Summary
holding that a litigation committee's document that revealed opinions, thought processes and recommendations of counsel prepared in anticipation of litigation is "protected by both the work product and attorney-client privileges"
Summary of this case from IN RE SUPPLEMENT SPOT, LLCOpinion
CIVIL ACTION NO. 03-2225, SECTION "E" DIVISION 3
April 23, 2004
ORDER AND REASONS
The defendants' Motion to Compel Discovery was the subject of an oral hearing before the undersigned Magistrate Judge. Participating were Charles Campisi, Gregory Cross and Joe Spillman on behalf of the plaintiff and Steve Usdin on behalf of the defendants. At issue are ten (10) documents withheld by the plaintiff under claims of both the attorney-client and work product privileges. These documents, together with a privilege log, were presented to the Court for in camera review at the time of the hearing. The Court, having now had the opportunity to review the subject documents, denies the defendants' Motion to Compel for the following reasons.
BACKGROUND
The underlying dispute involves a collection matter arising out of a loan to Mobile Hotel Properties by the plaintiff LaSalle as assignee of the original lender. The promissory note dated October 26, 1995 was secured by a mortgage, assignment of leases and rents, and security agreement on a hotel located at 600 Beltline Highway in Mobile, Alabama, operated as a Ramada Inn. Defendant, Mobile Hotel Properties ("Mobile"), is the successor and assignee of the original borrower. Defendant, Columbus Hotel Properties, LLC ("Columbus"), guaranteed the loan. The promissory note is a "non-recourse" note, which means that the borrower is not personally liable for the indebtedness and the lender's sole recourse upon the borrower's default is against the property securing the note. The mortgage also contains a "non-recourse" provision which additionally provides as follows:
. . . (ii) the Debt shall become fully recourse to Mortgagor in the event that: . . . (B) Mortgagor . . . fails to maintain its status as a single purpose entity, . . .; (C) Mortgagor fails to obtain Mortgagee's prior written consent to any subordinate financing or other voluntary lien encumbering the Mortgaged Property;. . . .See Mortgage, Assignment of Leases and Rents and Security Agreement, p. 44 § 55 [Exhibit "F" to Plaintiffs Second Amended Complaint].
The Guaranty executed by Columbus provides that the Guarantor (Columbus) irrevocably and unconditionally guarantees the payment and performance of all of Mobile's obligations should the Borrower (Mobile) fail to maintain its status as a single purpose entity. See Guaranty, p. 4, §§ 1.1, 1.2 [Exhibit "A" to Plaintiff's Second Amended Complaint]. LaSalle avers that in June of 2001, Mobile incurred additional debt of $3.6 million in favor of Columbus without prior written consent of the lender. Plaintiff further claims that on November 28, 2001, Mobile amended the original Articles of Organization by changing the organization's name and changing its purpose to any lawful activity for which limited liability companies may be formed under the Act. See Articles of Amendment to the Articles of Organization of Columbus Mobile Hotel Properties, L.L.C. [Exhibit "K" to Plaintiffs Second Amended Complaint]. LaSalle submits that incurring additional debt and the change from a single purpose entity constitute violations of the restrictions of the Loan documents, i.e., the Mortgage Note, Mortgage and Guaranty.
Following a default in payment of monthly installments due under the Note, on February 7, 2002, LaSalle accelerated the indebtedness due under the note and sought possession of the Hotel. Ultimately, LaSalle foreclosed on the hotel property. A year later, Lasalle instituted the present action to collect $3.1 million, which it claims constitutes its loss, damage, costs and expenses arising out of Mobile's alleged misconduct and/or breach of certain restrictive provisions set forth in the loan documents.
See Mobile's Counterclaim to Second Amended Complaint at p. 14 ¶ 9.
Defendants deny the allegations of the plaintiff's complaint and seek declaratory judgment that the mortgage documents do not provide a basis for recovery of a "Defeasance Fee" in the event of default or for acceleration of the Note and foreclosure upon the property by the lender. Defendants further claim that the plaintiff breached its duty of good faith and fair dealing and that the plaintiff was unjustly enriched by Columbus' capital infusions into the hotel property exceeding $4 million, which inured to the plaintiffs benefit.
