Our Voices

You Gotta Have Faith

by Edward Schnitzer

You often hear a party complain at a mediation that the other side is not acting in good faith. What does that mean? As the term “good faith” is subjective, there is no clear guidance on what constitutes good faith at mediation and what, conversely, qualifies as a lack of good faith. Further clouding the analysis is the fact that different courts view good faith differently and courts have differing requirements.[1] Moreover, bankruptcy cases regularly have their own procedure orders with their own requirements as to good faith and reporting obligations.[2]

Subjective vs. Objective

Courts grappling with how to enforce a good faith requirement have often focused on enforcing certain objective criteria. For example, in In re A.T. Reynolds & Sons Inc., the district court was hesitant to make a set of rules with respect to “participation” at a mediation, as opposed to enforcing certain “objective criteria [such] as attendance, exchange of pre-mediation memoranda, and settlement authority.”[3]

Similarly, in Procaps SA v. Patheon Inc., the district court noted that “the good-faith concept can at times be an inherently vague and subjective notion [that] would be difficult, if not impossible, to reasonably and logically enforce in practice.”[4] The court instead referred to certain “objective mediation requirements,” such as “attending a court-ordered mediation ... [or] submit[ting] a court-required written mediation summary” that should be enforced and subject a disobedient party to sanctions.[5]

Attendance

Failure to attend mediation with the necessary representatives and authority is the easiest way to run afoul of a court’s rules.[6] In Official Airline Guides Inc. v. Goss, “Both parties were directed to have someone available by telephone with settlement authority or to have attorneys present with settlement authority themselves” at a settlement conference.[7] In contravention of such direction, the defendant’s “attorney appeared alone, without settlement authority, and no one was available by telephone with settlement authority.”[8] In calculating sanctions of $5,804.78, the court included the cost of the plaintiff’s representative, who “wisely appeared” at the settlement conference.[9]

Settlement Authority

Different courts have different views on what level of settlement authority a party must have at mediation in order to be proceeding in good faith. In In re A.T. Reynolds & Sons, the district court held that a mediation participation requirement was satisfied by a party “sending a person with authority to settle for the anticipated amount in controversy and who is prepared to negotiate all issues that can be reasonably expected to arise.”[10]

Parties have been sanctioned where the representative had extremely limited authority and such action was deliberate. In Pitman v. Brinker Intern. Inc., the district court expressed its displeasure at a party for bringing a “biased corporate employee with extremely limited authority.”[11] Specifically, the representative attended a mediation with only a settlement authority of up to $1,075 on a $450,000 demand. In sanctioning the conduct, the court found that the defendant decided not to have a real representative “physically present because it was cheaper to violate the court’s order ... than to attend the conference in person. Such an unapproved settlement tactic is not negotiating in good faith.”[12]

In Nick v. Morgan’s Foods Inc., sanctions were awarded based in part on the defendant sending a corporate representative “who had no independent knowledge of the facts of the case and had permission to settle only up to $500.”[13] Particularly irritating to the court was the defendant’s admission that it decided to not “comply with the guidelines because doing otherwise would be a waste of time and money.”[14]

Courts can also find a lack of authority based on circumstantial evidence. In Richard v. Spradlin, the district court affirmed the bankruptcy court’s imposition of sanctions, noting that 

[Gary] Richard asked to make phone calls to his associates and confer with his lawyers, rather than engage
in settlement negotiations... If Richard had full settlement authority and believed in the supremacy of his legal position, he would have acted very differently. His response would have been to make a counter offer from his position of strength, or at least flatly refuse the plaintiffs’ terms as soon as they were offered. Instead, he asked to make phone calls to his associates and spend several hours with his attorneys.[15]

While courts can require mediation attendees to have authority to settle, that does not mean that parties have to settle or that a defendant cannot “adopt a ‘no-pay’ position.”16 Similarly, “a plaintiff is within its rights to adopt a ‘no-compromise’ position and not budge off its initial settlement demand or the amount prayed for in the Complaint.”[17]

Failure to Make a Settlement Offer

Parties at mediation “are free to make reasonable offers, to not make offers, to make offers the opposing party deems illogical or to stand on an offer and not make counter- offers.”18 In Stoehr v. Yost, the following scenario took place:

