“Churning” The File: An Unprincipled Mediation”

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From the Blog of Phyllis G. Pollack.

Black’s Law Dictionary defines “good faith” as

“A state of mind consisting in (1) honesty in belief or purpose, (2) faithfulness to one’s duty or obligation, (3) observance of reasonable commercial standards of fair dealing in a given trade or business, or (4) absence of intent to defraud or to seek unconscionable advantage.”

(Black’s Law Dictionary, 2d. pocket ed. 2001 at p. 307.)

It defines “bad faith” as “dishonesty of belief or purpose.” (Id. at p. 56).

A few weeks ago, I, unwittingly, conducted a “bad faith” mediation. One of the parties was clearly there with a dishonest purpose and an intent to seek an unconscionable advantage.

The matter was a simple one, arising out of an everyday business transaction. Debtor did not pay the invoices and so Creditor and Debtor worked out a settlement by which Debtor agreed to make monthly payments. The parties signed a settlement agreement drafted by the Debtor’s attorney because the Creditor did not retain one. However, the agreement was heavily negotiated. (During the mediation, the Creditor claimed it was one-sided in favor of the Debtor.)

When the Debtor failed to make the monthly payments, the parties sought mediation as required by the agreement. If the mediation did not resolve the matter, the parties were then to arbitrate using a three arbitrator panel. What I did not know at the time this mediation was scheduled was that the Creditor never intended to settle; it wanted to go to arbitration so as to run-up the attorney’s fees and then have the Debtor pay the fees as part of the arbitration award. The file was being “churned.”

I, slowly, began to realize this during the mediation when the matter became increasingly more difficult to settle. The Debtor admitted it owed the debt, without any question. The issue became how much and the terms of payment.

First, the Creditor claimed the principal balance to be slightly more than the Debtor thought it was. But, for the sake of compromise, the Debtor agreed to pay the higher sum. Then, the Creditor wanted the interest paid on this sum as well. Again, for the sake of compromise, the Debtor agreed. The Debtor then proposed terms with the first payment not starting for a few months. The Creditor balked.

The Debtor requested to meet directly with the Creditor – without the attorneys. The Creditor agreed, and so they met. The Debtor explained its financial situation, how strapped it was for cash and how it did not want to make promises it could not keep. After several minutes of conversing, the Debtor and Creditor tentatively agreed on a payment plan but the Creditor had to check with counsel.

When the Creditor returned from speaking with its counsel, it told the Debtor that it needed additional monies as “collection costs.” With some more negotiation, I convinced the Creditor to cut its demand in half and convinced the Debtor to agree to pay these additional “collection costs.”

The Creditor then spoke with its attorney again and suddenly there were additional “future” “collection costs” that had to be paid.

Naturally, this led to more negotiation but with convincing, I was, again, able to convince the Creditor to accept a lesser sum and to convince the Debtor to pay that additional sum.

Then suddenly, the Creditor became dissatisfied with the payment terms, not liking that payment would take many months.

At this point, the Debtor was extremely frustrated and was ready to leave because the Creditor had continuously been inserting new terms into the deal: the sands beneath the Debtor’s feet had been ever shifting for the last four hours.

I managed to convince the Debtor not to walk out but rather to have a joint session to see if the parties could brainstorm their way to a resolution. After several minutes of joint discussion, the Debtor agreed to pay a slightly higher amount each month thereby reducing the number of months.

I reviewed the details of the settlement with the parties and counsel, and it appeared that both parties were in full accord. The Debtor was willing to sign a settlement agreement then and there.

But, then the Creditor’s attorney removed a Confession of Judgment pleading from her briefcase and slid it toward the Debtor and its counsel. The Creditor’s attorney insisted that it be signed then and there, and absolutely refused to sign a settlement agreement.

Although the Creditor’s attorney had told the Debtor and its attorney that if the matter resolved, she wanted the Debtor to execute a Confession of Judgment, neither the Debtor nor its counsel expected one to be thrust in front of them at the mediation. To say the least, they were taken aback: I could see the look of shock if not dismay on their faces.

So, after recovering from this “new demand”, the Debtor and its counsel began reading the document and saw that it provided for an additional several thousand dollars in attorney’s fees and costs. It also required counsel to execute an affidavit under oath attesting to certain facts and waiving certain rights.

By this point, the mediation had been ongoing for more than four hours; never once during that time had Creditor’s counsel mentioned the additional attorney’s fees and costs set out in the Confession of Judgment much less offered to share this actual document with Debtor and its counsel so they could review and analyze it (although she had mentioned to them that she wanted one signed!) Rather, counsel showed it to them at the very end, knowing full well that they would never agree! When the Debtor and its counsel tried to negotiate over the additional monetary sums, the Creditor’s attorney demurred: the term had to remain as a disincentive to default on the payment schedule.

In short, Creditor’s counsel never wanted to settle. She came to mediation because the settlement agreement required it as a pre-condition to arbitration. Every time the Debtor agreed to the Creditor’s terms, Creditor’s counsel added a new term, changing the playing field, then “compromising” a little so that it seemed that Creditor’s counsel was there in “good faith.” Her true intent was shown when counsel slid the actual Confession of Judgment across the table containing additional terms (attorney’s fees and costs) with a “take it or leave it” attitude.

Naturally, the Debtor and counsel were unwilling to sign such an ominous document with such far reaching consequences without first studying it or negotiating its terms. But no – that opportunity was not to be had. Either sign it or arbitrate.

Not surprisingly, the parties walked out without settling. And on the following day, the Creditor’s attorney demanded that Debtor’s counsel choose three arbitrators by the end of the day.

This was a dishonest, unprincipled, mediation. While the purpose of mediation is to explore options and to reach a resolution, the hidden agenda or goal of this mediation was simply to go through this charade in order to arbitrate and run up fees and costs: To “churn” the file.

While I hope never to be an unwitting victim of such a mediation again, sadly, I know I will be: Such unprincipled negotiations will occur!

. . . Just something to think about!