JUDGE CYNTHIA A. NORTON, United States Chief Bankruptcy Judge.
Must a Chapter 9 debtor produce a prepetition mediation statement so that its creditor may ascertain whether the debtor mediated in good faith and is thus eligible to file Chapter 9 under 11 U.S.C. § 109(c)(5)(B)? Under the facts of this case, the court concludes that the mediation statement is privileged and need not be produced.
On August 26, 2016, the Lake Lotawana Community Improvement District ("the District") filed for Chapter 9 relief.
Shortly after the District filed for relief, the Bondholders and Wells Fargo Bank, N.A., as Trustee, (collectively, the "Movants") sought production of the District's mediation statement (the "Statement")
The Movants make the following arguments in support of the Motion to Compel: (1) the Statement is not protected by Federal Rule of Evidence 408; (2) the parties did not agree in the mediation that the Statement was exempt from production in this bankruptcy case; (3) mediation statements are admitted in many and varied circumstances; (4) the Statement is not privileged; (5) in bad faith litigation, these types of documents must be produced; and (6) the "sword and shield" doctrine operates to permit discovery of the Statement. The first three arguments are essentially admissibility arguments, and thus, are irrelevant in the context of this Motion to Compel.
Pursuant to Federal Rule of Civil Procedure 26(b)(1),
In this case, the District argues the Statement is privileged.
"The work product privilege operates to ensure that an opponent cannot secure materials that an adversary has prepared in anticipation of litigation." Gundacker v. Unisys Corp., 151 F.3d 842, 848 (8th Cir. 1998). "The work product doctrine was designed to prevent `unwarranted inquiries into the files and mental impressions of an attorney,' and recognizes that it is `essential that a lawyer work with a certain degree of privacy, free from unnecessary intrusion by opposing parties and their counsel.'" Simon v. G.D. Searle & Co., 816 F.2d 397, 400 (8th Cir. 1987) (quoting Hickman v. Taylor, 329 U.S. 495, 510, 67 S.Ct. 385, 91 L.Ed. 451 (1947)).
"There are two kinds of work product — ordinary work product and opinion work product. Ordinary work product includes raw factual information." Baker v. Gen. Motors Corp., 209 F.3d 1051, 1054 (8th Cir. 2000). "Opinion work product includes counsel's mental impressions, conclusions, opinions or legal theories." Id.
"Ordinary work product is not discoverable unless the party seeking discovery has a substantial need for the materials and the party cannot obtain the substantial equivalent of the materials by other means. Id. (citing FED. R. CIV. P. 26(b)(3)). "In order to protect work product, the party seeking protection must show the materials were prepared in anticipation of litigation, i.e., because of the prospect of litigation." PepsiCo, Inc. v. Baird, Kurtz & Dobson, LLP, 305 F.3d 813, 817 (8th Cir. 2002).
In the Eighth Circuit, the "determination of whether the documents were prepared in anticipation of litigation is clearly a factual determination: `The test should be whether, in light of the nature of the document and the factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation. But the converse of this is that even though litigation is already in prospect, there is no work product immunity for documents prepared in the regular course of business rather than for purposes of litigation.'" Simon, 816 F.2d at 401 (quoting 8 C. WRIGHT & A. MILLER, FEDERAL PRACTICE AND PROCEDURE § 2024, at 198-99 (1970)).
In this case, the court finds the Statement was prepared in anticipation of litigation. The Statement was prepared to educate a mediator in a pre-petition mediation that took place as part of the District's negotiations with the Movants. "[I]f the party asserting protection meets its burden, the burden shifts to the party seeking the materials to show `substantial need' and `undue hardship.'" Progressive Cas. Ins. Co. v. F.D.I.C., 49 F.Supp.3d 545, 551 n.3 (N.D. Iowa 2014). Thus, having found the District met its burden, the burden
"What `substantial need' is depends on the facts and circumstances of the individual case, but it is certainly more than mere tangential relevance to the case. There can be no substantial need for documents or other materials that do not bear on a material fact at issue in the underlying case." Pemberton v. Rep. Servs., Inc., 308 F.R.D. 195, 202-03 (E.D. Mo. 2015).
