In the News: More About Mediation and Municipal Bankruptcies
More Mediation for Stockton, and Possibly Mediation for San Bernardino
No sooner did Stockton end mediation and file for bankruptcy, than Judge Christopher Klein, the bankruptcy judge overseeing Stockton’s bankruptcy ordered the city and its creditors to mediate with bankruptcy Judge Elizabeth L. Perris next month. So reported Steven Church at bloomberg.net on July 13, 2012.
Looks like San Bernardino may be next up at the plate. On July 12, 2012, Reuters reported that San Bernardino’s city council “will receive an opinion from the city’s legal staff on July 16 on whether the city needs to enter into pre-bankruptcy mediation with its creditors . . . .”
How to build and destroy a house of cards . . . .
Appealability: Court Of Appeal Dismisses Appeal From Order Staying Action And Compelling Arbitration
Affirm? Reverse? No, Dismiss, Because the Order is Unappealable
Plaintiff Brian Zulli “purports to appeal from an order staying an action and compelling arbitration . . . “ Purports? Yes, “purports”, because the order is not appealable. Zulli v. Toll Brothers, Inc., Case No. B231622 (2nd Dist. Div. 6 July 10, 2012) (Perren, J., author) (not to be published).
“’The rationale behind the rule making an order compelling arbitration nonappealable is that inasmuch as the order does not resolve all of the issues in the controversy, to permit an appeal would delay and defeat the purposes of the arbitration statute. . . However, a party compelled to arbitrate is entitled to have the validity of the order reviewed on his appeal from a judgment confirming an award.’. . . “ State Farm Fire & Casualty v. Hardin, 211 Cal.App.3d 501, 506 (1989). “Accordingly, the appeal must be dismissed.”
Arbitration/Federal Arbitration Act: Ninth Circuit Affirms District Court’s Decision Affirming Denial of Motion to Compel Arbitration Where Conflict Existed Between Dischargeability Purpose of Bankruptcy Code and Arbitration
How to Reconcile the Federal Arbitration Act With the Bankruptcy Code?
The threshold issue that the Ninth Circuit had to resolve In the Matter of: Jose Eber, Case Nos. 10-56772 and 11-55341 (9th Cir. July 9, 2012) (for publication) was “how to reconcile the FAA with the Bankruptcy Code, and, more specifically, a bankruptcy court’s jurisdiction to determine dischargeability pursuant to sections 523(a)(2), (4) and (6).” Those subsections are the bases for nondischargeability of a debt in bankruptcy: fraud or deception ((a)(2)), fiduciary fraud, embezzlement, or larceny ((a)(4)); and willful and malicious injury to person or property ((a)(6)). The debtor in the bankruptcy, Jose Eber, is the well-known celebrity hairstylist (i.e., a celebrity himself, as well as a stylist for celebrities), and author of the books “Shake Your Head, Darling,” and “Beyond Hair: The Ultimate Makeover Book.” Mr. Eber earns a Wikipedia entry.
The appellants, Ackerman and Kuriloff, had sought to compel arbitration with with Jose Eber, based on an arbitration agreement. The problem, according to the Bankruptcy Court, was that the arbitration, which had not yet commenced, could result in findings to which collateral estoppel applied — “for all practical purposes” the arbitrator would end up determining the issue of nondischargeability. The district court agreed, and the appeal followed.
The Ninth Circuit noted that disputes involving the Bankruptcy Code and the FAA often “present a conflict of near polar extremes: bankruptcy policy exerts an inexorable pull towards centralization while arbitration policy advocates a decentralized approach towards dispute resolution.” (quoting In re United States Lines, 197 F.3d 631, 640 (2d Cir. 1999).
Polar extremes. 1924. Library of Congress.
Here, there is “no evidence in the text of the Bankruptcy Code or in the legislative history suggesting that Congress intended to create an exception to the FAA in the Bankruptcy Code.” But that is not the sole test of preemption here. “The relevant inquiry then becomes ‘whether there is an inherent conflict between arbitration and the underlying purposes of the Bankruptcy Code.’” Ins. Co. v. Thorpe Insulation Co., 671 F.3d 1011, 1020 (9th cir. 2012). And because dischargeability is especially within the purview of the Bankruptcy Court, here, the Ninth Circuit found that there was no abuse in denying the motion to compel arbitration because it would have conflicted with the underlying purpose of the Bankruptcy Code.
The opinion, authored by District Judge Marbley, invites future examination. Why? Because: “Our holding in no way extends beyond the particular facts of this case or to all cases in which a bankruptcy judge makes this determination prior to the commencement of an arbitration.”
Mediation/Confidentiality/In the News: Judge in Stockton Bankruptcy Limits Release of Mediation Information to Public
When Mediation Involves The Public’s Interest, How Confidential Is The Mediation Under Federal Law?
On July 6, 2012, Steven Church reported in Bloomerg, “[t]he judge overseeing Stockton, California’s bankruptcy limited the amount of information the city and its creditors can make public about a months-long mediation process that failed.” Mediation is required under California law before a city can file for bankruptcy. Mr. Church reports that Bankruptcy Judge Christopher Klein ruled that the City’s offer can eventually be made public, but that counter-offers remain confidential. Interestingly, the City asked for release of the information, while bondholders asked for the release of some of the information.
The issue is noteworthy to us, because the confidentiality of mediation-related matters is somewhat unsettled under federal law, though the privilege is strong under California law (Cal. Evid. Code 1119). Thus, we have posted about Facebook, Inc. v. Pacific Northwest Software, Inc, 640 F.3d 1034 (9th Cir. 2011), in which the Court of Appeals Court expressed doubt that the federal district court Local Rules applying to ADR could create a “privilege” for confidential communications in a mediation, because privileges are created by the Federal Rules of Evidence, which rules cannot be overruled by Local Rules. See also Phyllis G. Pollock, Mediation Confidentiality: A Federal Court Oxymoron, The Resolver 8, available at http://www.pgpmediation.com/blog/wp-content/uploads/2009/08/mediation-confidentiality-a-federal-court-oxymoron31.pdf (urging adoption by the states of the Uniform Mediation Act to create consistency and provide “a framework for the federal courts,” and urging codification of a federal mediation privilege); Joseph Lipps, The Path Toward A Federal Mediation Privilege: Approaches Toward Creating Consistency for a Mediation Privilege in Federal Courts (google the title to find the article).
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 (4th 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.