Proposed New Exception To Mediation Confidentiality Statutes Would Utilize In Camera Screening Process.
On August 7, 2015, the California Law Revision Commission directed staff “to begin the process of preparing a draft of a tentative recommendation that would propose an exception to the mediation confidentiality statutes (Evid. Code sections 1115-1128) to address ‘attorney malpractice and other misconduct.’” For minutes of the meeting, follow the link. The excerpt of the minutes concerning this topic is found at pages 4 to 6.
COMMENT: I blogged on April 8, 2012, about legislative efforts to “fix” the mediation confidentiality statutes to allow the introduction of evidence from a mediation in cases involving attorney malpractice or breach of fiduciary duty.
The Disqualification Outcome Hinges On Whether The Attorney-Settlement Officer Received Confidential Information
Bird’s-eye view of the Great Wall of China. Jean E. Norwood, photographer. 1979. Library of Congress.
Attorney Banuelos participated as a settlement officer on a “CRASH” panel mediating an employee-employer dispute in Los Angeles Superior Court. “CRASH” stands for “Civil Referee Assisted Settlement Hearing,” and the CRASH panel consisted of two attorneys and one judge. A little less than six months after the mandatory settlement conference, Banuelos’ law firm substituted in to represent the employer in the dispute, and the employee moved to disqualify Banuelos’ law firm.
The trial court denied the disqualification motion, holding that even if Banuelos received confidential information – an issue the court did not decide – adequate screening measures could be established to ensure Banuelos did not discuss the case with anyone at the firm. The employee filed a writ. Castaneda v. Superior Court (Perrin Bernard Supowitz, Inc., Real Party in Interest), No. B259950 (2/8 June 24, 2015) (Rubin, Flier Grimes) (published).
The employee’s petition was granted, with directions. The trial court must now consider whether Banuelos participated in ex parte communications with the employee’s representatives. If ex parte communications occurred, then it will be presumed that confidential information was exchanged, and the law firm will be vicariously disqualified. No ethical wall will prevent vicarious disqualification if the attorney received confidential information.
COMMENT: I have participated as a “mediator” in a settlement conference program in LASC. The status of attorneys who participated in the program was not clearly defined. Participants were informed that the formal mediation privilege did not apply, because these were settlement conferences ordered under rule 3.1380. However, as the Court of Appeal points out in Castaneda, its concern is not with the laws of mediation confidentiality, but rather with “the law of attorney disqualification based on confidential communications, wherever they may occur.”
Amis v. Greenberg Traurig LLP Acknowledges Supreme Court’s “Near Categorical Prohibition Against Judicially Crafted Exceptions To The Mediation Confidentiality Statutes”
Amis v. Greenberg Traurig LLP, No. B248447 (2/3 March 18, 2015) (Kitching, Aldrich, Lavin) (published) holds “a malpractice plaintiff cannot circumvent mediation confidentiality by advancing inferences about his former attorney’s supposed acts or omissions during an underlying mediation.”
Given that there are now many cases holding that mediation confidentiality statutes are just about ironclad, even in cases where a client alleges his attorneys committed malpractice during mediation, one may first wonder why this opinion was published. The important point made in this case is that even inferences about what must have been said by the attorneys to the client to induce the client to agree to a horrible settlement are not admissible.
Here, the client, Amis, alleged he was not advised his personal liability was nil, yet in mediation, he agreed to a settlement that put both Pacific Marketing Works, Inc. (Pacific), in which he was a minority shareholder, and himself personally, on the hook for $2.4M in the event of a default in payment by Pacific. Furthermore, a deal was in the works whereby a Japanese corporation was to acquire Pacific, and Amis expected that the acquisition would make it feasible to pay the settlement amounts agreed to in mediation. However, the settlement agreement failed to make the settlement payments contingent upon the acquisition of Pacific by the Japanese company. Of course, everything that could go wrong did go wrong: the acquisition didn’t go through, Pacific defaulted on the settlement payments, and Amis ended up personally liable and declaring bankruptcy.