When counsel for [the defendant] arrived at the mediation, he informed the mediator that based on the facts of the case, he did not believe his client was liable, he questioned the claimed damages, and therefore he did not intend to offer the [plaintiffs] any money to settle their claim. While [the defendant’s] counsel expressed a willingness to go forward with the mediation and possibly change his position depend- ing on what the [plaintiffs] had to say, counsel for the [plaintiffs] elected to terminate the mediation upon learning that [the defendant] would not be making a settlement offer.[19]

 In reversing the sanctions, the court of appeals held that the plaintiff failed to provide “evidence beyond bald assertions of bad faith,” and “even if State Farm had no intention of offering to settle the dispute for a certain dollar amount, there are still several valid reasons why State Farm could have sought to mediate the case”:[20]

[M]ediation is not all “about money”... Settlement of the whole case is not the only goal of mediation; “agreement” is another goal, whether it be a factual stipulation, an agreement to forego jury trial in favor of binding arbitration, an identification of issues, a reduction of misunderstandings, a clarification of priorities, or a location of points of agreement. Thus, even where the odds of resolution are slim, mediation can be beneficial because other goals might be achieved.[21]

Pre-Mediation Statements

Failing to submit a required pre-mediation statement is another easy way to ensure sanctions.[22] What made the court’s decision in Nick v. Morgan’s Foods quite easy was the “undisputed [fact] that [the] appellant did not provide the court-ordered memorandum to the mediator because appel- lant’s outside counsel considered it unnecessary and duplicative, and thus too costly.”[23]

Mediation Preparation

A party can be sanctioned for failure to participate in good faith based on their inadequate preparation for the mediation. In Richard v. Spradlin, the evidence demonstrating a failure to prepare was based on the following:

[T]he night before the mediation, the defendants’ attorney told [the mediator] that the defendants needed to meet before the mediation and would be late; and [the defendant] insisted on spending several hours with his attorneys before joining the mediation ... if the defendants and their attorneys had properly prepared for the meeting, they would not have needed either delay.[24]

Other Sanctionable Conduct

  • The party representative scheduling a 2:30 p.m. flight, demonstrating a “lack of willingness to negotiate the entire day.”[25]
  • “[I]ntentionally sabotag[ing] the mediation by arranging for the arrest during the mediation of another party to the mediation, namely, the debtor.”[26]
  • Filing a summary judgment motion on the eve of mediation while opposing counsel is traveling to mediation “without the courtesy of telephoning [opposing coun- sel] ... [and] present[ing] [opposing counsel] with a copy of the [summary judgment] memorandum of law” at the mediation presentation.[27]
  • Circulating a draft state court complaint at the mediation and filing it before the mediation has formally ended.[28]
  • Telling opposing counsel that “they had five minutes to put a serious settlement offer on the table or that [he] and his client were leaving,” refusing to give the mediator the opportunity to explain the reasoning behind the defendant’s offers, refusing to engage in a dialogue with defense counsel, and “unilaterally terminating or abandoning the mediation process.”[29]

Conclusion

To mediate in good faith, one should follow the applicable rules and guidelines concerning pre-mediation submissions and attendance, including who attends and their required level of settlement authority. While one does not have to settle at mediation, one must attend, be prepared and not engage in obstreperous conduct. As a mediator, be familiar with the applicable rules for the particular mediation and ensure that all parties are fully aware of them beforehand in order to increase the likelihood that the mediation proceeds in good faith.

Reprinted with permission from the ABI Journal, Vol. XXXVII, No. 7, July 2018.

The American Bankruptcy Institute is a multi-disciplinary, non-partisan organization devoted to bankruptcy issues. ABI has more than 12,000 members, representing all facets of the insolvency field. For more information, visit abi.org

This content originally appeared on American Bankruptcy Institute Journal.


