Opinion
01-CV-0201E(F)
May 9, 2003.
MEMORANDUM and ORDER
This decision may be cited in whole or in any part.
Inasmuch as the parties are well-acquainted with the facts of this case, the Court will not here reiterate such in any great detail. Robbins Myers, Inc. ("RM") bought the stock of Flow Control Equipment, Inc. ("FCE") from J.M. Huber Corporation ("Huber") pursuant to a stock purchase agreement ("the Agreement") dated November 20, 1997. FCE is in the business of selling pipeline closure products. While negotiating the Agreement, Huber disclosed that there would be a problem and a potential liability involving off-specification closures that had been sold. Subsequently, RM brought this suit for various claims of fraud based on its contention that Huber had induced RM to buy FCE by misrepresenting the scope of the off-specification closure liability. RM contends that Huber had represented that the liability was limited to 194 units whereas the liability now appears to be for several thousand units. Pending before this Court are two discovery disputes.
In 1996 FCE was a division of Huber; that February Huber incorporated its Flow Control Division as a wholly-owned subsidiary. Huber transferred various liabilities — including liability for off-specification closures — to FCE on July 31, 1996 pursuant to an Acquisition Agreement.
"Off-specification closures" refers to those closures sold by Huber (through its FCE division) that failed to meet certain specifications.
RM filed a motion seeking to preclude defendants from asserting the attorney-client privilege with respect to the following disputed issues: (1) formation of FCE by Huber, (2) the transfer of liabilities from Huber to FCE (including liability for off-specification disclosures), (3) the investigation of off-specification closures before Huber sold its FCE stock to RM and (4) the negotiation of the FCE sale to RM. Defendants cross-moved for discovery of (1) the due diligence performed by RM as part of the FCE acquisition, (2) the representations allegedly made to RM by defendants, (3) the information available to RM when it allegedly relied on any such representations and (4) the information obtained by RM that allegedly demonstrates such representations to have been false (collectively "RM's Reliance Materials"). For the reasons set forth below, plaintiff's motion will be granted and defendants' motion will be granted in part and denied in part.
The Court declines to address the parties' claims of deficient privilege logs at this time.
As a threshold matter, this Court must address the choice-of-law to be applied. Both parties rely extensively on federal common law in their briefs. Consequently, they have implicitly consented to the application of federal common law to these discovery disputes. By briefing New Jersey law as well as federal common law, defendants have likewise consented to the application of New Jersey law. This Court will thus apply, in its discretion, federal common law or New Jersey law in addressing RM's motion; federal common law will be applied in addressing defendants' motion. Federal common law governs the attorney-client privilege in cases involving federal claims (including pendent state claims). Rule 501 of the Federal Rules of Evidence ("FRE"); Bank Brussels Lambert v. Credit Lyonnais, 160 F.R.D. 437, 441 (S.D.N.Y. 1995) (applying FRE 501). Plaintiff's claims are state law claims governed by state law. Nonetheless, this rule may give way where, as here, the parties' have implicitly consented to the application of federal common law.
A federal court exercising diversity jurisdiction applies the substantive law of the forum state, including its choice-of-law or "conflicts" rules. Day Zimmermann, Inc. v. Challoner, 423 U.S. 3, 4-5 (1975); Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-497 (1941); Brink's Ltd. v. S. African Airways, 93 F.3d 1022, 1030 (2d Cir. 1996), cert. denied, 519 U.S. 1116 (1997). Under New York's choice-of-law rules, a district court must give controlling effect to the law of the jurisdiction with the most significant interest in the specific issues involved in the dispute. Krock v. Lipsay, 97 F.3d 640, 645 (2d Cir. 1996). This Court, however, will dispense with the choice-of-law analysis because the parties have implicitly consented to the application of federal common law with respect to the attorney-client privilege — as discussed more fully below.
Tehran-Berkeley v. Tippetts-Abbett, 888 F.2d 239, 242 (2d Cir. 1989) (holding that "implied consent to use a forum's law is sufficient to establish choice of law ***."). Although most courts applying Tehran-Berkeley do so where the parties rely exclusively on the law of one jurisdiction, several courts have relied on Tehran-Berkeley where the parties discuss the law of several jurisdictions in their briefings. See Cowan v. Codelia, P.C., 1999 WL 1029729, at *4 n. 2 (S.D.N.Y. 1999) (holding that parties implicitly consented to application of New York law because they cited "almost exclusively to New York law") (emphasis added); Cafiero v. Lifton, 1996 WL 539841, at *7 n. 3 (S.D.N.Y. 1996) (holding that parties' reliance on New York law constituted implied consent to have such applied, despite defendant's argument that Michigan law should govern); West Tsusho Co. v. Prescott Bush Co., 1993 WL 228072, at *2 (S.D.N.Y. 1993) (holding that parties consented to application of New York law despite their discussion of Japanese law as well). Despite the parties' arguments in favor of the laws of Texas, New York or New Jersey, their briefs rely extensively on federal common law governing the attorney-client privilege. Accordingly, the parties implicitly consent to the application of such federal common law.