Defendants propounded a number of discovery requests to which the plaintiff objected claiming the protections afforded by the attorney-client and work product privileges, to wit:
Interrogatory No. 7: "Please identify every person who was employed by or associated with you who has information or who participated, in any way, with any discussions or the decision not to allow Mobile to receive funds from Columbus and/or to allow Mobile to change hotel franchises from a Ramada to a Holiday Inn."
Interrogatory No. 20: "Please state the dates of any and all Criimi Mae credit committee meetings at which Mobile, the Hotel, or Columbus was discussed, and for each such meeting identify the person(s) in attendance and describe the substance of the issues discussed."
Request for Production No. 8: "Please produce all documents relating in any way to Mobile's request for proposal to change hotel franchises from Ramada to a Holiday Inn."
Request for Production No. 9: "Please produce all documents relating in any way to the decision not to allow Mobile to change hotel franchises from a Ramada to a Holiday Inn."
Request for Production No. 13: "Please produce all notes, minutes, taped recordings, or any other document of the Criimi Mae credit committee or any member of that committee that relate in any way to Mobile, the Hotel, or Columbus."
Request for Production No. 16: "Please produce all documents that reflect any communications between Pacific Life and LaSalle and/or Pacific Life and Criimi Mae, and/or between LaSalle and Criimi Mae that relate in any way to Mobile, the Hotel and/or Columbus."
Request for Production No. 23: "Please produce all documents prepared or submitted to the Criimi Mae credit committee relating to the Hotel, Mobile and/or Columbus."
Also at issue is the defendants' 30(b)(6) notice, because LaSalle refuses to produce a witness to testify regarding the below listed noticed items.
b) "The purpose of the Criimi Mae Credit Committee, including but not limited to its role in determining whether to approve requests by borrowers and whether to foreclose on a given property."
(c) "Persons in attendance at any meeting of the Criimi Mae Credit Committee at which any issue relating to Mobile was discussed."
(d) "The dates and substance of any meetings and/or discussions of members of the Criimi Mae Credit Committee or any person reporting and/or providing information to the Criimi Mae Committee relating to Mobile."
(e) "All decisions made by the Criimi Mae Credit Committee relating to Mobile, including but not limited to decisions made with respect to intercompany loans, any franchise issues, and the acceleration of the indebtedness."
(g) "All recommendations of and/or reports by D. J. Morakis to the Criimi Mae Credit Committee relating to Mobile."
CONTENTIONS OF THE PARTIES
Defendants argue that, through the foreclosure sale of the hotel property, LaSalle has already recovered $6.9 million (more than the principal owed) on the non-recourse loan and now it attempts to convert this Loan into a full recourse loan and recover millions in alleged penalties, costs and interest in excess of the loan amount. Defendants highlight that LaSalle's complaint alleges that Mobile Hotel breached certain loan documents by accepting certain inter-company funds from its parent, Columbus, even though the funds were used for operational expenses and capital improvements for the hotel property that LaSalle eventually foreclosed on, thereby benefitting from the capital infusion. Nevertheless, LaSalle claims that because the transfers were made without its approval, Mobile Hotel breached the loan agreement. Additionally, defendants argue that LaSalle refused to approve a franchise change from Ramada to Holiday Inn which Mobile Hotel proposed to enhance the hotel's financial performance. Defendants argue that LaSalle considered approving both the intercompany funding and the franchise change, but that LaSalle's loan committee refused to provide its consent, which ultimately led to the foreclosure on the property.Defendants submit that LaSalle's improper consideration of the intercompany funding and franchise change is (1) a defense to LaSalle's claim and (2) a central element of Defendants' counterclaim against LaSalle. Defendants argue that LaSalle's reasons for ultimately failing to approve either the franchise change or the intercompany funding are key issues and that LaSalle has no sound basis for refusing to respond to discovery requests targeting whether its consideration and rejection was in bad faith or otherwise improper.
Defendants aver that LaSalle represented to Mobile Hotel that it expected to consent to the transaction it was recommending to the credit committee namely, that the additional "debt" incurred by the hotel be allowed to remain in place. Despite their repeated requests for information regarding the status of the recommendation, defendants contend that LaSalle delayed providing a response. According to the defendants, LaSalle's refusal to consent to the conversion ( i.e., Ramada to Holiday Inn), also dramatically impaired the ability of Mobile Hotel to salvage its business and forced it into bankruptcy, with LaSalle reaping the benefits of the millions of dollars infused by the Mobile's parent company.
