Court: United States Bankruptcy Court, C.D. California; September 11, 2014; Us Bankruptcy; United States Bankruptcy Court
Chase filed a motion to compel the Trust to produce documents it had withheld during discovery, claiming these documents were protected by attorney-client privilege, the work product doctrine, and the common interest doctrine. The Trust, representing the beneficiaries of SNTL Corporation and its affiliates, had withheld or redacted the requested documents, asserting they were privileged. The background includes SNTL’s chapter 11 filing in 2000, the confirmation of a reorganization plan in 2002 allowing Chase to utilize over $1 billion in net operating loss carryforwards (NOLs), and the Trust’s subsequent complaint alleging Chase benefited significantly from these NOLs without compensating the Trust. After several motions and the filing of a Second Amended Complaint by the Trust, the discovery disputes escalated, leading to the current motion. A tentative ruling was issued by the Court prior to the hearing, instructing the parties to attempt resolution. However, they could not reach an agreement, prompting the Court to schedule further discussions and proposals from both sides for resolution. The hearing was postponed to September 16, 2014.
On August 15, 2014, the Trust submitted a proposal outlining restrictions on the admissibility of evidence related to claims and defenses. Key provisions included: prohibiting evidence based on individualized intent or unilateral mistake; requiring that evidence of mutual intent or mistake be derived solely from non-privileged sources; barring attorney testimony regarding communications not involving both parties; and allowing attorney testimony only on non-privileged communications between the parties or with the Court. Subsequently, on August 22, 2014, Chase proposed that the Trust withdraw certain claims based on intent and narrow its remaining claims to exclude evidence of intent regarding specific financial elements and obligations. The Trust also agreed not to present attorney testimony to support its claims.
The document notes that California and federal laws on privilege are similar but have significant differences that may impact legal determinations. Attorney-client privilege and work product doctrine are to be evaluated separately. Under Federal Rule of Evidence 501, state law applies to claims governed by state law, making California law, specifically Cal. Code Evid. 950 et seq., relevant for privilege issues in this case. This law grants clients the right to refuse disclosure of confidential communications with their attorneys, aimed at protecting the confidentiality of the attorney-client relationship, as established in Mitchell v. Superior Court.
The Work Product Doctrine, governed by Federal Rule of Civil Procedure 26(b)(3), provides qualified immunity for documents prepared in anticipation of litigation. Under this rule, a party generally cannot discover such documents unless they are otherwise discoverable under Rule 26(b)(1) and the requesting party demonstrates a substantial need for them and an inability to obtain equivalent materials without undue hardship. Bankruptcy proceedings are considered litigation for the purposes of this rule. The doctrine protects materials created for any litigation by or for a party involved in the litigation.
The Common Interest Doctrine, which is state law governed and functions as a non-waiver doctrine, protects attorney-client communications from being waived in actions involving state law claims. There is ambiguity regarding the application of state versus federal law when the underlying privilege is work product, with some cases indicating state law applies while others suggest federal law governs. The doctrine allows for privileged communications between parties with a shared interest without waiving those privileges, but it does not create a broader attorney-client relationship among all parties involved.
The burden of proof for establishing attorney-client privilege lies with the party claiming it, who must demonstrate the existence of a communication within the attorney-client relationship. Once a prima facie case is established, the communication is presumed confidential, shifting the burden to the opposing party to prove otherwise. This principle also applies to attorney work product privilege under federal law.
Chase contends that communications involving third-party information are not protected by attorney-client privilege, emphasizing that involvement of an attorney does not automatically confer privilege. The Tenth Circuit has ruled that communications must pertain directly to legal advice sought by the client, and 'conduit' communications—where the attorney merely relays third-party information—may fall outside the privilege. However, California law, as established in Costco Wholesale Corp. v. Superior Court, affirms that the privilege protects the transmission of documents, even if they contain public information, as the fact of transmission itself can reveal the attorney’s strategy.
Chase further argues that the Trust has waived privilege by making claims that question the intent of the parties regarding the Plan and the EON, and by planning to use attorneys’ extrinsic evidence to support its claims. Specifically, the Trust alleges that Chase's calculation of the Turnaround Amount contradicts the parties' intent and asserts that the Plan does not encompass Later Recognized NOLs or the time value of money related to these NOLs.
The reformation claim contends that the drafted Plan does not reflect the parties' true intentions. The Trust intends to introduce parol evidence from its attorneys to substantiate this intent regarding the Plan and the EON. Under California law, attorney-client privilege can be waived in cases where the claims directly address the substance of attorney-client communications. This waiver occurs only when the client raises an issue that involves the actual content of such communications, rather than mere indirect evidence. Relevant case law, such as Rockwell International Corp. v. Superior Court and Mitchell v. Superior Court, supports that privilege is only waived when privileged information is central to the claim, as fairness necessitates its disclosure for litigation to progress.
