Declarations of Disclosure Must Be Exchanged Before
Entry of Mediated Judgments and Are Not Exempt
From Disclosure Under Mediation Confidentiality Privilege
By Thurman W. Arnold III CFLS
Judge Thomas Trent Lewis is one of the pre-eminent trainers of Certified Family Law Specialists for the Rutter Group and other continuing legal ed seminars. He is a top California Family Trial Court jurist, sitting for the Los Angeles County Superior Court. But the recent Second Appellate District reversal of Judge's Lewis' ruling in Lappe v. Superior Court filed December 19, 2014, reminds us that the appellate justices don't always agree with the best among our colleagues and bench officers. Click the link to read it.
Lappe was decided on a Writ of Mandate appealing an order of Judge Lewis that would have shielded from disclosure the preliminary and final declarations of disclosures that the parties purportedly exchanged during their mediation, although the appellant Wife (Gilda) contended that in fact there was no such exchange and that instead she was pressured, outside the presence of the mediator, to sign the Declaration Re Service ( Judicial Council Form FL-140) that represented, under oath, that they had in fact been exchanged. The FL-140 speaks to the Schedule of Assets and Debts that is Judicial Council Form FL-142.
I find this alleged fact very odd, because as a mediator, I always ensure that at least the Preliminary Declaration is completed, shared, and discussed early on in the mediation proceedings and before any agreement is reached. This is, after all, a perfect 'road map' for framing the issues. I cannot imagine any mediator not doing likewise - but evidently that did not happen here. I see it this way because the mediation process has to be about ensuring there exist no imbalances of power as between the parties, and I believe a mediator's responsibilities include assuring informed consent of both the parties to any agreements reached. How can that possibly occur without an exchange of at least the PDD, followed by a knowing waiver of the FDD, assuming that is proper in any given case? The more complex the marital history, and the bigger the pie to identify and divide, it would seem the more compelling the need to insist the parties not waive the Final Declaration of Disclosure. Of course, the mediation process is supposed to "belong" to the parties, and not to be a function of mediator bias or even mere preferences, but still the idea of full disclosure and waivers must be discussed between the parties.
I remember an adage drilled into me in Law School so many years ago - "bad facts make bad law." To some extent, this seems to apply to the appellate court ruling of Justice Kitching, who authored this reported decision; on other levels, however, it makes sense. In my view, this appellate decision rests at the feet of the mediator, and not of Judge Lewis who simply was attempting to honor the mediation process in the ruling for which he is reversed. As such, it is instructive to all California mediators in guiding how they manage their mediations, but the decision itself may have unforeseen repercussions for others who have mediated their cases in the past, especially if their judgments have not been entered or were entered without the formalities that led to a reversal in this case.
Marriage of Lappe
Gilda and Murray were married for 16 years, having two children. Gilda was a stay-at-home mom, and Murray was a physician and businessman who developed a medical device called the eScreen. Gilda filed for divorce, and early on the parties agreed to mediate their dissolution without utilizing their own attorneys. The mediation was a success - the parties reached a marital settlement agreement which, among other things, provided that Murray would pay Gilda $10 million dollars to cash her out of the community interest of shares in eScreen, Inc.
The agreement included a contractual provision that "[t]he parties' Preliminary/Final Declarations of Disclosure shall be inadmissible in a court of law, and otherwise protected from disclosure, pursuant to the provisions of Section 1119(b) of the California Evidence Code." Section 1119(b) bars discovery of admissibility of writings "prepared for the purpose of, in the course of, or pursuant to, a mediation."
Evidently the parties filed their Declarations re Service of Disclosures before, or together with, a stipulated judgment which incorporated the marital settlement agreement.
I cannot imagine a mediator allowing that language to be inserted into an MSA, and this is a red flag to me and maybe it was to the appellate court justices, too. It is not uncommon to waive the FDD per Family Code section 2105 - but this agreement would have the result of insulating both disclosure documents from subsequent scrutiny, essentially rendering the judgment impossible to attack for breach of fiduciary duty at a later date because there would be nothing to test what was known at time of settlement against.
Gilda learned that Murray had sold eScreen for $75 million dollars shortly after the judgment was entered. She filed an application to set aside the judgment on the grounds of fraud, perjury, duress, and mistake. She asserted that she learned five months after the judgment was entered that Murray was selling 100% of the company for this stunning amount. She contended that she had no idea Murray was shopping eScreen for sale, presumably including during the period of the mediation, and, that had she known he was, she would never have sold her CP interest in the company for a measly $10 million.
Personally, that averment does not pass the sniff test for me, because obviously by selling her interest in the business she was giving Murray the right to do whatever he wished with it and - what, was he going to operate it in perpetuity? On the other hand, given the nature of mediation and the fact that Gilda seemed to be unprotected in terms of divorce counsel (unlikely, however), a $20 million value (equally divided) was represented to be true and fair by someone, and that would reasonably be expected to be Murray given his role as businessman and Gilda's as a relatively unsophisticated homemaker. We have no idea how this $20 million "value" was fixed, and whether any neutral forensic accountants were utilized during mediation - but shouldn't they have been in a case of this magnitude?