In the context of bad faith insurance litigation, "[o]ften, `there is a substantial need for discovery of a claims file as it relates to a vexatious refusal to pay claim.'" Lloyd's Acceptance Corp. v. Affiliated FM Ins. Co., No. 4:05-cv-1934-DDN, 2012 WL 1389708, at *5 (E.D. Mo. April 23, 2012) (quoting McConnell v. Famers Ins. Co., Inc., No. 07-4180-cv-c-NKL, 2008 WL 510392, at *3 (W.D. Mo. Feb. 25, 2008)). "[A]llowing a plaintiff to overcome an insurer's work product privilege may be particularly appropriate in an action for bad faith, in light of the insurer's virtual monopoly over the evidence required to support such an action." Logan v. Commercial Union Ins. Co., 96 F.3d 971, 977 (7th Cir. 1996). "Pleading a vexatious refusal to pay claim, [however], does not, ipso facto, create a substantial need for an insurer's internal documents." Lloyd's, 2012 WL 1389708, at *6.
Logan, 96 F.3d at 977.
In Logan, the district court conducted an in camera examination of each document and concluded the documents contained no evidence of bad faith, stating that "even if totally disclosed, not a single one of these documents would support an argument of bad faith." Id.; see also, Llyod's, at *6 ("Where, as here, an insured raises a bad faith claim against an insurer, by an in camera examination of the documents the court can evaluate the possibility that the documents contain evidence of bad faith.").
The Movants argue they have made a sufficient showing of necessity. According to the Movants, "that `showing' is straightforward: absent the Statement, there is an utter lack of any evidence to explain both what the Debtor's positions were during the Mediation and the basis for those positions. Without understanding the basis, the Movants have no ability to understand, test, or indeed challenge whether the Debtor negotiated in good faith." Reply at 6 n.5. The Movants continue, "[n]ot only is the Statement a necessity for consideration of the issue of good faith negotiation under § 109(c)(5), but it is the linchpin and indeed, the bad faith insurance cases recognize this when they hold that in bad faith litigation, such statements are not subject to the protection under the work product doctrine." Id. The court disagrees.
To the extent the Statement contains ordinary work product, the Movants have failed to carry their burden in demonstrating substantial need and undue hardship. A mere allegation of bad faith is not sufficient to show substantial need. Logan, 96 F.3d at 977. The Movants have not even alleged bad faith in this case. Moreover, the court has conducted an in camera
Pursuant to Federal Rule of Civil Procedure 26(b)(3)(B), "if the court orders discovery of [work product] materials, it must protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of a party's attorney." This is known as opinion work product.
"It is clear that opinion work product is entitled to substantially greater protection than ordinary work product. Therefore, unlike ordinary work product, opinion work product cannot be discovered upon a showing of substantial need and an inability to secure the substantial equivalent of the materials by alternate means without undue hardship." See In re Murphy, 560 F.2d 326, 336 (8th Cir. 1977). Instead, "opinion work product enjoys a nearly absolute immunity and can be discovered only in very rare and extraordinary circumstances." Id. (citing Hickman v. Taylor, 329 U.S. 495, 67 S.Ct. 385, 91 L.Ed. 451 (1947)); see also Baker v. Gen. Motors Corp., 209 F.3d 1051, 1054 (8th Cir. 2000); In re Chrysler Motors Corp. Overnight Evaluation Program Litig., 860 F.2d 844, 846 (8th Cir. 1988).
In Murphy, the Eighth Circuit explained "[o]ur unwillingness to recognize an absolute immunity for opinion work product stems from the concern that there may be rare situations, yet unencountered by this court, where weighty considerations of public policy and a proper administration of justice would militate against the non-discovery of an attorney's mental impressions. Absent such a compelling showing, the attorney's opinion work product should remain immune from discovery." Murphy, 560 F.2d at 336.
One example of "rare and extraordinary circumstances" is where the opinion work product contains inculpatory evidence of the attorney's own illegal or fraudulent activities. See In re Murphy, 560 F.2d at 336 n.19; Baker, 209 F.3d at 1054; In re Chrysler Motors Corp., 860 F.2d at 846.
