The United States Court of Appeals for the Seventh Circuit recently affirmed a decision of the Bankruptcy Court for the Eastern District of Wisconsin relating to the breadth of the mediation privilege under Wisconsin law in John Doe v. Archdiocese of Milwaukee (Case No. 13-3783, decided November 5, 2014).
While this is not a construction case, it is an informative case in terms of how far the mediation privilege can extend to protect statements in a mediation which, on their surface, might be seen as fraudulent and flat-out lies.
The 2007 Mediation
In Doe, the claimant was sexually abused by Father Lawrence Murphy while the child was attending the St. John's School for the Deaf in 1974 when he was 17 years old. In 2007, Doe participated in the Archdiocese's voluntary mediation program for victims of sexual abuse. As a result of the mediation, he was paid $80,000 in return for settling his claims of fraud, negligence, and sexual battery. To formalize the settlement, both Doe and the Archdiocese signed a settlement agreement containing a confidentiality clause and a second clause precluding the parties from introducing any statements made at the mediation into evidence in any later proceeding. The Settlement Agreement also purported to settle "all claims of any nature" between the parties "arising from any sexual abuse of [Doe] by Murphy . . . ."
The Archdiocese Files Bankruptcy
Unfortunately, Doe was not the only person who was sexually abused by priests who were being supervised by the Archdiocese of Milwaukee. So many claims arose that the Archdiocese filed a petition for reorganization under Chapter 11 of the Bankruptcy Code in 2011. Doe filed a proof of claim against the Archdiocese as part of the bankruptcy for the sexual abuse he suffered in 1974.
Summary Judgment Granted After Reconsideration by the Bankruptcy Court
In response, the Archdiocese moved for summary judgment on Doe's claim, citing to the 2007 settlement agreement. On its face, this was a straight-forward motion.
In response to the motion, however, Doe claimed that he had been fraudulently misled during the mediation to believe that the $80,000 he received was the maximum amount of money that the Archdiocese could pay to him. Doe further alleged that the Archdiocese told him during the mediation that other similarly situated victims were also being paid $80,000 and so, out of fairness, the Archdiocese could not pay him more than the others.
Doe stated in his appellate brief that he learned later that other survivors of the sexual abuse received amounts from $100,000 to $200,000. Additionally, Doe argued that the Archdiocese had failed to inform him that priests were being paid between $10,000 and $20,000 to leave the church. Doe finally argued that the Archdiocese withheld the extent of its knowledge regarding Father Murphy's past history of abusing children.
Initially, the Bankruptcy Court held in Doe's favor, finding that the two claims -- one from 2007, the other in 2011 -- were distinct claims and disputes and that breaking the mediation privilege to avoid "manifest injustice" was necessary. In response, the Archdiocese subpoenaed the mediator, and the mediator moved to quash the subpoena. As a result of the hearing on the motion to quash, the bankruptcy court reconsidered its prior ruling and held that the communications in mediation were inadmissible and granted summary judgment to the Archdiocese.
Seventh Circuit Affirms
The problem that Doe ran into in fighting the previous settlement is a Wisconsin Statute codifying the mediation privilege, Wis. Stat. §904.085. That statute makes inadmissible any "oral or written communication relating to a dispute in mediation made or presented in mediation by the mediator or a party . . . ." The statute includes exceptions, however, such as whether, "in an action or proceeding distinct from the dispute whose settlement is attempted through mediation . . . admission is necessary to prevent a manifest injustice of sufficient magnitude to outweigh the importance of protecting the principle of confidentiality in mediation proceedings generally." Wis. Stat. §904.085(4)(e) (emphasis added).
In affirming the Bankruptcy Court's decision, the Seventh Circuit agreed with the lower court that the allegations and claims that were resolved as part of the mediation were the same claim and action. Doe argued that a fraudulent inducement claim was "distinct" from the underlying sexual abuse claims; the Seventh Circuit was not convinced.
The question raised to me is whether the mediation privilege should have precluded Doe from being able to raise a fraudulent inducement claim in the Archdiocese's bankruptcy. The question left unanswered by the Court based on the breadth and language of the state statute was whether the Archdiocese had any duty of candor to Doe in the mediation in which neither party was represented by an attorney (not to mention that Doe was and is deaf). If lawyers are not involved in a negotiated settlement, is there any duty of candor?
Further, should the mediation privilege be so broadly construed if it means that parties can be less than truthful to one another? Especially in a mass-claim context -- where the claims cannot be aggregated as a class action due to the individual factual scenarios and injuries involved -- should the Archdiocese be able to represent -- apparently falsely -- that "everyone was getting $80,000" and that it would be unfair to others for Doe to get more?
What are your thoughts on this?