MEDIATION PRIVILEGE CANNOT BE PIERCED, NOR CONSENT JUDGMENT ALTERED

Hydroscience Technologies, Inc. v. Hydroscience, Inc.

Dallas Court of Appeals, No. 05-11-01536-CV (May 7, 2013)

Justices Moseley, O’Neill (Opinion), and Lewis

In affirming summary judgment, the court of appeals sustained the exclusion of parol evidence regarding discussions during mediation that would have altered the settlement and consent judgment ultimately reached in the wake of that mediation. The appeals court reaffirmed a prior decision holding that the mediation privilege may be pierced to support “a new and independent tort” that occurred during the mediation, but found that exception to the privilege inapplicable here. Further, the court held, the appellant could not be allowed to attack or alter the final consent judgment that flowed from the mediation, because appellant had never filed a bill of review with respect to that judgment and the time had long passed for it to do so.

In connection with an “asset contribution agreement” appellant HTI had transferred shares of its preferred stock to appellee HSI in the mid ’90s. Later, a dispute arose between HTI and HSI’s parent company regarding past-due lease and note payments. A lawsuit ensued. The parties mediated their dispute in 2001, reached a settlement, and agreed to a consent judgment entered later that year. Neither the settlement agreement nor the consent judgment expressly addressed the preferred stock that HTI previously had transferred to HSI, and although HTI paid several thousand dollars in what it argued were monthly installments for the return of the stock, the certificate for that stock was never surrendered and the stock was never transferred on the corporation’s books. In 2010, after some intra-corporate wrangling, HSI filed suit seeking a declaratory judgment that it retained ownership of the preferred shares. In a series of summary judgment rulings, the trial court upheld HSI’s claim, rejecting a variety of arguments and defenses from HTI along the way.

The most interesting aspects of the court’s lengthy decision are its discussions of the mediation privilege and sanctity of the consent judgment. HTI argued that, although the written settlement agreement and consent judgment did not expressly address return of the preferred stock, there was an oral agreement during the mediation that this would occur. The appeals court, however, rejected HTI’s proffered evidence of such an interchange at the mediation. First, the court held that HSI’s failure to obtain a written ruling on its mediation privilege objection did not preclude reliance on that issue on appeal. It drew a distinction between “formal defects”—which can be waived by failure to object— and “substantive defects”—which “are never waived because the evidence is incompetent and cannot be considered under any circumstances”; it found consideration of evidence covered by the mediation privilege to be a non-waivable substantive defect. Then, reconciling two of its prior decisions—Avary v. Bank of America and In re Empire Pipeline—the court held that the mediation privilege can be pierced only to support a “new and independent tort” that occurred during the mediation (e.g., breach of fiduciary duty). The privilege cannot be evaded to obtain or proffer evidence intended to “disturb” the result of the mediation itself. Further, the court held, to allow HTI to argue now that the parties agreed HSI would return the preferred stock as part of the settlement would constitute a belated collateral attack on the consent judgment based on that settlement. Had HTI wanted to mount such an attack, the court ruled, it would have had to do so through a bill of review filed within the four-year statute of limitations—something it had not done.

Ultimately, therefore, the appeals court rejected all of appellant HTI’s arguments and affirmed judgment for HSI.