Fraud in Mediated Settlement Agreements

From Professor Ellen Deason, Moritz College of Law at the Ohio State University, comes our first guest blog:

Most court challenges to the enforcement of settlement agreements reached through mediation are doomed to fail.  As shown by Jim Coben’s and Peter Thompson’s empirical analysis of litigation concerning mediation, courts are far more likely to enforce a challenged agreement than to set it aside.  This is especially true for allegations of fraud.  James R. Coben & Peter N. Thompson, Disputing Irony: A Systematic Look at Litigation About Mediation, 11 Harv. Neg. L. Rev. 43, 80 (2006).  For a draft of Jim and Peter’s article, see http://www.hamline.edu/law/adr/Mediation_Case_Law_Project/Disputing_Irony.pdf    

A recent case from the Alabama Supreme Court bucks this trend.  BillyBarnes Enterprises, Inc. v. Williams, 2007 WL 2812768 (Ala), is significant for its interpretation of reliance as a requirement for proving fraud, but is ultimately disappointing if one reads it as an indication of courts’ ability to ensure fairness in mediation.   

The facts of BillyBarnes are graphic.  A railroad switchman on a backing train applied an emergency brake to avoid a collision with a truck speeding across the tracks.  The force threw him off the train, which ran over his legs.  Williams, the switchman, maintained that he had read the name “BillyBarnes” on the side of the truck and sued the company.   

BillyBarnes attacked this identification with evidence that all its trucks had left the premises well before the accident was reported.  Williams then claimed the accident had actually occurred hours earlier than the delayed report.  BillyBarnes made repeated discovery efforts to uncover notes or tapes of any prior inconsistent statement Williams might have made to his employer but all these efforts, including a motion to compel, failed.  Williams denied making any statement about the accident and the employer did not produce one.  Faced with a risk of a high jury verdict, BillyBarnes mediated with Williams and settled for $500,000 a week before trial. 

The very next day, the employer found a tape of an interview with Williams following the accident.  On the tape he reported the later time for the accident and acknowledged that he hadn’t been able to read a name on the truck.  Of course BillyBarnes tried to get the settlement agreement set aside.  One might think that this would be an easy legal case for rescinding an agreement, but the trial court denied the motion.  It held there was no fraud and that the agreement was binding and enforceable.   

The Alabama Supreme Court, over a dissent by its Chief Justice, concluded that the agreement must be set aside.  It was very generous with Williams, allowing that he might not have really  understood the deposition question asking him about a “verbal statement.”  But under Alabama law, fraud is fraud whether the misrepresentation was intended or was made in good faith – so long as the other party reasonably relied to his detriment on the false representation.   

Reliance is thus the crux of the matter, in this case as in many other mediation cases concerning fraud.  How can a party reasonably rely on statements made by an adversary in mediation?  Many courts import litigation assumptions into the mediation setting and write as if almost any reliance on the opposing party is unreasonable.  Indeed, BillyBarnes was appropriately skeptical about the assertions by Williams and his employer, which was why it spent 16 months seeking a statement using discovery mechanisms.  This effort, the trial court held, showed that BillyBarnes had in fact doubted Williams’s denial of a taped statement, and therefore it was unreasonable for the company to have relied on that denial.   

The Alabama Supreme Court agreed that BillyBarnes had doubted Williams’s veracity, but saw that doubt as ending prior to the settlement agreement.  It concluded that when BillyBarnes finally entered into the agreement, after all that unsuccessful discovery, it was reasonable for the company to rely on Williams’s representation that there was no recorded statement.   

I think this case is superficially good news.  It shows a court using standard contract doctrine to uphold the integrity and fairness of the mediation process.  But unfortunately the tools it used are not likely to be sensitive enough for policing unfairness in the majority of fraud cases.   

In finding reasonable reliance by BillyBarnes on Williams’s denial, the court rested its conclusion on the fact that the company had exhausted every possible means of obtaining Williams’s statement.  In my view, reliance under these circumstances is a bit of a fiction to fit the legal definition of fraud.  BillyBarnes was not really relying on Williams’s denial so much as on the court-sanctioned process of discovery that had not uncovered the misrepresentation.   

But what if litigants hold a mediation earlier to avoid spending money on discovery battles?  May a party not rely on an adversary’s statement unless it first pursues discovery to its limits?  In BillyBarnes, there was a smoking gun that eventually smoked.  But most smoking guns exist only in the imagination of the lawyer who is drafting discovery questions.  Is a doctrine that requires a full search for a nonexistent gun a wise use of resources?  

There is no easy prescription for combining the conciliatory norms of mediation with the adversarial norms of litigation – a process that is necessarily underway in the courts as mediation is used more frequently to settle litigation.  And parties should certainly not read this court opinion as a sign that when they try to settle their case through mediation they can set aside their adversarial vigilance.   

Ellen Deason

One thought on “Fraud in Mediated Settlement Agreements”

  1. Currently there is no licensing requirement or license available for Mediators in NY State. Mediators can get a certificate after taking a short course, and a certification program is being explored. Mediators such as Vincent Cavaleri http://www.yellowbook.com/profile/southshore-counseling-and-mediation-center_1844001717.html?addressId=1

    who advertise (as in this yellowbook ad) that they are “licensed” are doing so fraudulently.
    This particular individual also worked as a Home Improvement Contractor illegally without a license in Suffolk County. He now works for Michelle Cavaleri at the South Shore Counseling and Mediation Center. Owned by Michelle Cavaleri
    http://www.linkedin.com/pub/dir/michelle/mullane

    Michelle is a South Country Library Trustee and
    a member of the South Country School Board.

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