LaSalle counters that the documents, which have not been disclosed and are withheld under claims of privilege, were either prepared in consultation with counsel, contain recommendations of counsel as to litigation strategy or were compilations of information prepared for the purpose of litigation involving collection of the debt owed by Mobile and the Guarantor. As to the Trust producing such privileged internal documents, the Bank notes that all of the documents were created after the borrower had breached the above provisions in the loan documents ( i.e., the "single purpose entity" restriction and the corresponding provisions which create liability for the Guarantor).
As an initial matter, the Bank asserts that the material is irrelevant because the loan documents at issue give Criimi Mae absolute discretion to "consent or not consent, approve or disapprove" even a request that is timely submitted, as opposed to the after-the-fact requests that the borrower proposed in this particular case. LaSalle Bank refers the Court to the Mortgage at ¶ 43. Plaintiff argues that it is indeed questionable whether the defendants have a right to maintain any counterclaim, arguing that they waived all such rights. LaSalle Bank refers the Court to ¶ 30 of the Mortgage as authority for its position in that regard. Plaintiff further submits that no aspect of the defendants' defenses or counterclaims concerns Crimii Mae's litigation strategy, which is protected information prepared in anticipation of litigation, as the primary motivating force for creating the documents was post-default strategy to collect the debts owed to the Trust. Moreover, LaSalle refers the Court to correspondence dated October 30, 2001, wherein the plaintiff offered to consent to the. additional debt provided that the defendants enter enter into a subordination agreement, which offer was not accepted.
Plaintiff further highlights that the defendants are not the first litigants to seek disclosure of Credit Committee memoranda and that in LaSalle Bank, N.A, v. Lehman Bros. Holdings, 209 F.R.D. 112 (D. Md. 2002), the district court of Maryland evaluated a very similar request and confirmed the privileged nature of the documents being sought, finding that the documents in question concerned strategy, evaluation and decisions by the Criimi Mae Credit Committee which were protected from disclosure by the attorney-client privilege, work product doctrine or both. Defendants argue that the Maryland case is inapposite, noting that the documents withheld in the Lehman Bros, case were created at the instance of in-house counsel for Criimi Mae, whereas, in the case at bar, many of the documents were created by D.J. Morakis, who is not an attorney.
The dispute concerns below-listed ten (10) documents which are the subject of LaSalle's privilege log, to wit:
(1) D. J. Morakis' "Business Plan" dated October 7, 2001, evaluating strategies and consideration of alternate strategies;
(2) CMSLP's "Status Report" dated December 7, 2001, recording status and chronology of events including communications to and by counsel;
(3) D.J. Morakis' "Business Plan," "Budget," and "Status Report" dated October 8, 2001, evaluating strategy, consideration of alternative strategies, and recording status and chronology of events including communications to and by counsel;
(4) D.J. Morakis' "Annual Budget" dated 6/6/02 setting out budget plan for litigation evaluating litigation strategy;
(5) D.J. Morakis' "Business Plan/Case" dated September 12, 2002 evaluating strategy and consideration of alternative strategies;
(6) A. Hoffman, Esq.'s Memorandum "Re: Agenda for Litigation Committee" dated January 16, 2003 setting forth evaluation of litigation strategy and alternative strategies;
(7) CMSLP's "Status Report" dated August 2, 2002 recording status, chronology of events including communications to and by counsel;
(8) D.J. Morakis' "Business Plan" dated October 8, 2001 evaluating strategies and consideration of alternate strategies;
(9) CMSLP's "Status Report" dated October 5, 2001 recording status, chronology of events including communications to and by counsel; and
(10) CMSLP's "Status Report" dated December 8, 2003 recording status, chronology of events including communications to and by counsel.
All of the aforesaid documents were prepared after May 29, 2001, when the loan at issue was transferred to special servicing due to the alleged technical default including the Borrower incurring additional debt. All of the documents have been withheld on the basis that both the attorney-client and work product privileges apply to each.