Chase contends that the waiver case law distinguishes between two types: one where the communication itself is at issue and another where a claim requires examining the communication for resolution. Chase claims reliance on the latter, while asserting that the Trust misapplies precedent related to the former. The precedent set in Merritt v. Superior Court illustrates that waiver can occur when a client challenges the attorney's decisions or mental state, but subsequent California Supreme Court cases have clarified that this application is narrow. In the case of S. Cal. Gas Co. v. Public Utils. Com., the court noted that the party did not place its privileged communications at issue, reaffirming that waiver depends on the client's reliance on attorney communications to support their claims.
Chase has maintained its attorney-client privilege, as its attorneys' advice and state of mind are not relevant to the case. There is no California case law directly addressing the application of the 'at issue' waiver to this specific scenario, where a plaintiff's claim necessitates examining attorney-client communications for resolution. Federal law offers a three-part test for 'at issue' waiver: (1) the party asserts the privilege through an affirmative act, such as filing suit; (2) this act puts privileged information at issue; and (3) maintaining the privilege would deny the opposing party access to critical information for its defense. The overarching principle is whether upholding privilege would be 'manifestly unfair' to the opposing party. Case law indicates that claims involving contract interpretation or assertions of mistake can result in a waiver of privilege, as the attorney-client communications are essential to understanding intent. For example, in cases of mutual mistake, attorney-client communications are at issue due to the attorney's role in negotiating agreements. Additionally, when a client asserts claims such as fraudulent misrepresentation, the privilege is waived to the extent necessary to clarify the parties' intent regarding contract terms. Overall, Chase's privilege remains intact unless its communications are directly pertinent to the intent behind contractual agreements.
The Trust claims that several referenced cases are distinguishable from its situation, which is partially accurate. In Monsanto, the reformation claim stemmed from a mistaken belief influenced by counsel's advice, but did not require that the information be inaccessible from other sources, contrary to the Trust's assertion. Pitney-Bowes supports the argument that attorney-client communications were the sole source of direct proof regarding the parties' intent, as noted by the Trust. In Galt Capital, Seykota, who counterclaimed mutual and unilateral mistakes, could not invoke attorney-client privilege after willingly signing a separation agreement without understanding its terms. Similarly, in Synalloy, by seeking rescission for a purported lack of mutual understanding, Chariot Group waived its privilege against revealing communications that could clarify parties' intent. The assertion of privilege deprived Synalloy of necessary information to defend against the counterclaim. Chariot Group's claims of misunderstanding and alleged fraudulent misrepresentation implicitly waived privilege due to the attorneys’ roles in negotiating the agreement. State-Wide Capital further illustrates that intent is a crucial issue, with both parties addressing intent in their arguments, leading to a waiver of privilege concerning attorney communications relevant to contract formulation. Chase's reference to the Trust's intent to use extrinsic evidence for interpreting the Plan and EON suggests a privilege waiver, although Stovall v. United States limits this to potentially relying on attorney evidence for contract interpretation.
The court, upon reconsideration, allowed a party to avoid waiver of privilege by filing a binding statement that it would not call any Office of General Counsel (OGC) attorneys to testify, nor rely on privileged communications or any evidence influenced by OGC advice regarding the Resolution Agreement. In Stovall v. United States, it was established that presenting attorney testimony or privileged materials as evidence would constitute a waiver of privilege. The case law referenced pertains to Delaware, New York, and Federal privilege laws, rather than California's, but serves as persuasive authority in determining the necessity of disclosing attorney-client communications related to the intent and understanding of the parties involved in the reformation and restitution claims.
The court observed that the Trust's claims directly engage the parties' intent and understanding of the Plan and EON, with the communication from attorneys being potentially crucial to Chase's defense. The relevance of these communications hinges on whether the intent or mistake is mutual or unilateral. If both parties share a mutual misunderstanding, their negotiation history may suffice without invoking privilege. Conversely, unilateral mistakes necessitate the attorney's communications as vital evidence. The restitution claim suggests that the parties would have acted differently had they known of a large Turnaround Amount, while the reformation claim addresses both unilateral and mutual mistakes, indicating significant relevance of attorney-client communications.
The court provided both parties the chance to propose a narrowing of claims to avoid waiver, leading to the Trust’s proposal which aligns with the court's findings. This proposal restricts reliance on unilateral intent or mistake and stipulates the use of only non-privileged evidence to establish mutual intent or mistake. Chase’s response, however, seeks to eliminate restitution and reformation claims entirely, along with any issues of intent from the remaining claims, exceeding the court's initial concerns.
The Court declines to adopt Chase’s broader restrictions, which would undermine the current action, favoring the Trust's narrower restrictions. Chase claims it requires privileged material to demonstrate the negotiating history with the Debtor, asserting that the Debtor requested provisions similar to those the Trust seeks, but Chase rejected them. While non-privileged communications would be ideal evidence, Chase insists it cannot access such evidence and argues that the Debtor’s internal communications with its attorneys represent the best available evidence of negotiations. The Court finds it implausible that no direct evidence or substantial correspondence exists between Chase and its attorneys regarding the transaction. California case law permits waiver of privilege when the material is central to a claim, but since the Trust has narrowed its claims to mutual mistake and intent, the Debtor's internal communications are no longer central, thus limiting their relevance in Chase’s defense and failing to meet the criteria for waiver.