Amis’s legal malpractice expert opined that Greenberg Traurig’s conduct fell below the standard of care and there was “no advice [GT] could have given to John Amis during mediation that would justify making John Amis Personally liable for payment of $2,400,000.”
This evidence – an inference about advice given in mediation – was inadmissible. Thus, Amis could not prove malpractice, and lost on summary judgment, which judgment was affirmed.
The upshot is that you cannot do indirectly, through inference, what you cannot do directly, i.e., admit evidence of what was said or not said in the mediation.
Recognizing the “seemingly unintended consequence” that mediation confidentiality protects lawyers from malpractice claims, the Court concludes that it “is for the Legislature, not the courts, to correct.”
Court Refuses To Carve Out Judicial Exception To Mediation Privilege While Explaining Why Privilege Simply Didn’t Apply Here.
Few are the cases in which courts have pierced the mediation confidentiality privilege, because the courts have said the privilege is almost absolute, refusing to craft judicial exceptions to the statutory privilege, Evid. Code sections 1115 et seq. Thus, the law is relatively well-defined in this area. Gilda Lappe v. Superior Court (Murray Lappe Real Party In Interest), Case No. B255704 (2/3 Dec. 19, 2014) (Kitching, Klein, Edmon) offers a rare counter-example of a case in which the mediation privilege is not enforced.
In a divorce proceeding, Gilda Lappe relinquished for $10M her community property interest in shares owned by her husband Murray Lappe, a successful physician/businessman. Some five months after judgment was entered in the family law case, Dr. Lappe sold his interest for $75M pre-tax dollars. Ms. Lappe sought to reopen the judgment and obtain through discovery a financial disclosure statement her husband had produced during mediation. Dr. Lappe’s attorneys took the position that the disclosure statement was subject to the mediation privilege; indeed, a marital settlement provided the Declarations of Disclosure were subject to the privilege and were confidential.
The superior court judge assigned the discovery dispute to a referee who concluded the Declaration of Disclosure was not subject to mediation confidentiality because the document had “independent legal significance” and the “public policy” declared under the Family Code favoring disclosure to ensure fair and equal property divisions trumped mediation confidentiality. However, the superior court judge rejected the referee’s recommendation, instead concluding the public policy argument provided insufficient reason to carve out a judicial exception to mediation confidentiality.
The threshold question, said the Court of Appeal, is: “[D]o the mediation confidentiality statutes apply in the first instance to statutorily mandated disclosures that must be made regardless of whether the parties participate in mediation? We conclude the answer to this question is ‘no.’” (Fam. Code, section 2103 mandates the exchange of of preliminary and final disclosure statements, except under limited circumstances prescribed by statute (Fam. Code, sections 2105 and 2110)).
The Court hurried to explain that it was not agreeing with the referee’s conclusion that a declaration of disclosure was not subject to mediation confidentiality because of “public policy” and the Family Code favoring disclosure. Rather, the Court explained that it was simply recognizing “that the confidentiality statutes do not apply in the first instance, because these statutorily mandated declarations do not fall into any category delimited by Evidence Code section 1119.” In other words, mandated financial disclosures must be made whether or not mediation occurs, and making the disclosures in mediation will not immunize them from discovery.
Having concluded that the disclosures were not immunized by mediation confidentiality, the Court still needed to explain why the settlement agreement, by which the parties agreed that the documents were confidential and subject to section 1119 confidentiality, failed to be an effective contractual waiver of the mandatory Family Code disclosure requirement. Here, the Court relied on Civil Code, section 3513: “Any one may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.” By way of explanation, the Court simply said, “So it is here,” adding that waiver was only permitted under section Family Code, section 2105.