APPLICABLE LAW
Fed.R.Civ.P. 26(b)(1) defines the scope of discovery in pertinent part as "any matter, not privileged, which is relevant to the subject matter involved in the pending action. . . ." Fed.R.Civ.P. 26(b)(1) (emphasis added). The attorney-client privilege and the work-product doctrine are two distinct protections which can be invoked to exempt certain information from discovery. Both have been invoked by the plaintiff and are discussed below.
The attorney-client privilege generally protects confidential communications made by a client to his lawyer for the purpose of obtaining legal advice. A corporate client has a privilege to refuse to disclose, and prevent its attorneys from disclosing, confidential communications between its representatives and its attorneys when the communications were made to obtain legal services. Inquiry into the substance of the client's and attorney's discussions implicates the privilege and an assertion of the privilege is required to preserve it. Neither the attorney-client nor the work-product privilege is absolute.
Nguyen v. Excel Corporation, 197 F.3d 200, 206 (5th Cir. 1999) (citing Upjohn Co. v. United States, 449 U.S. 383 (1981)).
Id.
Nance v. Thompson Medical Co., 173 F.R.D. 178, 181 (E. D. Tex. 1997).
The attorney work-product privilege first established in Hickman v. Taylor, 329 U.S. 495 (1947), and codified in Fed.R.Civ.P. Rule 26(b)(3) for civil discovery, protects from disclosure materials prepared by or for an attorney in anticipation of litigation. Since Hickman, supra, courts have reaffirmed the "strong public policy" on which the work-product privilege is grounded. The Supreme Court in Upjohn Co. v. United States, 449 U.S. 383 (1981) found that "it is essential that a lawyer work with a certain degree of privacy" and further observed that if discovery of work product were permitted "much of what is not put down in writing would remain unwritten" and that "the interests of clients and the cause of justice would be poorly served.
Varel v. Banc One Capital Partners, Inc., 1997 WL 86457 (N.D. Tex.) ( citing Blockbuster Entertainment Corp. v. McComb Video, Inc., 145 F.R.D. 402, 403 (M. D. La. 1992)).
Upjohn, 449 U.S. at 397-998; see also In re Grand Jury Proceedings, 219 F.3d 175, 190 (2nd Cir. 2000); United States v. Aldman, 134 F.3d 1194, 11967(2nd Cir. 1998).
Fed.R.Civ.P. 26(b)(3) provides that
a party may obtain discovery of documents and tangible things otherwise discoverable under subdivision (b)(1) of this rule and prepared in anticipation of litigation or for trial by or for that other party's representative (including the other party's attorney, consultant, surety, indemnitor, insurer or agent) only upon a showing that the party seeking discovery has substantial need of the materials in the preparation of the party's case and that the party is unable without undue hardship to obtain the substantial equivalent of the materials by other means.
Fed.R.Civ.P. 26(b)(3) (emphasis added).
The Fifth Circuit describes the standard for determining whether a document has been prepared in anticipation of litigation as the "primary purpose" test. The primary purpose test, coined by the Fifth Circuit in Davis, states:
See In Re Kaiser Aluminum and Chemical Co., 214 F.3d 586, 593 n. 19 (5th Cir. 2000) ( citing precedents in United States v. El Paso Co., 682 F.2d 530, 542 (5th Cir. 1982) and United States v. Davis, 636 F.2d 1028, 1040 (5th Cir. 1981)).
It is admittedly difficult to reduce to a neat formula the relationship between the preparation of a document and possible litigation necessary to trigger the protection of the work product doctrine. We conclude that litigation need not necessarily be imminent, as some courts have suggested, as long as the primary motivating purpose behind the creation of the document was to aid in possible future litigation.
Davis, 636 F.2d at 1039.
The determination that one or more of the documents were not prepared by counsel is not necessarily dispositive of the inquiry, as Rule 26(b)(3) protects documents prepared by a party's agent from discovery, as long as they were prepared in anticipation of litigation.
In Hickman and Nobles, supra, the Supreme Court recognized that the "the work-product doctrine is distinct from and broader than the attorney-client privilege." The doctrine protects not only materials prepared by a party, but also materials prepared by a representative of a party, including attorneys, consultants, agents, or investigators. In United States v. Nobles, 422 U.S. 225 (1975), the Supreme Court explained:
Hickman, 329 U.S. at 508; Nobles, 422 U.S. at 238 n. 11.