Essential to Gilda's set-aside motion was proof that there had been no actual exchange of the PDD and FDD, or if there was, evidence of what those documents represented to her in terms of value. After all, the Family Code requires that the FDD disclose business and income-producing opportunities that arise after separation from any investment or significant business activity outside the ordinary course in order to allow the other spouse to make an informed decision whether he or she wishes to participate. FC section 2102(a)(2), 2105(d)(3). The key policy being ensuring that spouses make informed decisions before waiving valuable rights.
Gilda thereupon sought production of the disclosure statements through discovery, following filing her set-aside motion. Murray objected to the production, taking the position that mediation confidentiality and the express terms of the stipulated judgment precluded him having to turn over those documents (if they existed). Judge Lewis appointed a discovery referee who concluded that the declarations of disclosure were not subject to mediation confidentiality because the documents had "independent legal significance" and the "public policy" declared by the Family Code favoring disclosure to ensure fair and equal property divisions trumped mediation confidentiality. Ironically, that is not exactly what Justice Kitching ultimately holds in Lappe. Judge Lewis did not agree with the referee's recommendations, and ruled in favor of Murray that he did not have to disclose or produce the disclosure documents. Hence, the Writ and thence the reversal.
Lappe discusses a number of cases upholding and limiting mediation confidentiality, but for me the chief among them that are relevant to best practices for family law mediators are Elden v. Superior Court (1997) 53 Cal.App.4th 1497 and Marriage of Woolsey (2013) 220 Cal.App.4th 881. Elden held that parties to mediation don't have to strictly follow the California disclosure statutes during the mediation (or arbitration) in order to reach a binding settlement, so long as before the settlement is entered as a judgment the parties have exchanged something that does so comply (i.e., a PDD or an FDD unless waived pursuant to FC section 2105). In that sense, one would think this is a mere formality and possibly that is what Judge Lewis concluded. Woolsey likewise held that where the parties had agreed to mediation, "strict compliance" with the "technical procedural requirements" of sections 2104(PDDs) and 2105 (FDDs) was not required, but, per section 2106, there still must be an exchange of these prior to entry of Judgment.
Ultimately, Lappe reiterates that the mediation confidentiality privilege is not absolute - especially where the Family Code requires the exchange of declarations before a Judgment can even properly be entered. What may or may not be confidential also turns on what communications would encourage mediation "by permitting the parties to frankly exchange views, without fear that disclosures might be used against them in later proceedings." Fair v. Bakhtiari (2006) 40 Cal.4th 189. While the California Supreme Court has consistently held that trial and appellate courts should not uphold judicially crafted exceptions to mediation confidentiality, the legislature must resolve the competing policy concerns. Here, the legislature has clearly expressed a preference for the exchange of declarations of disclosure before a judgment can be entered. This does not, of itself, mean that a mediated settlement will be set aside because of what is or is not in the subsequent exchange; instead, it ensures full and fair disclosure of all relevant facts to both parties. In most cases, this will be pro forma, I suspect.
I imagine that Judge Lewis holds mediation in his heart as sacrosanct, and if so I agree with him. Lappe should not be viewed as disapproving Elden or Woolsey, and in fact it does not. It merely reiterates that before a mediated settlement can be approved, the parties must comply with the disclosure statutes.
But it does beg the question of what happens to prior mediated settlements which have not yet been submitted for judgment, where one party refuses after mediation to exchange a PDD or waive the FDD? Can they thereby block a settlement which they now wish to escape, based upon this ruling, and game the system and the other party? We will see - I have that very issue pending before the Court in Indio, involving a mediation that occurred five years ago in a different state between a married same-sex couple that must proceed in California because this is where they married and their home state did not recognize same-sex marriage. Of course, neither the mediator nor the parties knew anything back then about California rules regarding declarations of disclosure. Evidently the remedy here is a motion to compel the FDD per Family Code section 2107(a), prior to the actual entry of Judgment, since Elden continues to stand for the proposition that, in mediations, the exchange need not be contemporaneous with the MSA itself.
In any event, mediations don't have to end like this.
Many mediators bring in co-mediators and neutral forensics (i.e., real estate appraisers, accountants, therapists, and others) to help the parties understand and work through the issues. This can be expensive, though, and often one or both parties resists the expense or the scrutiny such would require. It is true that often the more-empowered spouse is the one pushing mediation.
But it is the role of the mediator and NOT the Court to manage the process, and to ensure that agreements that waive these important safeguards are entered into that do become a part of the record. This result does a disservice to both the parties, and possibly to all of us who are dedicated to supporting mediated outcomes. But possibly there are reasons for what happened that are not evident in the decision and, of course, mediators must remain silent and so cannot defend themselves.
For the Lappes, the litigation they sought to avoid by agreeing to mediate their family law dispute is now in full flame, with lawyer fees ablazing. Gilda was awarded her costs on appeal. I predict Lappe II, next year.
Author: Thurman W. Arnold III CFLS