COMMENT: Saying that the Family Code statutory requirement is for the public benefit, rather than for private benefit, begs the question. Why is it for a public benefit that cannot be waived, rather than for a private benefit that could be waived? The fact that the Family Law Code expressly limits waiver supports the “public benefit” argument. However, I suspect that the same reasons waiver is limited under the Family Code may be the same public policy reasons the referee gave for “overriding” mediation confidentiality – namely, that the Family Code favors disclosure to ensure fair and equal property divisions. So even though the Court of Appeal expressly abjured reliance on “public policy”, perhaps public policy slipped in under the radar via reliance on Fam. Code, section 2105.
Though the opinion opens with a fanfare announcing, “George R. Hearst, Jr. . . scion of the wealthy Hearst family,” the facts and legal points are actually pretty simple.
George and Susan Hearst married in 1998, and entered into a marital property agreement (MPA) in 2002, whereby Susan waived her community property interests in George’s assets in exchange for $10 million in cash and a life estate in certain real property. Susan accepted the $10M in cash without attempting to invalidate the MPA. After George died, however, Susan filed claims against his estate and trust seeking her share of community property. Following mediation, Susan entered into a written settlement agreement, providing an additional $550K, with $140K allocated to her life estate in a residential property and $410K allocated to her community property claims.
Susan signed the settlement agreement, but refused to accept respondents’ tendered performance, triggering the filing of a successful motion for entry of judgment under Code of Civ. Proc., section 664.6 in the probate actions. Susan appealed. Estate of Hearst, Case Nos. B251912 and B251964 (2/6 Dec. 16, 2014) (Perren, Gilbert, Yegan) (unpublished).
The settlement agreement, stating it was binding and could be enforced by motion under section 664.6, was admissible in evidence under Evid. Code, section 1123. Susan may not have read the entire agreement – but she signed it, and therefore was deemed to assent to its terms. Marin Storage & Trucking, Inc, v. Benco Contracting & Engineering, Inc., 89 Cal.App.4th 1042, 1049 (2001). And: “Susan was represented by three attorneys from two different law firms.” Apparently Susan decided to forego legal advice on her MPA claims – a fact that did not render the settlement agreement unenforceable because section 664.6 only requires a written agreement signed by the parties, not legal advice. Given her legal representation, her entitlement to $10,550,000, and lack of evidence about her late husband’s personal (as opposed to familial) wealth, Susan was unable to show procedural and substantive unconscionability.
Is anyone surprised the Court of Appeal affirmed the judgments?
Also, Settlement Documents May Be Admitted For Purposes Other Than Proving Liability.
While documents subject to the mediation privilege may be inadmissible as evidence, an error in admitting the documents into evidence will not matter to the Court of Appeal, if admission of the evidence resulted in harmless error. That was the case in Lofton v. Wells Fargo Home Mortgage, Case No. A136626 (1/3 Oct. 22, 2014) (Siggins, McGuiness, Jenkins) (certified for publication).
Initiative Legal Group, APC (ILG) objected to a TRO freezing funds from a class action settlement while the trial court sorted out problems with the settlement. One of ILG’s contentions was that the trial court erred by relying on inadmissible evidence subject to mediation confidentiality. The Court of Appeal, however, brushed off this contention on the ground that “any potential error was harmless in light of the substantial admissible evidence before the court supporting its issuance of the TRO.” The admissible evidence included attorney letters to clients, an attorney declaration, and the record of settlement approval proceedings in the class action.
Furthermore, attorney letters related to settlement were not being introduced to establish the attorney’s liability for any loss, “but rather to establish the risk of imminent harm that would justify issuance of the TRO.” The Court reminds us that Evid. Code section 1152 is not an absolute bar to introducing settlement documents, because such documents may be admissible for purposes other than proving liability.
The case is a wild one involving a bungled class action settlement and the disbursement of settlement funds to clients and attorneys. It makes for interesting reading, and is the subject of a post today on California Attorney’s Fees.
