Mediation is the Emerging Tool to Bring Banks/Lenders and Shareholders to Certainty of Result in Uncertain Times.
In this time of economic upheaval and heightened distrust of banks and lenders, shareholders do have a better alternative to courtroom combat in order to reach certainty of result along with monetary savings and fairness. Banks and lenders, at the same time, can satisfy their needs to maintain reputation, manage risk, and obtain party-directed results, leaving them more time to spend on developing money-generating business projects rather than putting out “fires” of hostile and costly shareholder meetings/demonstrations, instant news feeds, press conferences, or reporter inquiries, all at great expense to the corporate bottom line.
Research in the field, both on the ground and in written word, allows this author to posit that mediation, the alternative dispute resolution procedure juxtaposed to courtroom battlefields, can clearly provide more benefit to banking or lending entities with respect to disputes involving shareholders, than can costly litigation. At the same time mediation can bring more certain, interest-based, individualized resolutions without the attendant vagaries of appeal, instantaneous publicity surprises, and potential losses of long standing relationships.
In another article this author published the question was posed: “… why do lenders and borrowers, buyers and sellers, gravitate to litigation? No one is enamored about paying legal fees, not a soul appreciates the snail’s pace of the judicial processes. But resolving disputes seems to draw out a need for public places (the courthouse), press coverage and finding justification (justice as it is often called). Things do not always run perfectly. And when they do not, the people involved develop a hard time talking about the issues with one another and, driven by self-protection, head off to adversarial ritual, rather than focusing on compromise, relationship protection and resolution.” This same query is quite relevant to claims involving shareholders and banks/lenders.
To highlight the benefits of mediation over litigation, one must first look at the needs of the parties. One expects both sides want frank, pragmatic discussions in a process that is basically without prejudice to their interests, one under the umbrella of mediation confidentiality. All mediators know, and most attorneys and parties understand that a mediated result is one reached by compromise. Without mediation, parties will rapidly be in litigation mode without the ability to speak in mediation sessions freely, while fearing anything said, or any concession made with the goal of compromise, will be used against them. This is the key basis supporting the inherent value of mediating bank/lender/shareholder disputes. Also, both sides typically share the desire for rapidity of resolution over lengthy litigation/appeal processes. In many instances banks/lenders seek resolution before a dispute escalates to full blown litigation or hits the press.
More directly, the bank/lender wants to focus on discussions about the commercial interests of the parties, not just legal issues. Managing relationships of bank/lender with its shareholders, its business counterparts, its customers, and solving issues based upon workplace conflicts or other intra-company policy matters, maintaining the goodwill of the bank in the community, are top of mind to bank/lender parties.
In today’s economy, investors (be they shareholders, lenders, or otherwise) are filing claims against failed banking institutions. These cases are likely to grow in numbers as investors seek to recoup losses from this banking crisis. Likely issues will take the form of assertions that top bank officials failed to disclose important information about the bank’s condition before it “spiraled out of control”, or misrepresented the bank’s financial condition, failed to disclose to investors such things as losses in the bank’s portfolio or censure by regulators. Each claim raises concerns that could be mitigated by mediation versus litigation. Sensitive financial information which the bank and investors may not want to make available to competitors, such as insurance coverage issues, loss runs, or customer information regarding pull out of deposits, could be discussed and circulated under a mediation umbrella of confidentiality.
In the case of smaller local banks, many disputes are best served by resolution through mediation. Examples are departing shareholders where stock valuation or stock option issues are involved and confidentiality of internal discussions is critical, as well as a non-competition agreement if the shareholder were also an officer, director or employee. Others may involve trade secret non-disclosure or trademark infringement issues, necessary contract language to protect customer lists or confidential customer information, or the firing of a minority shareholder who works for the institution. It is quite likely that shareholders in a small lending corporation would not have planned in advance for the instance of a minority shareholder being forced to leave by the controlling shareholders, leaving employment, share valuation, insurance and many other issues irresolvable except by mediation or expensive litigation.
Similar confidentiality issues would be served in instances where minority shareholders, facing conversion of a lending entity into a bank, want to be bought out, raising issues over share value, customers, expansion of products and services, competition, and buy out packages for shareholders who are officers of the entity. As in other “divorces,” emotions can run high and the proper arena is not a public courtroom. The entity seeks to not pay dissenting minority shareholders more than what non-dissenter will get, and the dissenter may have not wanted a change in the first place. Arguments abound over whether the entity is more valuable than it now says it is, some holding out for what s/he thinks is due. A court may be bound by the jurisdiction’s law on valuing a buyout, which the shareholders do not agree with, or have broad discretion in determining valuation in a binding judgment, drawing conclusions that none of the parties may find acceptable. Mediation allows the parties to conduct their own negotiations, taking into account their own needs and outlooks, reaching a value that all can accept rather than being forced to binding judgment and the potential of appeal.
