California Mediation and Arbitration

In The News: Mediation Ends, Stockton Fends

Stockton Goes Bankrupt

      On June 28, 2012, Stockton declared bankruptcy.  The news story was widely reported.

     But all is not gloom and doom.  As quoted in the New York Times, bankruptcy attorney Karol K. Denniston, who helped draft AB506, the California legislation requiring municipalities to mediate before filing a bankruptcy petition, optimistically observed:  “Despite their failure to reach an agreement, three months of negotiation between the city and its creditors could make the bankruptcy process more efficient by shortening what can otherwise be a long and costly period in court . . . “ 

     Mediations that do not resolve a dispute are frequently judged to be failures.  Such a judgment can be premature.  Often mediation, even when it does not lead to immediate resolution, creates conditions making a dispute more amenable to future resolution.

     We raise another issue related to the financial problems facing cities:  pension funds for public employees that are underfunded and unsustainable.  Can the pension funds themselves go bankrupt?  Not if they are governmental units.  Whether the employee’s public pension fund can declare a Ch. 11 bankruptcy is the issue in a pending case in the Commonwealth of the Northern Mariana Islands (CNMI).  Judge Robert J. Faris of the U.S. District Court for the CNMI Bankruptcy Division, who is handling a bankruptcy decision for the public employee’s pension fund in CNMI, recently issued a tentative decision that he was inclined to dismiss the bankruptcy, because the pension fund is a governmental unit.  As reported by NPR, “[t]he CNMI may be small, but this case has ramifications for much larger pension funds all across the U.S. that are facing shortfalls.”  Regardless of what happens in the CNMI case, one suspects this is not the end of the story.

    If public employee pension funds were able to declare bankruptcy, this could be a game-changer that could in turn change the playing field for cities facing bankruptcy.

 Caption:  “Waiting for the semimonthly relief checks at Calipatria, Imperial Valley, California. Typical story: fifteen years ago they owned farms in Oklahoma. Lost them through foreclosure when cotton prices fell after the war. Became tenants and sharecroppers. With the drought and dust they came West, 1934-1937. Never before left the county where they were born. Now although in California over a year they haven't been continuously resident in any single county long enough to become a legal resident. Reason: migratory agricultural laborers.”  Dorothea Lange, photographer.  1937.  Library of Congress.

Mediation/Fees/Condition Precedent: Party Prevailing On Complaint And Cross-Complaint Can Recover Fees On Cross-Complaint Despite Failure To Request Mediation Before Filing Complaint

 

For Fee Recovery, Complaint And Cross-Complaint Are Treated As Separate Actions

     In Frei v. Davey, 124 Cal.App.4th 1506 (2004), the Court of Appeal made it very clear that parties need to pay attention to those pesky provisions requiring that one request mediation before filing suit, or else risk losing attorney’s fees even if one prevails. That’s what happened to the plaintiff, at the trial court level, in Castleton Real Estate & Development, Inc. v. Tai-Fu California Partnership, Case No. G044304 (4^th Dist. Div. 3 June 28, 2012) (Rylaarsdam, J., author) (unpublished).  The outcome, however, was changed by the appeal.

     Plaintiff Castleton sued to recover its broker’s commission, without first requesting mediation. Big problem: the listing agreement required Plaintiff to request mediation before initiating litigation. Defendant Tai-Fu cross-complained, also without requesting mediation. When Castleton then requested mediation, Tai-Fu refused to mediate. Castleton prevailed on both its complaint and on the cross-complaint against it. However, when it requested attorney’s fees from the trial court, it was rebuffed, because it had failed to request mediation, a condition precedent to bringing suit. Castleton appealed.

     On appeal, Castleton conceded it could not recover fees for the prosecution of its complaint because it failed to seek mediation prior to filing it. However, Castleton contended it was entitled to fees for its defense against the cross-complaint, as the cross-complaint initiated a separate action. The Court of Appeal agreed: the filing of a cross-complaint “institute[s] a ‘. . . . separate, simultaneous action’” distinct from the initial complaint and makes the cross-defendant a defendant. Bertero v. National General Corp., 13 Cal.3d 43, 51 (1974). The Court remanded the matter to the trial court to determine the appropriate amount of fees to award.

“Half a loaf is better than none.”  Flickr Creative Commons License.  mystuart’s photostream.