Another example of rare and extraordinary circumstances may also exist where the client engages in criminal or fraudulent behavior. See In re Green Grand Jury Proceedings, 492 F.3d 976, 980 (8th Cir. 2007) (recognizing a crime-fraud exception to the work product privilege and holding "a client who has used his attorney's assistance to perpetrate a crime or fraud cannot assert the work product privilege as to any documents generated in furtherance of his misconduct. We also hold that an attorney who does not knowingly participate in the client's crime or fraud may assert the work product privilege as to his opinion work product."). "With respect to the quantum of proof, before the crime-fraud exception may be applied, the moving party must make a prima facie showing that the legal advice has been obtained in furtherance of an illegal or fraudulent activity." Id. at 982 (quoting United States v. Horvath, 731 F.2d 557, 562 (8th Cir. 1984)).
Here, to the extent the Statement contains opinion work product, the Movants have failed to carry their burden in establishing rare and extraordinary circumstances justifying production of the Statement. Moreover, after an in camera review of the Statement, the court finds no evidence of illegal or fraudulent conduct. Thus, to the extent the Statement contains opinion work product, the Statement is privileged.
The Movants argue that the Statement is not protected by the work product privilege because, in essence, 11 U.S.C. § 109(c)(5)(B) operates as a statutory waiver of any privilege that may apply. See Reply at 4-10. Relying on In re City of Stockton, 475 B.R. 720 (Bankr. E.D. Cal. 2012), the Movants argue that the District has the burden of proof in establishing its eligibility under 11 U.S.C. § 109, and demonstration of good faith negotiation is an element of that showing.
In Stockton, the court considered the debtor's emergency motion for leave to dispense with confidentiality and introduce evidence relating to a pre-petition neutral evaluation process ("CNEP") so that it could establish the debtor's eligibility for Chapter 9 relief. In California, to be a Chapter 9 debtor, municipalities must either engage in CNEP for a specified period or its governing board must declare a fiscal emergency pursuant to specified procedures. Stockton, 475 B.R. at 727 (citing CAL. GOVT. CODE § 53760). If the municipality opts for the first option, all parties to the CNEP are required to maintain confidentiality and "`not disclose statements made, information disclosed, or documents prepared or produced, during the neutral evaluation process,' or during any bankruptcy proceeding except upon agreement of all parties, or for the limited purposes of determining chapter 9 eligibility under § 109(c), upon permission of the bankruptcy judge." Id. at 728 (quoting CAL. GOVT. CODE § 53760.3(q)). The debtor filed the emergency motion "invoking the part of the California Government Code § 53760.3(q) that authorizes a bankruptcy judge to lift the shroud of confidentiality from the pre-filing [CNEP] for the limited purpose of establishing the City's eligibility for chapter 9 relief." Id. at 724.
The court considered the "extent to which the California confidentiality provision applies in the context of [a] chapter 9 case and, to the extent it does not apply, how to deal with matters warranting confidentiality." Id. at 728. The court held that the "confidentiality provision of the California Government Code § 53760.3(q) [applies] only to the extent that [a] bankruptcy court confronts a question governed by a state rule of decision." Id. The court went on to reason that with respect to § 109 eligibility requirements, only § 109(c)(2) — whether the entity is specifically authorized to file — is a question governed by a state rule of decision. The other eligibility requirements under § 109(c) — (c)(1) municipality; (c)(3) insolvent; (c)(4) desire to effect plan of adjustment; and (c)(5) creditor negotiation — are "questions based on, and created by, the federal Bankruptcy Code and subject to a federal rule of decision as to which the California confidentiality provision does not control." Id. at 729.
After determining the extent of confidentiality under California law for evidence related to § 109(c)(2), the court addressed confidentiality issues related to the remaining eligibility requirements under § 109(c). Addressing privileges first, the court found that the Ninth Circuit has not recognized a federal mediation privilege and the court declined to recognize one in this particular case. The court then explained that the lack of a federal mediation privilege is not the end of the analysis. The court clarified, "an objection to the
The court issued a protective order to preserve the confidentiality in the Chapter 9 case of the "statements made, information disclosed, or documents prepared or produced during the pre-filing [CNEP]." Id. The court concluded that "if objections to the petition are made that place various elements of eligibility in actual dispute, then further relaxations of the protective order will be appropriate." Id. at 733.
