In re Teligent

• Decision Date: 05 May 2011
• Docket Number: 10–2411–bk (XAP).,Docket Nos. 10–2257–bk (L)
• Citation: 65 Collier Bankr.Cas.2d 1264,54 Bankr.Ct.Dec. 177,640 F.3d 53
• Court: U.S. Court of Appeals — Second Circuit
• Parties: In re TELIGENT, INCORPORATED, Debtor,Savage & Associates, P.C., Plaintiff–Appellant–Cross–Appellee,v.K & L GATES LLP, Appellee–Cross–Appellant,andAlex Mandl, Defendant–Appellee–Cross Appellee.

640 F.3d 53

65 Collier Bankr.Cas.2d 1264

54 Bankr.Ct.Dec. 177

In re TELIGENT, INCORPORATED, Debtor,Savage & Associates, P.C., Plaintiff–Appellant–Cross–Appellee,

v.K & L GATES LLP, Appellee–Cross–Appellant,andAlex Mandl, Defendant–Appellee–Cross Appellee.

Docket Nos. 10–2257–bk (L)

10–2411–bk (XAP).

United States Court of Appeals, Second Circuit.

Argued: Jan. 11, 2011.Decided: May 5, 2011.

Denise Savage, Savage & Associates, P.C., Croton on Hudson, NY, for Plaintiff–Appellant–Cross–Appellee Savage & Associates, P.C.Luba Shur (Michael S. Sundermeyer, Mark S. Levinstein, on the brief), Williams & Connolly LLP, Washington, DC, for Appellee–Cross–Appellant K & L Gates LLP.

Andrew C. Hall, Hall, Lamb and Hall, P.A., Miami, FL, for Defendant–Appellee–Cross–Appellee Alex Mandl.Before: POOLER, WESLEY, and CHIN, Circuit Judges.POOLER, Circuit Judge.

Appeal and cross-appeal from an order of the United States District Court for the Southern District of New York (Castel, J.) affirming the order of the bankruptcy court (Bernstein, C.B.J.), which denied K & L Gates LLP's (“K & L Gates”) motion to lift two protective orders prohibiting disclosure of communications made during a mediation, and Savage & Associates, P.C.'s cross-motion to enjoin K & L Gates from raising questions about the validity of certain provisions of a settlement agreement as a defense to malpractice in a related action.

With respect to the cross-appeal, the protective orders are silent as to when their confidentiality restrictions may be lifted; therefore, disclosure would have been warranted only if the party seeking disclosure had demonstrated (1) a special need for the confidential material it sought; (2) resulting unfairness from a lack of discovery; and (3) that the need for the evidence outweighed the interest in maintaining confidentiality. K & L Gates failed to make the requisite showing, and accordingly, we conclude there was no error in the denial of the law firm's motion.

With respect to the lead appeal, because K & L Gates was, at most, a potential debtor of a debtor of the estate, it could not have been considered a “party in interest” with standing to contest the validity of the settlement agreement when the motion to approve that agreement was pending before the bankruptcy court. There was, therefore, no error in the holding that K & L Gates is not barred from asserting a defense challenging the validity of any provision of the settlement agreement in connection with the related malpractice action currently pending against the law firm. Accordingly, we affirm the order of the district court in its entirety.

BACKGROUND

Since the issues are narrow, we recite only as much of the factual background as is necessary to understand the decision.

When Teligent, Inc. (“Teligent”) hired Alex Mandl as its CEO in 1996, the company extended Mandl a $15 million loan. The loan was to be due and payable immediately if Mandl resigned his employment without “good reason,” but would be automatically forgiven if Teligent terminated Mandl's employment other than for “cause.”

Mandl retained the law firm K & L Gates LLP around April 2001 in connection with his potential departure from Teligent. At that time, $12 million was outstanding on the loan. K & L Gates drafted a severance agreement for Mandl that, according to the law firm, “reflect[ed] that Teligent had terminated Mandl other than for Cause effective as of April 27, 2001, thus triggering automatic loan forgiveness.”

Less than a month after the parties ratified the severance agreement, Teligent filed for bankruptcy under Chapter 11. Cross–Appellee Savage & Associates, P.C. (“Savage & Associates”) was appointed by the bankruptcy court to be the Unsecured Claims Estate Representative. In discharging its duties pursuant to this role, Savage & Associates filed approximately 1,000 adversary proceedings. These adversary proceedings included an action against Mandl, brought under Sections 548 and 550 of Chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 548, 550, to recover the balance of the loan. Mandl again retained K & L Gates to represent him in connection with this matter.

The bankruptcy court held a one-day trial after which it concluded that Mandl had resigned before Teligent terminated his employment, and therefore, Mandl was liable for the balance of the loan. See In re Teligent, Inc., 380 B.R. 324, 333–36 (Bankr.S.D.N.Y.2008). That finding was not appealed.