Nobles, 422 U.S. at 228; see also Fed.R.Civ.P. 26(b)(3).
At its core, the work-product doctrine shelters the mental processes of the attorney, providing a privileged area within which he can analyze and prepare his client's case. But the doctrine is an intensely practical one, grounded in the realities of litigation in our adversarial system. One of those realities is that attorneys often must rely on the assistance of investigators and other agents in the compilation of materials in preparation of trial. It is therefore necessary that the doctrine protect material prepared by agents for the attorney as well as those prepared by the attorney himself.
Nobles, 422 U.S. at 238-39 (emphasis added).
Absent a showing of compelling need and the inability to discover the substantial equivalent by other means, work product evidencing mental impressions of counsel, conclusions, opinions and legal theories of an attorney are not discoverable. Indeed, opposing counsel may rarely, if ever, use discovery mechanisms to obtain the research, analysis of legal theories, mental impressions, and notes of an attorney acting on behalf of his client in anticipation of litigation. Moreover, a document does not lose its privilege status merely because its contains factual information. The party asserting a privilege exemption bears the burden of demonstrating its applicability.
See Conkling v. Turner, 883 F.2d 431, 434-35 (5th Cir. 1989); In Re Grand Jury Proceedings, 219 F.3d 175, 190 (2nd Cir. 2000); Varel v. Banc One Capitol Partners, Inc., 1997 WL 86457 (N.D. Tex.) (Boyle M. J.).
See Dunn v. State Farm Fire Casualty Co., 927 F.2d 869, 875 (5th Cir. 1991); Hodges, Grant Kaufmann v. United States, 768 F.2d 719, 721 (5th Cir. 1985).
See High Tech Communications, Inc. v. Panasonic Co., 1995 WL 45847 at *6 (E. D. La., Feb. 2, 1995).
United States v. Newell, 315 F.3d 510, 525 (5th Cir. 2002).
DISCUSSION
There are four categories of documents that have been withheld, which the Court discusses serially hereinbelow, bearing in mind the arguments of counsel.Business Plans
Defendants seek production of the business plans, suggesting that such plans were prepared in the ordinary course of business. The Court's review of the documents reveals that the documents were in prepared "in anticipation of litigation." The loan was considered to be technically in default as of May 29, 2001 before any of these "business" plans were prepared.
The plan documents were prepared by Morakis and/or other employees of Criimi Mae and contain evaluations of various strategies, including maximizing asset value, possible foreclosure, acceleration of the loan and alternatives to litigation. The documents reflect the assessment of the plaintiff's rights under the loan documents. These are the type of documents deemed protected by the Maryland court in Lehman, supra. Suffice it to say, these plans are "business plans" in name only, having been prepared because of the prospect of litigation.
Status Reports
It is apparent that the status reports were to evaluate the status of the loan and record chronologies of events leading up to and through the litigation. Noted events include evaluation of various strategic decisions, communications with counsel, the borrower's intention to file a Chapter 11 Reorganization Plan in bankruptcy court, and that the CMSLP has retained counsel. The documents in question are clearly protected by the work product doctrine and the attorney-client privilege.
Annual Budget
The Annual Budget is a document evaluating the litigation budget for this matter and summarizes events in the litigation and Criimi Mae's proposed actions of going forward. Plaintiff submits that both privileges apply. The budget document discusses the status of the Chapter 11 bankruptcy proceeding instituted by the borrower on March 8, 2002, various litigation strategies and the projected attorneys' fees to be incurred by CMSLP. From its review of the document, this Court is satisfied that it was prepared in anticipation of litigation and is protected by the work product doctrine and the attorney client privilege
Litigation Committee Agenda
The Memorandum of Agenda for Litigation Committee was prepared by an employee of Criimi Mae. The agenda encloses a Business Plan document for the Litigation Committee that evaluated the prospect of litigation against the defendants and discussed operative provisions in the loan documents. The document reveals the opinions, thought processes and recommendations of counsel and was obviously prepared in anticipation of litigation. It is protected by both the work product and attorney-client privileges.
Accordingly and for all of the foregoing reasons,
IT IS ORDERED that the defendants' Motion to Compel Discovery is DENIED.