Here, the Movants argue that the court in Stockton recognized "that if a § 109(c)(5) dispute arose, it would permit disclosure of the CNEP communications because they were not privileged." Reply at 9. This overstates the Stockton case.
First, the motion regarding disclosure of the confidential communications from the CNEP related to disclosure to the court, not production of material in a discovery dispute between parties. The debtor sought to disclose this information to the court for purposes of determining eligibility under § 109(c). It was not a motion to compel evidence from an opposing party. Second, the court did not address a § 109(c)(5) challenge and specifically how such a challenge would relate to further disclosure of confidential communications. Third, the court never addressed whether a mediation statement is subject to the work product privilege.
Finally, the court finds that 11 U.S.C. § 109 does not provide for a blanket repeal of privileged material. While the Movants are correct that the District carries the burden of establishing eligibility under § 109(c), the Statement is not the exclusive means for satisfying § 109(c)(5)(B). There is other evidence, such as the District's actions before, during, and after the mediation that may satisfy § 109(c)(5)(B). In addition, the Code provides four separate means to satisfy § 109(c)(5), none of which address repealing recognized privileges. For these reasons, this court finds that 11 U.S.C. § 109(c)(5)(B) is not a statutory waiver.
The Movants also argue that even if a privilege applies,
The Movants cite various cases dealing with bad faith in the context of insurance litigation. The cases essentially stand for the proposition that "[t]he time-worn claims of work product and attorney-client privilege cannot be invoked to the insurance company's benefit where the only issue in the case is whether the company breached its duty of good faith in processing the insured's claim." Cedell v. Farmers Ins. Co., 176 Wn.2d 686, 295 P.3d 239, 245 (2013). The Movants argue that, similar to the insurance cases cited, under § 109(c), whether the District negotiated in good faith at the mediation is a "pertinent issue" to determine if the District discharged its mandated duty of good faith.
The District responds that these cases are distinguishable. Specifically, "[i]n these settings, the things that are created by defense counsel are available to the insurer,
The court finds the bad faith insurance cases relied on by the Movants distinguishable. In these types of cases, the evidence sought provides the basis of the claim — i.e., whether or not the insurance company properly processed the insured's claim. See, e.g., Holmgren v. State Farm Mut. Auto. Ins. Co., 976 F.2d 573, 577 (9th Cir. 1992) (finding the work product privilege did not apply where "the strategy, mental impressions, and opinion of the insurer's agents concerning the handling of the claim are directly at issue"); Henderlong v. Allstate Ins. Co., No. 08-cv-01377-CMA-MEH, 2009 WL 82493, at *2 (D. Colo. Jan. 13, 2009) ("The case for discoverability is much stronger when a bad faith claim is alleged and when the parties involved in the lawsuit are insured and insurer. Allowing a plaintiff to overcome an insurer's work product privilege may be particularly appropriate in an action for bad faith, in light of the insurer's virtual monopoly over the evidence required to support such an action.").
Here, on the other hand, the District's good faith is evidenced by its actions before, during, and after the mediation, such as offers and counteroffers of settlement, and bringing a representative with settlement authority. The District does not have a "virtual monopoly over the evidence required" to establish good faith negotiation. Moreover, the Statement itself does not provide the basis of any claim or counterclaim that the Movants assert here. The Statement's purpose was to educate the mediator. The Statement did not relate to any negotiation between the District and the Movants. Thus, the court is unpersuaded that the privilege protecting the Statement is waived based on the cases cited by the Movants.
The sword and shield doctrine provides that "a party who raises a claim that will necessarily require proof by way of a privileged communication cannot insist that the communication is privileged." Bradfield v. Mid-Continent Cas. Co., 15 F.Supp.3d 1253, 1257 (M.D. Fla. 2014).
