to an agreement is not necessarily bad faith. A party may feel discouraged to participate in court-ordered mediation when that party feels it is missing its day in court or that by coming to an agreement in mediation the party is inviting future litigation or not settling is a business decision.
Finally, imposing sanctions upon a mediating party for failing to address specific claims would undermine the privacy that attaches to mediation. Once conduct that is not patently objectionable is scrutinized, secrecy surrounding mediation may be lost, and positions advanced behind closed doors see the light of day, unintentionally or otherwise.
In Procaps S.A. v. Patheon Inc., the U.S. District Court for the Southern District of Florida held that the plaintiff’s failure to provide its settlement figures in advance of mediation did not constitute an objective lack of good faith. Procaps, however, also enumerated what constitutes offensive conduct in mediation, and included: (1) not attending a court‐ordered mediation; (2) not having a representative with sufficient settlement authority attend the mediation; and (3) leaving a mediation after a few minutes (or some other inadequate amount of time).
Of the grounds for imposing sanctions, failure to appear at a scheduled mediation is by far the simplest basis for imposing sanctions. For example, in Lucas Automotive Engineering Inc. v. Bridgestone/Firestone Inc., the U.S. Court of Appeals for the Ninth Circuit affirmed the imposition of sanctions where the plaintiff’s president failed to attend a mediation session and had not given prior notice, claiming that “he was suffering from an incapacitating headache, and that his failure to appear was not intentional.”
Other courts have a taken a similar approach toward participation, deeming conduct that disregards accepted norms as potentially sanctionable. In Negron v. Woodhull Hospital, the U.S. Court of Appeals for the Second Circuit held that the failure of a principal possessing settlement authority to participate in mediation constituted bad faith, while also recognizing that a party is free to adopt a no-pay position.
The Second Circuit, however, vacated the district court’s sanction order which had directed the entry of a default judgment against the defendant for its failure. According to the appellate court, the entry of a default judgment — on top of a monetary sanction — was a disproportionate punishment. However, the appellate court held that it was proper for the district court to require the defendant to pay for the expenses incurred in preparing for the mediation.
In Spradlin v. Richard, defendants had arrived late and unprepared for the mediation, lacked a representative who possessed settlement authority and filed a complaint in Kentucky state court well before the date to conclude mediation and before the mediator officially ended the mediation. The U.S. Bankruptcy Court for the Eastern District of Kentucky sanctioned defendants for bad faith and lack of preparedness in mediation and the U.S. District Court for the Eastern District of Kentucky affirmed. On appeal, the U.S. Court of Appeals for the Sixth Circuit found that the undisputed facts provided a sufficient basis for the award of sanctions and for the district court to affirm the bankruptcy court’s award of sanctions.
Although court-annexed mediation has grown, there has been no sustained effort to codify the boundaries of good faith participation. Nor should there be. Courts have generally sanctioned offending mediation participants when clearly warranted. In effect, the courts have relied upon an objective test aimed at punishing a party’s insolence or raw defiance — as opposed to hammering a party into submission or settlement.
As a practical matter, the most that the courts should demand of litigants is to come prepared to a mediation. Expecting more than that gives the mediator and the courts more authority than they should exercise or possess.
Melanie L. Cyganowski is a partner at Otterbourg PC, chair of the firm's insolvency department, and a mediator and arbitrator with FedArb. She was previously chief U.S. bankruptcy judge for the U.S. District Court for the Eastern District of New York.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] D.N.J. LBR 9019-2(i)(4).
[2] D.N.J. LBR 9019-2(l); D.N.J. Civ. R. 103.1.
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