Mediation Statements in Federal Courts May or May Not be Privileged and Can Be Waived

The Bankruptcy Court for the Western District of Missouri declined to recognize a mediation privilege in In re Lake Lotawana Community Improvement District, 2016 WL 7984347 (Bankr. W.D. Mo. Sept. 19, 2016), despite the fact that it conceded that other circuits have done so. Lake Lotawana did not involve a mediation with a plaintiff and an insured; however, the cases presented by the parties drew heavily from the case law in the bad faith context.

More specifically, in a Chapter 9 bankruptcy proceeding, the debtor must allege that it negotiated in good faith at a pre-petition mediation. In Lake Lotawana, the mediation failed and the debtor alleged as a prerequisite to filing a Chapter 9 proceeding that it had negotiated in good faith. In response, the creditor sought the debtor’s mediation statement and argued that the mediation statement was not privileged. In rebuttal, the debtor asserted a work product privilege and argued that the statement was privileged because it was prepared in anticipation of litigation and the mediation privileged also applied.

Courts within the Eighth Circuit, which includes Missouri, had not previously addressed the applicability of the mediation privilege. Initially the Court pointed out that only the Sixth Circuit (Kentucky. Michigan, Ohio and Tennessee) had adopted a mediation privilege. In actuality, courts in the Third Circuit (Pennsylvania), Ninth Circuit (California), and Eleventh Circuit (Georgia) also recognize a mediation privilege. The Seventh Circuit (Illinois, Indiana and Wisconsin) and the Federal Circuit have declined to recognize such a privilege. In deciding whether to adopt a mediation privilege in Missouri, the Court discussed Jaffee v. Redmond, 518 U.S. 1 (1996) which established four factors that must be satisfied before a federal common law privilege can be established. Those 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. The Court indicated that if the debtor attempted to use the mediation statement to prove it was acting in good faith, the debtor could re-urge its motion under the “Sword and Shield” principle.

The learning from Lake Lotawana is that, like most privileges, the mediation privilege can be waived. Insurers should be cautious in relying upon statements to mediators to prove that they were acting in good faith but rather should attempt to prove good faith by offering evidence of the offers and counteroffers that were made at the mediation.

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Avoiding Insurance Bad Faith
Cozen O’Connor represents insurance clients in jurisdictions throughout the U.S. against statutory and common law first- and third-party extracontractual claims for actual and consequential damages, penalties, punitive and exemplary damages, attorneys’ fees and costs, and coverage payments. Whether bad faith claims are addenda to a broader coverage matter or are central to the complaint, Cozen O’Connor attorneys know how to efficiently respond to extracontractual causes of action. More
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