Shortly after the bankruptcy court issued its decision relating to the loan, Mandl retained Greenberg Traurig, LLP (“Greenberg Traurig”) as new counsel. Greenberg Traurig then filed a number of motions, including a motion for relief from the judgment based in part on a claim of newly discovered evidence. Around the same time, Savage and Associates commenced a new lawsuit in the Eastern District of Virginia against Mandl, naming as defendants Mandl's wife, Susan Mandl, and ASM Investments LLC (“ASM”), an entity associated with Mandl, and alleging that Mandl had fraudulently transferred certain property through ASM to his wife in order to shelter his assets from creditors.

All parties to the action in Virginia participated in a voluntary mediation in attempt to resolve both the motions before the bankruptcy court as well as the Virginia Action. Greenberg Traurig invited K & L Gates to participate in the mediation, to address Mandl's claim that K & L Gates committed malpractice in the course of representing him during his termination from Teligent and in the resulting adversary proceeding. K & L Gates declined to participate.

In setting up a framework for the mediation, the parties agreed to be bound by the terms of the protective orders routinely employed by the Bankruptcy Court in the Southern District of New York in the context of court-ordered mediation (the “Protective Orders”). The Protective Orders imposed limitations, inter alia, on the disclosure of information relating to the mediation. However, the Protective Orders provided no guidance on when, or if, a party might be entitled to release confidential information connected to the mediation.

Although formal mediation did not result in a settlement, the parties thereafter reached an agreement. In exchange for dismissal of the action in Virginia, Mandl agreed to pay the estate $6.005 million and to commence a malpractice suit against K & L Gates. The terms of the agreement also required Mandl to remit to the estate 50% of the net value of any malpractice recovery. The bankruptcy court approved the settlement pursuant to a motion under Federal Rule of Bankruptcy Procedure 9019. The approval of the settlement is not before us on appeal.

On May 30, 2008, and as required by the settlement, Mandl filed a malpractice action against K & L Gates in the Superior Court of the District of Columbia. During discovery, K & L Gates sought documents relating to “the negotiations leading up to the Settlement Agreement, including all mediation and settlement communications[.]” K & L Gates argued that the discovery was “critical to issues such as causation, mitigation, and damages.” In response to K & L Gates's request, Mandl produced certain documents.

When Savage and Associates learned that Mandl had disclosed confidential mediation communications, Denise Savage, the firm's principal, contacted Mandl, insisting that he withhold all documents relating to the settlement agreement. Denise Savage also demanded that K & L Gates destroy or return any such documents in its possession. Both parties complied with these requests.

K & L Gates then filed a motion with the bankruptcy court, seeking to lift the confidentiality provisions of the Protective Orders. The bankruptcy court denied the motion, see In re Teligent, Inc., 417 B.R. 197 (Bankr.S.D.N.Y.2009), reasoning, among other things, that K & L Gates had not shown a need for all mediation communications, though the law firm had sought discovery of the entire universe of documents. Id. at 207. The bankruptcy court also noted that its conclusion was “not intended to foreclose K & L's right to argue before the DC court that a specific communication is not covered by the confidentiality provisions of the [Protective] Orders ( e.g., it was not made ‘during the mediation process'), or that the court should nevertheless order disclosure of a specific communication under applicable law.” Id. at 209. The bankruptcy court's denial of K & L Gates's motion to lift the confidentiality provisions of the Protective Orders is the subject of the cross-appeal before us.

Savage & Associates opposed the motion to lift the Protective Orders before the bankruptcy court and cross-moved for injunctive relief prohibiting K & L Gates from asserting any defense in the District of Columbia action relating to the mediation of the action filed in Virginia. Specifically, Savage & Associates sought to enjoin K & L Gates from raising as a defense to malpractice that certain provisions in the settlement agreement between Mandl and Savage were invalid. The bankruptcy court denied Savage & Associates' motion for injunctive relief, see In re Teligent, Inc., 417 B.R. 197, 210 (Bankr.S.D.N.Y.2009), and the district court affirmed, see In re Teligent Servs., Inc., No. 09 Civ. 09674, 2010 WL 2034509 (S.D.N.Y. May 13, 2010). These orders are the subject of the lead appeal before us.

DISCUSSION

In an appeal from a district court's review of a decision of a bankruptcy court, we conduct an independent and plenary review of the bankruptcy court's decision, accepting the bankruptcy court's findings of fact unless they are clearly erroneous and reviewing its conclusions of law de novo. Evans v. Ottimo, 469 F.3d 278, 281 (2d Cir.2006). Further, we review de novo the bankruptcy court's view of the principles governing who may contest a settlement as a party in interest under Section 1109(b), In re Refco Inc., 505 F.3d 109, 116 (2d Cir.2007), and we review for abuse of discretion the...