In the context of a marital dissolution proceeding, is there (or should there be) an exception to mediation confidentiality (California Evidence Code section 1119) for financial disclosures “prepared for the purpose of” and used “in the course of … the mediation?” (Evidence Code section 1119).

This is the issue that has been presented to the California Supreme Court for review  in Lappe  v. Superior Court of Los Angeles County (Murray Lappe, Real  Party in Interest)  ( Case No. S224076- January 28, 2015).

In the appellate opinion issued by the Second Appellate District in mid-December 2014,  ( Case No. 255704-December 19, 2014),  (B255704 ) the appellate court held that the financial disclosure declarations mandated by California’s Family Code were subject to disclosure even though they were prepared for  the purpose of and used in the course of  the mediation.

After 16 years of marriage, Gilda and Murray Lappe decided to divorce. (For ease I will use their first names, without intending any disrespect.)  Murray is both a trained doctor and a businessman. As part of the dissolution of the marriage, they went to mediation to settle the property and support issues. During the mediation, they each signed a declaration attesting that they had exchanged preliminary and final financial declarations as required by Family Code sections 2100 et seq.  In truth, they had not done so.

During the mediation, the parties executed a marital settlement agreement. In it, Murray agreed to pay Gilda $10 million as her community interest in a business that Murray owned called eScreen, Inc.  In August 2011, the trial court entered a stipulated judgment incorporating the terms of the parties’ marital settlement agreement.

In April 2012, Gilda filed an application to set aside this judgment alleging fraud, perjury, duress and mistake. She contended that in January 2012, she learned that Murray was in the process of selling eScreen, Inc. for approximately $75 million, far more than he led her to believe the company was worth during the mediation.  She further alleged that Murray never disclosed during the mediation that he was in the process of trying to sell the company, and had she known this, she would not have sold her interest in the company to him.

In preparation for the hearing, Gilda served a request to produce documents on Murray, asking him to produce, among other things, the financial disclosure declarations that  were exchanged prior to the entry of the judgment in August 2011. He objected on the grounds that it was protected by mediation confidentiality.  In response, Gilda filed a motion to compel the production.

The trial court appointed a referee to make findings and recommendations. Even though the referee recommended that the  financial disclosure declaration was not subject to mediation confidentiality and should be produced, the trial court decided otherwise and ruled that mediation confidentiality trumped the requirement in the Family Code that the parties exchange preliminary and final declarations of all assets and liabilities.

The appellate court disagreed.  It recognized the strict interpretation given to mediation confidentiality by the Supreme Court in several cases beginning with Foxgate Homowners’ Assn. v Bramalea California, Inc. (2001) 26 cal. 4th 1  repeating the often cited language that:

“Judicial construction, and judicially crafted exceptions, are permitted only where due process is implicated, or where literal construction would produce absurd results, thus clearly violating the Legislature’s presumed intent. Otherwise, the mediation confidentiality statutes must be applied in strict accordance with their plain terms. Where competing policy concerns are present, it is for the Legislature to resolve them.” (Cassel, supra, 51 Cal.4th at p. 124; Simmons v. Ghaderi (2008) 44 Cal.4th 570, 582-583 (Simmons).)  (Id. at 10).

However, it concluded that while the rule of mediation confidentiality has been very strictly applied by the state’s high court, it does not apply to “statutorily mandated disclosures that must be made regardless of whether the parties participate in mediation.”  (Id.  at 10). In arriving at this conclusion, the appellate court agreed with Gilda’s assessment of the situation:

“the disclosure documents are not created and exchanged because a mediation is contemplated and they will form a part of the party’s negotiation strategy. Rather, they are created and exchanged because the [L]egislature demands it, so that divorcing spouses will have full and accurate information upon which to base fair and equitable divisions of assets.”  (Id. at 11).

In sum, the court concluded that these declarations were prepared pursuant to a requirement of the Family Code and were mandated regardless of whether mediation occurred.  Thus, the Family Code requirement governs as the documents were NOT prepared for “… purpose of, in the course of, or pursuant to a mediation.” (Evidence Code  section 1119).

While I am not a family lawyer, and know nothing of the Family Code, the decision makes sense to me.  I would not be surprised that part of the court’s reasoning, although unsaid, is that this arose in the context of an alleged “fraud, mistake and perjury” in that Murray never disclosed the true value of his company.  While neither party mentioned it, Evidence Code section 1123 does provide that a settlement agreement arrived at during mediation, is admissible to show “fraud, duress or illegality that is relevant to an issue in dispute.”

It will be interesting to see what the Supreme Court does with this. Stay tuned.

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By Phyllis G. Pollack

Phyllis G. Pollack is a full time neutral in Los Angeles where, as President of PGP Mediation, she focuses on business, real estate, contract and “lemon law” disputes. She may be reached at Phone: 213-630-8810 / phyllis@pgpmediation.com / Website: www.pgpmediation.com