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The “Fairness” Dilemma

From the Blog of Phyllis G. Pollack.

Almost four years ago (February 23, 2007), I posted a blog on ‘Fairness”. I had attended a training session in which the teacher asked the very simple yet complex question “How do you define “fairness”? Is it from a legal viewpoint? Equitable viewpoint? Moral viewpoint? Ethical viewpoint? Cultural viewpoint? All of the above? None of the above?

I suddenly recalled this blog during a mediation I conducted last week in which the many definitions of fairness collided. As of now, I am not sure which definition will “win”. What I am certain of, is that if the “legal” definition wins, the outcome may be quite “unfair”.

The story unfolds (using fictitious names): Jane Owner (“Owner”) owned some real property on which she wanted to develop and build a small commercial/residential mixed use building consisting of condos and retail shops. To do this, Owner hired Mary General Contractor (“GC”) and also obtained a one-year construction loan from California Friendly Bank (“Bank”). The loan was secured by a mortgage on the project. The project proceeded, and as is typical on construction loans, at set stages in the construction, GC was to submit applications for payment to the Bank, and the Bank was to pay GC who, in turn, would pay her subcontractors and materialmen.

At first, all went well. But gradually, Owner fell behind in her monetary and other obligations to the Bank. Once this occurred, the Bank refused to pay the applications for payment submitted by GC. Eventually, the Bank declared the Owner to be in default on the loan, and the Bank no longer made any payments to GC who was now owed $1.3 million. To protect herself and her subcontractors and materialmen, GC timely filed her mechanic liens and bonded stop notices in accordance with California law. Upon receipt of the bonded stop notices, Bank should have set aside 150% of the amount needed to pay the mechanic liens in full, but did not do so.

Instead, the Bank itself, failed and defaulted. But before it did so, it sold the defaulted note to Joyce New Buyer (“Buyer”) who then foreclosed on the property and became the owner of the property.

So, the GC now finds herself owed $1.3 million (that she, in turn, owes to subcontractors and materialmen) from Owner who has since filed bankruptcy and from Bank now taken over by and under the control of the Federal Deposit Insurance Corporation (FDIC). (Not a fictitious name!)

How does the GC attempt to resolve this? She sues Owner, Bank and Buyer. The Owner having filed bankruptcy, does not answer the lawsuit as she is now judgment proof. The FDIC answers the lawsuit on behalf of Bank since it has now taken over the Bank. The Buyer answers the lawsuit.

They come to mediation. The FDIC contends that it must comply with federal law and pursuant to that law, it must pay first the administrative expenses, second, reimburse the depositors of the failed bank and then third, pay the unsecured general creditors of Bank such as GC. The FDIC further states that, in all probability, there will be no money left over to pay the unsecured general creditors including GC.

Joyce New Buyer contends that since she obtained the property in foreclosure, that foreclosure sale erased whatever prior liens were on the property including the mechanic liens and bonded stop notices of GC. In short, Buyer claims that she took this property “free and clear” of GC’s mechanics liens and bonded stop notice.

And, the GC contends that under California law, she is obligated to pay her subcontractors and materialmen out of her own pocket and even though she cannot get paid by Owner, Buyer, Bank or FDIC.

Is this fair? Accepting (for purposes of this blog) all of these arguments as true, if one defines “fairness” according to law – the GC loses – she is out $1.3 million, and must pay the subcontractors and materialmen with no hope of reimbursement.

If one defines “fairness” in terms of morals, ethics and/or equity, then perhaps a different and more “fair” or equitable” result can be reached. And that is precisely what the parties are investigating; even though Buyer can “legally” avoid this obligation altogether and would probably win at trial or on a motion for summary judgment, Buyer is looking for ways “outside of the box” to do what is “right” vis-à-vis GC so that all involved will “win” a little bit and be able to walk away with clean consciences. The mediation ended without a settlement but with the parties struggling to define “fairness” in a way that everyone can “live with.”

Sometimes, “fairness” has nothing to do with the law but has everything to do with doing the “right” thing. “Justice” and “fairness” can be oxymorons.

As the case is still pending, the definition of “fairness” is as yet undetermined. We shall see.

. . .Just something to think about!


Phyllis Pollack

Phyllis Pollack with PGP Mediation uses a facilitative, interest-based approach. Her preferred mediation style is facilitative in the belief that the best and most durable resolutions are those achieved by the parties themselves. The parties generally know the business issues and priorities, personalities and obstacles to a successful resolution as… MORE >

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