In smaller bank settlings, where friends, relatives and close business associates are involved on a day to day basis, strategic decisions for the entity such as mergers or takeovers, dividend awarding, disparate salaries, voting rights, succession (in case of death or family dissolution), loans to or from corporate officers/directors, diversion of corporate opportunities, a squeeze out or other exclusion of minority shareholder officer/employees from management, or even embezzlement, create highly emotional circumstances all ripe for mediation, not public combat. Sensitive issues such as these are enhanced by burdens of proof in litigation settings resulting in unwanted (sometimes by all sides) judgments of a trial court or jury. Stakes rise higher when the end result has to be appealed at even more expense than anticipated. Mediation permits the parties to negotiate, eliminating high standards of proof and unwanted judgments, appeals, delay and expense.
Shareholders desire many of the same things as banks/lenders: certainty of result (including no delay from lengthy appeal processes), direct involvement in the process, reasonably timely resolution without having to wait for other shareholders or other banks who may be involved in a larger scale dispute. One large scale example: Enron Corporation’s lenders/shareholders/investors failed after eight months of mediation to resolve claims of bank liability for the company’s collapse. The investor lawyers then sought out individual settlements with some banks in lieu of a group agreement. The potential benefit to shareholders or banks is that settlement made early, when there may be more ability to pay, is better than waiting for all to be ready to settle. Another example is Washington Mutual’s (WMI) shareholder claims which are ongoing in WMI’s bankruptcy proceeding. Class certification was granted leaving the shareholders to proceed to court-ordered mediation against four groups of defendants including some former WMI directors. The directors are indicating that an appeal is likely on the court’s order approving lead counsel status. Closure will be long in coming.
Mediated agreements, on the other hand, have an advantage over court judgments (or even arbitration awards) because they are the product of mutual understanding and consensual agreement of the parties. It is currently the case in most jurisdictions that if attorneys are not ethically bound by some state bar rule of conduct, or state or federal court rule or process, they are encouraged to advise clients that mediation or some form of alternative dispute resolution process is preferred over litigation. Once in mediation, the parties’ goal of fostering their future business interests, discussing what is most important to them, can, with the help of a skilled mediator, be framed and re-framed to lead them away from focusing on emotional and legal arguments to a position of potential cooperation for mutual gains. Needs of all parties can be pragmatically addressed, documented by an enforceable agreement which can be executed in a much shorter time than the years of litigation that comes with courtroom combat.
There are those who argue the non-binding nature of mediation is a disadvantage, and the possibility of enforcing a mediated settlement is harder than a court judgment or binding arbitration award would be. Watching the history of mediation over the last three decades as both litigator and alternative dispute resolution (ADR) professional, leads this author to conclude the argument cannot be substantiated in today’s legal environment. Processes have been put on place either by court rule or case law to provide for court intervention to uphold mediated settlement agreements where there may be recalcitrant parties. Today, mediation (as well as other forms of ADR such as judicial reference or arbitration) is encouraged in all levels of court proceedings. Many courts, both state and federal, require parties to state in a written pleading they have advised their clients of the availability of ADR processes at or near the commencement of the action and even offer court sponsored processes (often on some limited pro bono basis) for those purposes. Many federal courts have similar requirements that litigants engage in ADR at the outset of a case, in some instances through programs provided by the courts themselves. Even at the appellate level, at least in California state and federal courts, litigants are now required to participate in mandatory mediation, sometimes before briefing. While much of this is driven by fiscal constraints at various court levels, the substantial amount of dollars saved by using ADR processes, particularly mediation, is widely recognized and encouraged by courts in lieu of full blown litigation and appeal.
Others voice disadvantages of mediation due to cost. In bank/lender/shareholder cases, low-cost is not typically the driving factor when choosing mediation over litigation. Rather, the downsides of litigation far outweigh what may be a costly process in either venue. Yes, court processes are more “free” than not. But when one compares attorney time, full blown discovery, expensive expert workups, motion practice to limit issues or exclude evidence, and the length of the process and still comes to realize that litigation is not the place wherein one can craft one’s own conclusion (as can be had in mediation), nor can litigation provide the certainty of a settlement agreement (instead of the lengthy appeal processes that follow an unexpected binding judgment), mediation is the better alternative. Studies have been done to compare actual expenses of litigation to actual expenses of mediation. However, if the desire of the parties is for certainty, confidentiality, mutuality and closure within a reasonably short period of time, there can be no comparison as those attributes of mediation are absent in the courtroom context.
