Welch v. Regions Bank (In re Mongelluzzi)

Citation: 568 B.R. 702Docket: Case No. 8:11-bk-01927-CED; Adv. Pro. No. 8:14-ap-653-CED

Court: United States Bankruptcy Court, M.D. Florida; May 8, 2017; Us Bankruptcy; United States Bankruptcy Court

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An amended order was issued regarding a motion to compel Regions Bank to produce pre-petition attorney-client and work-product communications, citing the "at issue" doctrine. The court held hearings on several dates from November 2016 to April 2017 concerning motions filed by Trustees Angela Welch and Christine Herendeen. The court concluded that Regions Bank's assertion of a good faith defense waives certain attorney-client and work-product privileges, specifically concerning documents that reveal the bank's state of mind during the relevant period. 

The background outlines the relationship between Frank Mongelluzzi, his wife, and Regions Bank, detailing their ownership of over one hundred corporations and maintenance of 61 bank accounts with the bank. It highlights a significant lending relationship, including multiple forbearance agreements, and notes the bank's actions in July 2010, which resulted in $12 million being set off against obligations and caused $15.2 million in overdrafts at another bank. 

In February 2011, Mongelluzzi filed for Chapter 11 bankruptcy, which was converted to Chapter 7, leading to the appointment of Trustee Welch. Subsequently, Welch filed for bankruptcy relief for several associated entities, with Trustee Herendeen appointed for these estates. In January 2014, Trustee Welch initiated a legal complaint against Regions Bank, alleging fraudulent transfers, which was referred to the Bankruptcy Court, where Trustee Herendeen also filed separate complaints against the bank.

Trustee Herendeen, representing the Debtor-Entities, aims to nullify purported fraudulent transfers and seeks recovery based on unjust enrichment, aiding and abetting breach of fiduciary duty, and property recovery. The involved parties have consolidated related adversary proceedings solely for discovery and pre-trial matters under Adversary Proceeding No. 8:14-ap-653-CED. The Trustees assert that Mr. Mongelluzzi and the Entities were involved in a significant check-kiting scheme, which Regions Bank was aware of and strategically managed to minimize its financial exposure from over $25 million to approximately $3 million by offsetting over $12 million. Regions denies the Trustees' key allegations, claiming it acted in good faith and did not exert control over the funds in question. In its defenses, Regions contends that the Trustees have not adequately stated claims for relief, asserting good faith in all transactions and arguing that reasonably equivalent value was exchanged for the transfers.

In a joint case summary filed on February 6, 2017, the Trustees detailed Regions' knowledge from 2007 to 2010 regarding the Debtors' insolvency and the check-kiting activities, indicating that Regions was aware of the Debtors issuing checks without sufficient funds and regularly covering overdrafts. Regions’ suspicions about the Debtors’ financial practices were documented in emails between executives in late 2009. To mitigate risk, Regions entered 14 forbearance agreements between October 2009 and July 2010 and altered its account management system. On July 1 and 2, 2010, Regions froze or closed 43 accounts and revoked debit cards, followed by a significant set-off of funds on July 15, 2010, which included a further set-off of over $632,000 on October 5, 2010, from a different account.

Trustees filed Motions to Compel in September and October 2016, asserting that Regions wrongly withheld documents under attorney-client and work-product privileges, claiming these privileges were waived when Regions invoked a good faith defense against fraudulent transfer claims. Trustee Herendeen's First Motion to Compel in November 2016 requested an in camera inspection of documents on Regions' Amended Privilege Log dated September 20, 2016, particularly concerning e-mail communications involving counsel. During a December 13, 2016 hearing, the Court granted in part and denied in part the Motions to Compel, allowing for in camera review of the privileged documents. Regions submitted documents for inspection on January 17, 2017, including redacted information, and later highlighted the redactions on January 26, 2017.

At the March 8, 2017 hearing, the Court indicated its ruling, stating that Regions waived attorney-client and work-product privileges when it raised the good faith defense, thereby placing its state of mind at issue. The Court found that the majority of reviewed e-mails did not disclose relevant knowledge, intent, or motive beyond what was already evident from the Trustees’ timeline. The Court then instructed Regions to submit additional documents for in camera inspection. After considering comments from the parties, the Court continued to deliberate on the Motions to Compel and requested further documents from Regions, which were provided on March 27, 2017.

On March 28, 2017, Regions submitted a Supplemental In Camera Submission of Privileged Documents to the Court, revealing the discovery of 153 documents previously marked as privileged but inadvertently omitted from an earlier submission. Following this, on April 3, 2017, Trustee Herendeen filed a Supplemental Memorandum arguing that, once the Court determined that the attorney-client and work product privileges had been waived, the inquiry should conclude. She contended that the Court should not dictate how she presents her case or which documents are relevant to counter Regions Bank’s "good faith" defense, and requested that all documents reviewed in camera, with possible redactions, be promptly turned over to the Trustees.

The Court's rulings on discovery are discretionary, and while Trustee Herendeen asserts that the Court should not influence her case strategy, the Court is responsible for making discovery rulings in accordance with Rule 26. The Eleventh Circuit has affirmed that trial courts have broad discretion in discovery matters, reviewing only for clear errors or incorrect legal standards. A denial of additional discovery constitutes an abuse of discretion only if it substantially harms a party's case. The 2015 amendments to Federal Rule of Civil Procedure 26, reflected in Federal Rule of Bankruptcy Procedure 7026, limit discovery to nonprivileged matters relevant to any party's claims or defenses and proportional to the case's needs, emphasizing the importance of balancing the discovery's burden and benefit.