Stipulated Judgment May Not Have Contained Magic Words, But It Was Sufficient To Express Parties’ Intent To Waive Confidentiality And Allow Enforcement
Daly v. Oyster, B249255 (2/1 July 29, 2014) (Chaney, Johnson, Wiley) (published) deals with that nettlesome situation that sometimes arises after mediation when papers are not filed with the court, the case is eventually dismissed, and one of the parties then seeks to enforce the settlement. Does the confidentiality of mediation prevent introduction of the stipulated judgment into evidence? Has a party simply waited too long to enforce the agreement? Has the court lost jurisdiction to enforce?
In 1981 Joanne Daly and David Oyster married. In 2004 they separated. In 2005, Daly filed a marital dissolution petition. In June 2006, the parties entered into a stipulated judgment following mediation. In May 2011, the superior court dismissed Daly's petition for lack of prosecution. In June 2011, Daly filed a second dissolution petition to enforce the stipulated judgment. Apparently wanting to open up the proceedings and seek modifications, Oyster objected to admission of the stipulated judgment on the ground it was protected by the mediation privilege, Evid. Code section 1119.
The Court of Appeal, however, disagreed with Oyster. One exception to mediation confidentiality is a written settlement agreement providing “that it is admissible or subject to disclosure or that it is enforceable or binding, or words to that effect.” That little tail -- “words to that effect” – means that magic words are not necessary. It is enough if the terms unambiguously signify the parties’ intent to disclose the agreement or be bound by it. Such was the case here: “The parties agreed the court would enforce the document, which it could not do unless the document was disclosed to it.”
Did the time to enforce the stipulated settlement run out, given that the divorce took longer than five years, and the underlying case was dismissed after five years? No – there was no authority that the statute of limitations for asserting breach of the agreement created a deadline for seeking to enforce it. But for good measure, even if a statute of limitations was running, Daly could have filed the stipulation until the case was dismissed in June 2011, after which she would have had four years to sue for breach of a written agreement.
PRACTICE TIP: Include language that your settlement agreement, achieved through mediation, is admissible, subject to disclosure to the court, enforceable, and binding, and you eliminate one problem encountered by Daly.
Maricopa County Waived Argument That Evidence Admitted To Show Settlement Should Be Privileged Under Federal Law
87 Yard Punt . . .
In Wilcox v. Arpaio, No. 12-16418 (9th Cir. Feb. 2, 2014) (Tashima, Farris, Reinhardt), the Ninth Circuit avoids having to “determine whether a mediation privilege should be recognized under federal common law and, if so, the scope of such a privilege.” The panel punted on the issue when it determined that Maripoca County, which did not want a settlement agreement enforced, had failed to argue that evidence of settlement should be privileged under federal law, by instead staking the erroneous position that state law governed.
Here are the points about the “privilege” that we can glean from the opinion:
In a civil case, state law governs privilege regarding a claim or defense for which state law supplies the rule of decision. Id.
The admissibility of evidence of settlement reached during mediation of federal and state law claims is governed by federal privilege law.
How did these rules play out here?
Plaintiffs brought claims against Maricopa County and certain officials alleging wrongful investigation, prosecution, harassment, and retaliation -- federal claims pleaded under 42 U.S.C. section 1983, and supplemental state law claims. Therefore, the admissibility of evidence that plaintiffs reached a settlement with defendants will be decided under federal law. Under federal law, there is no statutory mediation privilege – leaving the murky status of the privilege to be decided under federal common law. But here, the Court of Appeal did not have to decide the interesting question.
Because Maricopa County staked the (incorrect) position that the privileged status of the evidence had to be decided under Arizona state law, it forfeited the argument that the evidence was privileged under federal law.
And so the district court did not err by admitting evidence of settlement and enforcing the settlement. Affirmed.
“applying state contract law to determine in mediation the parties reached an enforceable settlement of plaintiffs’ federal and state law claims, but applying federal privilege law to determine what evidence from mediation was admissible in support of that determination.”