In Bradfield, following Florida common law, the court explained that a settlement agreement "cannot be enforced against an insurance carrier if it is unreasonable in amount or tainted by bad faith." Id. "The party seeking to enforce the [settlement] agreement bears the initial burden of going forward with the production of evidence sufficient to make a prima facie showing of reasonableness and lack of bad faith, however the ultimate burden of proof will rest on the insurance carrier." Id. Thus, "under Florida law, a party who bases a claim on [a] matter which would be privileged, the proof of which will necessitate the introduction of privileged matter into evidence, and then attempts to raise the privilege so as to thwart discovery, may be deemed to have waived the privilege." Id. (quoting GAB Business Servs., Inc. v. Syndicate 627, 809 F.2d 755, 762 (11th Cir. 1987)).
The Movants argue that by filing the Chapter 9 case, the District asserted that it negotiated in good faith prior to filing as a necessary component of its eligibility to be a debtor under Chapter 9. Thus, according to the Movants, the District cannot now insist that its communications in the mediation are protected.
In response, the District argues that the sword and shield doctrine does not apply
In reply to the District, the Movants argue that the sword and shield doctrine is "triggered by the issues raised by a party, not by the offer of the Statement into evidence." Reply at 6. The court disagrees.
The Bradfield case relied on by the Movants involves a unique cause of action under Florida law that requires the plaintiff to produce evidence relating to settlement negotiations — i.e., production of evidence related to the settlement negotiations is a necessary condition to a successful claim. While it is true the plaintiff triggered the sword and shield doctrine by raising a particular issue, it was a unique issue in that it could only be established by evidence that the plaintiff wished to shield from discovery. Thus, the plaintiff could not use the evidence as a sword to prove an element of his cause of action and then also shield it from discovery.
In this case, the good faith requirement under 11 U.S.C. § 109(c)(5) is not an issue that necessitates proof by the Statement. While the Statement may be sufficient,
The Movants argue that the District waived its privilege when it provided the Statement to the mediator and when it submitted the Statement to the court for an in camera review. See Reply at 3. "Disclosure to an adversary waives the work product protection as to items actually disclosed, even where disclosure occurs in settlement." In re Chrysler Motors Corp. Overnight Evaluation Program Litig., 860 F.2d 844, 846 (8th Cir. 1988) (quoting Grumman Aerospace Corp. v. Titanium Metals Corp. of America, 91 F.R.D. 84, 90 (E.D.N.Y.1981)).
Pittman v. Frazer, 129 F.3d 983, 988 (8th Cir. 1997) (quoting 8 C. WRIGHT & A. MILLER, FEDERAL PRACTICE AND PROCEDURE § 2024, at 198-99). "[B]road concepts of subject matter waiver analogous to those applicable to claims of attorney-client privilege are inappropriate when applied to
Mere disclosure to a third party does not waive the work product privilege. See Ayers Oil Co. v. American Bus. Brokers, Inc., No. 2:09-cv-02-DDN, 2009 WL 4725297, at *3 (E.D. Mo. 2009) ("Although disclosure by a client to a third party may waive the attorney-client privilege, such disclosure should not suffice in itself for waiver of the work product privilege.... While disclosure of work-product to adversaries has generally resulted in waiver of the privilege, disclosure to nonadversary third parties does not carry the same result."); see also United States v. Am. Tel. and Tel. Co., 642 F.2d 1285, 1299 (D.C.Cir. 1980).
8 C. WRIGHT AND A. MILLER, FEDERAL PRACTICE AND PROCEDURE § 2024.
In this case, the District did not waive its work product privilege when it provided the Statement to the mediator. The court finds that the District did not disclose the Statement with actual intent that the Movants see the Statement. Pittman, 129 F.3d at 988. This is bolstered by the fact that before providing the Statement to the mediator, the District signed the Mediation Letter that provided "Mediators cannot be subpoenaed or otherwise compelled to disclose any matter revealed in the process of conducting a mediation." Exhibit A to Objection. Moreover, mere disclosure to a third party — here, the mediator — does not waive the work product privilege. Ayers, 2009 WL 4725297, at *3.