Regarding attorney testimony, the Trust proposes to limit it to non-privileged communications, which avoids placing privileged material at issue and thus does not trigger waiver under California law. Chase objects to this limitation, arguing it hinders its ability to rebut the Trust’s attorney-witnesses due to the attorney-client privilege and work product doctrine. Specifically, Chase contends that the Trust’s attorneys may avoid using privileged documents that could contradict their testimony. The Trust's proposal is designed to ensure that attorney testimonies are based solely on non-privileged communications, allowing Chase to use non-privileged documents as rebuttal evidence.
Under Federal Rule 26(b)(3)(A), non-opinion work product can be compelled with a showing of substantial need and undue hardship, while opinion work product may be discoverable when mental impressions are at issue and the need for the material is compelling, based on Ninth Circuit precedent.
In a bad faith insurance claim settlement case, the Ninth Circuit emphasized that an insurer's agents' strategies and opinions regarding claim handling are crucial to the case but that opinion work product, which includes an attorney’s mental impressions and theories, is "virtually undiscoverable." Non-opinion work product can be accessed under a relaxed standard of substantial need and undue hardship, whereas the threshold for waiving opinion work product is higher than for either attorney-client communication or non-opinion work product. The court plans to apply standards of attorney-client communication to the work product 'at issue' waiver due to a lack of precedent for this specific situation.
Regarding the common interest doctrine, Chase contends that sharing documents with the Creditors’ Committee and members of the Oversight Committee constitutes an express waiver of privilege and that the common interest doctrine does not offer protection. Federal law suggests that work product privilege is only waived when disclosure allows an adversary access to the information. Similarly, under California law, work product privilege is preserved unless there is a disclosure that contradicts its purpose of safeguarding attorney work. Thus, unless the Creditors’ Committee or Oversight Committee members are considered adversaries or likely to share the documents with an adversary, the work product remains protected. The California common interest doctrine is limited, allowing for privileged communication to remain non-waivable if disclosed confidentially for the purpose of consultation.
Confidential communication between a client and lawyer refers to information exchanged during their professional relationship, intended to remain private except for individuals present to support the client's interests or for necessary transmission. This definition, outlined in Cal. Evid. Code § 952, encompasses legal opinions and advice given by the lawyer. While primarily addressing attorney-client privilege, these provisions also relate to the waiver or nonwaiver of the work-product doctrine, as established in *Citizens for Ceres v. Superior Court* and *OXY Resources* cases. California's application of the common interest doctrine allows for the preservation of privilege when parties with shared interests disclose privileged information, provided that such disclosure is necessary for the privilege holder's legal advice purposes and that an expectation of confidentiality exists.
In bankruptcy contexts, documents can be shared with parties like the Creditors’ Committee under these conditions, facilitating the debtor’s legal processes without waiving privilege. Federal law regarding the common interest doctrine is generally inapplicable, primarily affecting work product doctrine, and likely does not waive privilege. However, the Ninth Circuit introduced a requirement for a joint strategy agreement for privilege preservation, which is contested by the parties involved. The Court may not need to address this issue since federal law does not seem to apply in this context.
The document addresses the applicability of the common interest doctrine in the context of work-product immunity, highlighting that a shared interest can be financial or commercial rather than strictly legal. It references multiple court cases where the common interest privilege has been recognized between various parties in bankruptcy scenarios, such as debtors, creditors' committees, and affiliates. The courts have held that this privilege allows for the sharing of information without waiving confidentiality, as it serves the mutual goal of maximizing the estate's value.
The Trustee successfully argues for the common interest doctrine's application among the debtors, the Committee, and the Banks, emphasizing their collaborative efforts to confirm a liquidating plan of reorganization and recover the debtors' assets. The text also touches on a separate issue concerning Chase's claim that the Trust has improperly redacted documents.
The Court concludes that the transmission of documents from an attorney to a client falls under California’s attorney-client privilege, and that waiver of this privilege requires compelling circumstances that justify disclosure. The Trust’s approach to limit claims to mutual mistake or intent, relying on communications relevant to the case, minimizes the impact of privileged documents on Chase's defense.
Adopting the Trust's proposal allows it to avoid "at issue" waiver, while Chase's broader proposal will not be utilized. The Trust's proposal is designed to bind both parties, but the Court will not impose these restrictions on Chase. Chase has the option to accept the proposal, which would streamline the proceedings, or reject it and risk waiving privilege by using defenses based on individual intent or mistake, or by presenting privileged evidence and attorney testimony. The Court's reasoning regarding "at issue" waiver applies equally to work product privilege. Disclosure of documents to the Creditors’ Committee or the Oversight Committee does not constitute a waiver unless those parties are adversarial to the Debtors or Trust or likely to share documents with an adversary. Therefore, the common interest doctrine is unnecessary for protecting work product privilege from waiver. Under California law, the common interest doctrine would uphold privilege if documents were shared with an expectation of confidentiality to facilitate legal advice, which appears applicable to the Creditors’ and Oversight Committees. Consequently, the Trust’s claims, defenses, and evidence will be limited as per its proposal, leading to the denial of the Motion.
