In re Lake Lotawana Cmty. Improvement Dist.

• Decision Date: 19 December 2016
• Docket Number: Case No. 16–42357–can9
• Citation: 563 B.R. 909
• Parties: IN RE: LAKE LOTAWANA COMMUNITY IMPROVEMENT DISTRICT, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Missouri

563 B.R. 909

IN RE: LAKE LOTAWANA COMMUNITY IMPROVEMENT DISTRICT, Debtor.

Case No. 16–42357–can9

United States Bankruptcy Court, W.D. Missouri.

Signed December 19, 2016

James E. Bird, David D. Ferguson, Andrew J. Nazar, Polsinelli PC, Kansas City, MO, for Debtor.

OPINION AND ORDER DENYING MOVANTS' MOTION TO COMPEL DISCOVERY OF MEDIATION STATEMENT

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.¹

I. Background

On August 26, 2016, the Lake Lotawana Community Improvement District ("the District") filed for Chapter 9 relief.² Prior to filing, the District and MI Bondholders, LLC (the "Bondholders"), engaged in mediation, attempting to negotiate the terms of repayment of matured bonds owed by the District. As part of the mediation, the mediator requested each party provide the mediator with a confidential mediation statement to educate the mediator about the case and the parties' respective positions.³ The mediation was unsuccessful and the District subsequently filed for relief under Chapter 9.

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")⁴ to determine whether the District was an eligible debtor under Chapter 9.⁵ The District refused. After the parties agreed⁶ to dispense with the requirements of formal discovery requests, the Movants filed a Motion to Compel Production of Mediation Statement (the "Motion to Compel"). See Dk 52. The District timely filed an Objection to Movant's Motion to Compel Production of Mediation Statement (the "Objection"), see Dk 59, and filed a Motion to File a Document under Seal for In Camera Review of the Confidential Mediation Statement, see Dk 60. The Movants timely filed Reply Suggestions in Support of the Motion to Compel Production of Statement (the "Reply"). See Dk 63. Neither party requested an evidentiary hearing on this matter. This matter is fully briefed and ready for decision.

II. Discussion

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.⁷ The latter three arguments can be summarized as follows: the Statement is not privileged, and even if it was privileged, 11 U.S.C. § 109(c)(5)(B) repeals any privilege that may apply and, in the alternative, the District waived its privilege.

Pursuant to Federal Rule of Civil Procedure 26(b)(1),⁸ "[p]arties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense." FED. R. CIV. P. 26(b)(1) ; see also Gov't of Ghana v. ProEnergy Servs., LLC , 677 F.3d 340, 344 (8th Cir. 2012) ("Under the Federal Rules, any unprivileged matter that is relevant to a party's claim or defense is generally discoverable."). But the right to discovery is not absolute.

In this case, the District argues the Statement is privileged.⁹ Under Federal Rule of Evidence 501, "[t]he common law—as interpreted by United States courts in the light of reason and experience—governs a claim of privilege." The federal common law governs privileges where a claim or defense is based on a federal rule of decision. See In re Stockton , 475 B.R. 720, 728–29 (Bankr. E.D. Cal. 2012) ("The rules on privilege apply to all stages of [a] chapter 9 case."). At issue here is the District's eligibility under 11 U.S.C. § 109,¹⁰ specifically, whether the District negotiated in good faith with the Movants prior to filing for relief. See 11 U.S.C. § 109(c)(5)(B). With the exception of § 109(c)(2),¹¹ all eligibility questions "are federal questions based on, and created by, the federal Bankruptcy Code and subject to a federal rule of decision." Stockton , 475 B.R. at 729. Thus, the federal common law governs whether the Statement is privileged. At issue here are the work product and mediation privileges.

a. Work Product Privilege

"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.

i. Ordinary Work Product

"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).

1. Anticipation of Litigation

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 now shifts to the Movants to demonstrate substantial need and undue hardship.

2. Substantial Need and Undue Hardship

"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.

A mere allegation of bad faith is insufficient to overcome the work product privilege. The plaintiff must demonstrate some likelihood or probability that the documents sought may contain evidence of bad faith. Of course, this required showing is not a high hurdle because the plaintiff, without seeing the documents, can only speculate as to their likely contents. He need only show the possibility, not the certainty, that the claim documents contain evidence of bad faith.

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 ...