Paul J. Dubow, an arbitrator and mediator in San Francisco, asks whether post-award investigation can vacate arbitration awards in “ADR Update”, California Litigation (Vol. 27, No. 1 2014), p. 37. It is easy for an unhappy client’s attorney to do a Google search about an arbitrator after the arbitration award has already been made – and sometimes, facts relevant to arbitrator bias will be discovered. On January 26, 2014, I posted about the leading case in which, to quote Mr, Dubrow, “[t]he aggrieved attorney for plaintiffs . . . conjured internet magic.” Mt. Holyoke Homes LP v. Jeffer Mangels Butler & Mitchell LLP, 219 Cal.App.4th 1299 (2013) (arbitrator’s reliance on reference from name partner at defendant’s law firm raised reasonable suspicion of bias, resulting in vacation of arbitration award).
Of course, it may be just as easy to do the same Google search for information publicly available on the internet before commencing arbitration. And therein lies a dilemma, according to Mr. Dubrow. On the one hand, the integrity of the system would be undermined by an arbitrator who withholds information, hoping that the parties will not discover it. On the other hand, there is the possibility of abuse, if the party obtains information of bias before the disclosures are due, decides to retain the arbitrator, and then exploits the information the arbitrator failed to disclose only after receiving an adverse award.
Mediation Confidentiality Privilege.
Hanna B. Raanan, a litigation attorney and mediator, writes about exceptions to the confidentiality protection of mediation in “Things Your Mediator Didn’t Tell You About The Mediation Confidentiality Privilege,” Orange County Lawyer (April 2014), p. 36. She reminds us: 1) discoverable material doesn’t become confidential just because it is used in mediation; 2) execute confidentiality agreements before exchanging information – or else you may not be covered by mediation confidentiality; 3) mediation confidentiality will terminate if there are no communications with the mediator ten days following the mediation – unless you draft around this problem; 4) there are situations in which mediation confidentiality may be weighed against other policies, and found not to be absolute; and (5) if the ADR procedure is not within the definition of “mediation”, then mediation confidentiality may not exist. Her solutions: address the problem of confidentiality before engaging in mediation, and use a savvy mediator aware of the issues.
Ms. Raanan’s admonitions are a useful antidote for the mediator who announces: “Everything said here will be confidential.”
Confidentiality Provisions Are “Clear And Absolute.”
Yet again, the Court of Appeal reminds us, “[w]e have repeatedly said that these [mediation] confidentiality provisions are clear and absolute.” Syers Properties III, Inc. v. Rankin, et al., Case No. A136018 (1st Dist. Div. 2 May 5, 2014) (Kline, Haerle, Brick) (unpublished). In fact, I am convinced that is one reason why we don’t have even more reported appellate decisions concerning the mediation privilege: because the Courts of Appeal have generally drawn a “bright line” by saying that mediation confidentiality in Evid. Code section 1119 is “clear and absolute.”
The Court of Appeal didn’t even have to address the issue here, because it concluded on other grounds that plaintiff/appellant landlord, in a malpractice suit against its attorney, had developed no viable theory of damages, thus justifying a nonsuit by the trial court. But that didn’t deter the Court of Appeal from saying one more time that mediation confidentiality is “clear and absolute.” Well, not entirely, because as the Court acknowledged, there are “rare circumstances” that will justify an exception.
Here, however, there was no exception. Plaintiff/appellant “conceded that ‘the entire case is part of the mediation. . . . ‘”
Furthermore, plaintiff did not “attempt to show that any particular document was not subject to mediation confidentiality or was erroneously excluded.”
TIP: Given how very difficult it is to find an exception to mediation confidentiality, if you are going to argue that documents should not have been excluded based on Evid. Code 1119, at least focus on specific evidence, and show that exclusion resulted in prejudice. “It is plaintiff’s burden on appeal to show not only error, but also prejudice from the exclusion of evidence.”
For a discussion of attorney’s fees in a companion case, Syers Properties III, Inc. v. Rankin, Case No. A137610, see the May 6, 2014 blawg post on California Attorney’s Fees.