In theory, all sides to mediated settlement agreements desire enforceability. One would be remiss in not acknowledging such theory may fail in some cases. There are cases where clients claim they were threatened or coerced into signing a mediation settlement agreement. Such instances occur and are typically litigated through the appellate level. While no system is perfect, and there are appellate cases dealing with instances of coercion and dispute between lawyers and clients in a mediation context, the vast majority of mediated settlement agreements are complied with and the parties go on with their business having put extremely expensive litigations aside for a certainty, a mediated result in which they personally participated and can live with.
Alternative dispute resolution in the form of mediation (or other processes outside the scope of this article) has many attributes financial institutions, their shareholders, investors or customers can use as a business tool alternatively to (or even in conjunction with) litigation. ADR providers recognize that in many instances a lawsuit must be filed to preserve the status quo as in the case of injunctive relief, a stay of this or that, or to protect a statute of limitations or repose from running. Litigation in some states is required for mortgage foreclosures or certain particularized relief. However, use of mediation, in conjunction with those processes and to speed along the process of resolution, is appropriate and will bring more desired results than battlefield combat.
ADR has become highly recognized as an alternative, not a means to totally supplant the entirety of the processes of the court system in this country. The benefits of mediation, however, fit more needs of the parties in today’s world in light of the delays of court processes due to economic constraints on the system as a whole. Time is money in the banking/lending/shareholder world. With shortages of judicial officers and courtrooms, with furloughs and budget cuts, the individualization of the process of settling disputes through mediation better serves the banking industry than does battle and delay in the court system.
Linda DeBene is a mediator, arbitrator, referee and special master with JAMS – The Resolution Experts, specializing in business & commercial disputes, real estate, construction, and insurance related matters. She has been an ADR professional and court-appointed neutral since 1986, and a California legal professional since 1978. Linda is based in Walnut Creek, works throughout Northern California and Nevada, and can be reached at firstname.lastname@example.org
 . “Economic Downturn and Standard Contracts: Time for Another Look”, CCH Commercial Lending Review, March-April, 2009, pp.9-13
 . Apropos of a group of investors who have sued the parent of Georgian Bank in a Georgia state court. “Georgian Bank Shareholders Sue Ex-CEO, Chairman”, The Atlanta Journal-Constitution, July 27, 2010
 . Bloomberg News Corp, “Enron Mediation Talks Fail to Resolve Bank Dispute”, by Jef Feeley, March 22, 2004
 . Article by Allison Frankel, The Am Law Litigation Daily on AmericanLawyer.com, October 18, 2010
 . See, e.g., the American Bar Association Model Rules of Professional Conduct, Comment  to Rule 2.1: “When a matter is likely to involve litigation, it may be necessary under Rule 1.4 [Communication with Client] to inform the client of forms of dispute resolution that might constitute reasonable alternatives to litigation.” In 1993 the Colorado Supreme Court, in conjunction with the Colorado Bar Association, amended Colorado Rule of Professional Conduct 2.1 to add a requirement that a lawyer in an appropriate case has an obligation to discuss arbitration, mediation and negotiation. The text is similar to the ABA Model Rule 2.1. See Dauer & McNeill, New Rules on ADR: Professional Ethics, Shotguns and Fish, 21 Colo Law 1877 (1992)
Other states have adopted the ABA Model Rules; California has not. But on July 20, 2007 the State Bar of California adopted California Attorney Guidelines of Civility and Professionalism (Civility Toolbox) which, at Section 13 discusses what a California attorney “should” do “as soon as possible” concerning discussions of ADR with the client and opposing counsel. See California State Bar website at http://ethics.calbar.ca.gov/LinkClick.aspx?fileticket=mPBEL3nGaFs%3d&tabid=455
 . See, e.g., California Code of Civil Procedure §664.6; California Evidence Code §1118, 1123, 1124
 . See, e.g., California Judicial Council Mandatory Form CM-110 required in all California civil litigation proceedings.
 . See, e.g., Federal Rule of Civil Procedure, Rule 16(a)(5), (c)(2)(I) and Form 52 4(f) & (g); U.S. District Court Northern District of California Local Rules 1-6-14.
 . See, e.g., Ninth Circuit Court of Appeal Local Rule 33-1; California Court of Appeal First District, Local Rule 2; California Court of Appeal Third District, Local Rule 1
 . Two such cases are Cassel v. Superior Court (2011) 51 Cal.3rd 113, 119 Cal.Rptr.3d 437, and Porter v. Wyner (2010) 183 Cal.App.4th 949, 107 Cal.Rptr.3rd 653, where review was granted by the Supreme Court and then transferred back to the DCA for further findings in light of the Cassel decision. 2011 WL 1713378 (2011)
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