With respect to the in camera review, the court is similarly persuaded that the District did not waive its privilege. Courts routinely conduct in camera reviews of evidence for various reasons. For example, where a party seeks production of work product material, a court may conduct an in camera review to determine whether the moving party has made a sufficient showing of undue hardship and necessity. See, e.g., Logan v. Commercial Union Ins. Co., 96 F.3d 971, 977 (7th Cir. 1996); Lloyd's Acceptance Corp. v. Affiliated FM Ins. Co., No. 4:05-cv-1934-DDN, 2012 WL 1389708, at *6 (E.D. Mo. April 23, 2012). In these instances, it would be absurd for the court to conduct such a review where doing so would waive the privilege protecting the evidence being sought in the first place. Thus, the court finds that the District did not waive its privilege by submitting the Statement to the court for an in camera review.
The District also argues that the Statement is protected by a mediation privilege.
Federal Rule of Evidence 501 authorizes federal courts to determine new privileges by examining "common law principles... in the light of reason and experience." Jaffee v. Redmond, 518 U.S. 1, 8, 116 S.Ct. 1923, 135 L.Ed.2d 337 (1996). In Jaffee, the Supreme Court laid out factors to consider in determining whether to recognize a new privilege. The four factors are: "(1) whether the asserted privilege is `rooted in the imperative need for confidence and trust'; (2) whether the privilege would serve public ends; (3) whether the evidentiary detriment caused by an exercise of the privilege is modest; and (4) whether denial of the federal privilege would frustrate a parallel privilege adopted by the states." Sheldone v. Pennsylvania Tpk. Comm'n, 104 F.Supp.2d 511, 513 (W.D. Pa. 2000) (citing Jaffee, 518 U.S. at 9-13, 116 S.Ct. 1923)).
The District argues that "several federal courts have recognized a federal mediation privilege rooted in Rule 408 of the Federal Rules of Evidence."
In Lake Utopia, the Second Circuit considered an appeal from a district court judgment confirming an arbitration award. In the appellee's brief on appeal, the appellee divulged the opinion of Staff Counsel for the Civil Appeals Management Plan during a pre-argument conference. Lake Utopia, 608 F.2d at 929. The pre-argument conference is conducted for the purpose of settlement and the opinion of Staff Counsel is confidential. The Second Circuit, in dicta, took issue with the appellee for including this information in the appellee's brief. Id. at 930 (noting that it "committed a serious breach of the confidentiality essential to the purposes of pre-argument conferences").
The courts in Folb, Sheldone, and RDM all adopted a federal mediation privilege. In Sheldone and RDM in particular, the courts found that the Supreme Court's
Relying on Carman v. McDonnell Douglas Corp., 114 F.3d 790 (8th Cir. 1997), the Movants argue that the Eighth Circuit has not adopted a federal settlement privilege and newly formed federal privileges are not favored. In Carman, the Eighth Circuit declined to adopt an "ombudsman
In declining to recognize an ombudsman privilege, the court reasoned, in part, that the defendant "failed to make a compelling argument that most of the advantages afforded by the ombudsman method would be lost without the privilege." Id. The Eighth Circuit went on to explain:
Id. at 793-94.
In this case, neither the District nor the Movants address the factors for recognizing a new federal mediation privilege. While Carman may be distinguishable, the case provides guidance for recognizing a new privilege in general. For example, the Eighth Circuit's reluctance to adopt a new privilege because it found the plaintiff failed to overcome the significant burden of creating a new privilege is persuasive. Here, the District has failed to address the Supreme Court's factors for recognizing a new privilege. The District has also failed to produce evidence to support why those factors are satisfied in this case. Thus, the court finds that the District has failed to "overcome the significant burden of establishing" a new privilege. Carman, 114 F.3d at 793. The court declines to adopt a new mediation privilege under the facts of this case.
The court is satisfied that the District has carried its burden in establishing that the Statement is protected by the work product privilege. The court finds that the Movants have failed to carry their burden in showing substantial need and undue hardship to the extent the Statement contains ordinary work product. The court similarly finds that the Movants have
IT IS SO ORDERED.
11 U.S.C. § 109(c).