The attorney-client privilege protects confidential communications made for legal advice, requiring that the communication be intended and reasonably expected to remain confidential. The party claiming the privilege has the burden of proving its applicability.

The work-product privilege, established by the Supreme Court in Hickman v. Taylor and codified in Federal Rule of Civil Procedure 26(b)(3), safeguards materials reflecting an attorney’s mental processes prepared in anticipation of litigation from discovery. This includes notes and memoranda, which remain confidential unless there is a substantial need for them and no alternative means exist to obtain equivalent materials without undue hardship. The burden is on the party claiming the privilege to prove its applicability. Additionally, the privilege is not absolute; waiver can occur if a party asserts a claim that puts the privileged matter at issue. The "at issue" doctrine, which promotes fairness, allows for waiver when a party's affirmative act places protected information directly relevant to the case. This doctrine has been endorsed by courts, including in Florida, where waiver can happen if a claim necessitates the introduction of privileged evidence. 

In the context of bankruptcy law under 11 U.S.C. 548, a trustee can reverse transfers made to hinder, delay, or defraud creditors within two years of a bankruptcy petition, provided they can prove actual or constructive fraud by a preponderance of evidence. However, a "good faith" defense exists under 548(c) for transferees, who must demonstrate that they provided value for the transfer and acted in good faith, a determination that is fact-specific and made on a case-by-case basis.

Regions has asserted good faith as an affirmative defense in its seventh and twelfth defenses. The "At Issue Doctrine" is relevant to this case, with the court finding the case of In re Gibco, Inc. instructive. In Gibco, creditors secured a substantial judgment against the debtor and its principals. Prior to the judgment, a principal of Gibco engaged an attorney to draft a quitclaim deed transferring property to him in exchange for assuming existing debt, and later reconveyed the property back to Gibco without consideration. The bankruptcy trustee subsequently sued to avoid these transfers as preferential and fraudulent, seeking production of related documents. The principal claimed these documents were privileged, but the court ruled that his subjective knowledge and intent regarding the transfer were crucial for assessing his good faith defense. The court emphasized that the documents were vital evidence of the principal’s state of mind at the time of the transfer, and that allowing the principal to present his version of events without the trustee having access to corroborating evidence would be prejudicial. Consequently, the court concluded that the principal waived attorney-client and work product privileges concerning the relevant documents by asserting his good faith defense, although it did not impose a blanket waiver requiring all privileged documents to be produced. Trustee Herendeen referenced Hearn v. Rhay in her Supplemental Memorandum, arguing that once a waiver is established, all emails reviewed in camera should be turned over to the trustee. Hearn recognizes a narrow exception to attorney-client privilege in civil rights cases where good faith is asserted, stating that waiver applies only when withholding privileged information would deny the opposing party access to vital information for their defense, without implying that all privileged documents must be disclosed upon a finding of waiver.

Hearn limits the waiver of attorney-client and work-product privileges to documents specifically related to malice towards the plaintiff or knowledge of the plaintiff's constitutional rights. Trustee Herendeen's argument for a blanket waiver is dismissed, as the court in Hearn recognized that even relevant documents may not be produced if the plaintiff lacks a compelling case. In this instance, Regions has introduced good faith as a defense, which necessitates the production of documents relevant to its state of mind during the relevant period. The court determined that not all documents are waivable; only those directly related to Regions' mindset are subject to production.

The court conducted an in camera review of Regions' documents, opting against a blanket waiver and instead assessing specific documents to determine the appropriateness of privilege assertions, relevance to Regions' knowledge and intent prior to account freezes, and whether they are the most probative evidence. The findings reveal that, with few exceptions, Regions properly asserted the attorney-client and work-product privileges. The court clarified that attorney-client privilege applies only to communications made for legal advice, and thus, documents that serve dual business and legal purposes, or those merely relaying information to opposing counsel, do not qualify for privilege.

Consequently, the court identified specific documents (Bates-stamp numbers Priv_00005522, Priv_00005527, Priv_00005237, Priv_00002877, Priv_00000505, Priv_00005184, Priv_00011604-1, Priv_00000048, Priv_00005189-2, Priv_00000780, Priv_00005177) as not privileged and subject to production. Additionally, one document reviewed at a prior hearing (Bates-stamp number FRAN0000012689) was deemed non-privileged and, if responsive to discovery, must be produced, despite being irrelevant to the Mongelluzzis or the Entities.

The Court addressed the relevance and necessity of certain documents to determine Regions’ knowledge and intent, impacting the Trustees' claims. Initially, some privileged documents were deemed relevant to Regions’ good faith defense; however, most did not reveal Regions’ state of mind and thus were not subject to production. The Court identified specific documents as the "most probative" evidence of Regions’ state of mind during critical periods, asserting that the Trustees could be prejudiced if these were not disclosed. Consequently, the Court ordered the production of select documents, including six directly related to Regions’ state of mind in July 2010 and one from December 2009. 

The Court concluded that the following documents are not privileged: Bates-stamp numbers Priv_00005522, Priv_00005527, Priv_00005237, Priv_00000048, Priv_00002877, Priv_00005189-2, Priv_00000505, Priv_00000780, Priv_00005184, Priv_00005177, Priv_00011604-1, and FRAN0000012689. Additionally, the attorney-client and work-product privileges were waived for numerous documents from both January 20 and March 27, 2017 submissions, as well as one document produced at a March 8, 2017 hearing. 

Regions is ordered to serve these documents to the Trustees' counsel and to update its Amended Privilege Log accordingly. The Court retains the authority to impose sanctions against Regions for non-compliance with previous discovery orders. This amended order supersedes earlier documents and reflects the Court's rulings related to the Trustees’ motion for clarification and Regions’ request for an extension to appeal.