1 Compare Procaps SA v. Patheon Inc., Case No. 12-24356 (S.D. Fla. June 4, 2015) ("Neither the local rules nor this Court's mediation requirement ... requires parties to mediate 'in good faith' ... nor is there an express sanction provided for ... failing to mediate in good faith."), with Bankr. S.D.N.Y. ADR Order, § 3.2 ("[A] mediator shall report any willful failure to attend or participate in mediation in good faith.").
2 Compare In re Advance Watch Co. Ltd., Case No. 15-12690, Procedures Order, Docket No. 415 (Bankr. S.D.N.Y. 2017) ("[The] parties shall participate in the mediation in good faith and with a view toward reaching a consensual resolution."), with In re Draw Another Circle LLC, Case No. 16-11452, Procedures Order, Docket No. 1501 (Bankr. D. Del. 2017) ("If the mediator feels that a party to the mediation is not attempting to schedule or resolve the mediation in good faith, the mediator may file a report with the Court.").
3 452 B.R. 374, 382, n.2 (S.D.N.Y. 2011).
4 Case No. 12-24356 (S.D. Fla. June 4, 2015).
5 Id.; see also ABA, Section of Dispute Resolution, Resolution on Good Faith Requirements for Mediators and Mediation Advocates in Court-Mandated Mediation Programs ("Sanctions should be imposed only for violations of rules specifying objectively-deter- minable conduct," such as "the failure of a party ... to attend a court-mandated mediation ... or provide written memoranda prior to the mediations.").
6 See, e.g., Delaware Local Bankruptcy Rule 9019-5(c)(iv)(B) (mediator must report to court "[w]illful failure to attend any mediation conference"); Negron v. Woodhull Hosp., 173 Fed. App'x. 77, 79 (2d Cir. 2006) ("[F]ailure to bring a principal party was a violation of a court order and impaired the usefulness of the mediation conference.").
7 6 F.3d 1385, 1396 (9th Cir. 1993).
8 Id. at 1396.
9 Id.
10 452 B.R. at 384 (reversing bankruptcy court's holding as "unworkable and overly stringent" where bankruptcy court required representative to (1) have authority to settle case for "any amount" and (2) be prepared to discuss any theory of legal liability).
11 216 F.R.D. 481, 485 (D. Ariz. 2003).
12 Id. at 486.
13 270 F.3d 590, 593 (8th Cir. 2001).
14 Id.; see also Thrane v. Metro. Transp. Auth., 2018 WL 840043, at *3-4 (E.D.N.Y. Feb. 12, 2018) (sending
representative "with strict instructions ... not to budge from the initial offer" shows "gamesmanship" on
defendant's part).
15 2013 WL 1571059, at *8 (E.D. Ky. April 12, 2013), aff'd, 572 F. App'x 420 (6th Cir. 2014).
16 In re A.T. Reynolds & Sons, 452 B.R. at 382; see also Negron, 173 Fed. App'x. at 79 ("[The] Hospital was
free to adopt a 'no pay' position.").
17 Procaps SA, Case No. 12-24356.
18 Id.; see also Graham v. Baker, 447 N.W.2d 397, 400 (Iowa 1989) ("[A] presence at the mediation meeting satisfied the minimal participation required by the statute.").
19 765 N.E.2d 684, 686 (Ind. Ct. App. 2002).
20 Id. at 687-89.
21 Id. at 688-89 (internal citations omitted).
22 See Morgan's Foods, 270 F.3d at 593; In re A.T. Reynolds & Sons, 452 B.R. at 384 (failure to "provide
pre-mediation memoranda" is example of lack of good faith); In re FBI Wind Down Inc., Case No. 13-12329, Adv. Pro. No. 15-51105, Docket No. 21 (Bankr. D. Del. July 6, 2016) (mediator report indicating that failure "to timely submit a mediation statement" was failure to comply with Local Rule 9019-5).
23 Morgan's Foods, 270 F.3d at 593.
24 2013 WL 1571059 at *5.
25 Brooks v. Lincoln Nat'l Life Ins. Co., 2006 WL 2487937, at *4 (D. Neb. Aug. 25, 2006).
26 Baek v. Halvorson (In re Halvorson), 581 B.R. 610, 613 and 643 (Bankr. C.D. Cal. 2018) (such actions "shock the conscience of this Court and, if allowed to stand, would undermine public confidence
in mediation").
27 Fisher v. SmithKline Beecham Corp., 2008 WL 4501860, at *5-6 (W.D.N.Y. 2008).
28 Richard, 2013 WL 1571059, at *6-7 (such conduct was indicative of failure to mediate in good faith
as "defendants were well aware that their actions would do nothing but strain an already contentious relationship").
29 Brooks, 2006 WL 2487937, at *2-5 (as sanction, plaintiff's counsel was required to (1) send letters of
apology to plaintiff, mediator, defendant and counsel; (2) provide copies of those letters to court; and (3) "enroll and complete an educational seminar or course in how to represent a client at a mediation" and file proof of attendance with court).