As a preliminary matter, the party asserting the attorney-client privilege bears the burden of demonstrating its applicability. In re Grand Jury Proceedings, 219 F.3d 175, 182 (2d Cir. 2000). Nonetheless, such "ought to be strictly confined within the narrowest possible limits consistent with the logic of its principle" because it stands in derogation of the truth. Ibid.
Turning to the merits of RM's motion, this Court assumes arguendo that the withheld communications related to the Disputed Issues are privileged. Nonetheless, applying New Jersey law, several exceptions prevent defendants from claiming the attorney-client privilege with respect to these communications. The attorney-client privilege must be "strictly construed" and the burden of asserting it rests upon defendants. Horon Holding Corp. v. McKenzie, 775 A.2d 111, 116-117 (N.J.Super.Ct. App. Div. 2001). The privilege is not absolute and is subject to several exceptions. Id. at 116; Kinsella v. Kinsella, 696 A.2d 556, 567-568 (N.J. 1997) (discussing exceptions to the attorney-client privilege under New Jersey law).
See also United Jersey Bank v. Wolosoff, 483 A.2d 821, 825 (N.J.Super.Ct.App.Div. 1984) (noting that New Jersey Courts have recognized that the attorney-client privilege "results in suppression of evidence and to that extent is at war with the truth" such that "some compensating gain should be apparent" when shielding evidence from discovery).
Jadlowski v. Owens-Corning Fiberglass Corp., 661 A.2d 814, 823 (N.J.Super.Ct.App.Div. 1995) (holding that attorney-client privilege is "`exceedingly important' but not `sacrosanct'" and that there are times when it "must give way to a full and fair inquiry").
First, New Jersey law permits a party to pierce the attorney-client privilege where (1) there is a legitimate need to reach the shielded evidence, (2) there is a showing of relevancy and materiality and (3) the information cannot be secured from any less intrusive source. In re Kozlov, 398 A.2d 882, 886-887 (N.J. 1979). The Kozlov analysis is very similar to the analysis applicable to the work-product protection and is so applied in New Jersey. See Payton v. N.J. Turnpike Auth., 691 A.2d 321, 336 (N.J. 1997) (applying Kozlov test and work-product analysis and holding that "[o]ur analysis of the applicability of the work-product doctrine is similar to that of the attorney-client privilege."). Accordingly, New Jersey law recognizes an exception to the attorney-client privilege that is not recognized under federal common law. See Pittston Co. v. Allianz Ins. Co., 143 F.R.D. 66, 71-72 (D.N.J. 1992) (applying Kozlov and its progeny with respect to privilege analysis and applying federal law with respect to work-product protection analysis). In Leonen v. Johns-Manville, 135 F.R.D. 94, 100 (D.N.J. 1990), the district court held that New Jersey's test was satisfied where memoranda from the 1930's and 1940's contained information "that may show if and when [defendant] became aware of the health dangers associated with asbestos." Similarly, defendants' communications relating to the off-specification closures will show if and when defendants were aware of the scope of liability for such and whether defendants, through misrepresentation or omission, fraudulently induced Huber to purchase FCE. Indeed, RM has satisfied the New Jersey test by showing that it has a legitimate need for defendants' communications related to the off-specification closures — which are clearly relevant and material to RM's fraud claims. More importantly, the information sought — i.e., defendants' knowledge of FCE's off-specification liability and whether it sought to foist such onto RM — cannot be obtained from any less intrusive source. See Leonen, at 100. Accordingly, defendants will be prohibited from asserting the attorney-client privilege with respect to communications relating to the off-specification closures because plaintiff has satisfied New Jersey's tripartite test.
See United Jersey Bank, supra note 7, at 826-827 (finding the New Jersey test met where plaintiff's reasonable reliance on defendant's representations was critical issue in the case). Likewise, defendants' knowledge regarding the off-specification closures is a critical component of this case. Cf. Dontzin v. Myer, 694 A.2d 264, 269 (N.J.Super.Ct.App.Div. 1997) (noting that New Jersey's attorney-client rule was not applicable to real estate breach of contract case because, inter alia, "fraud and its requisite reliance on an alleged misrepresentation is not an issue").
See also Dome Petroleum Ltd. v. Employers Mut. Liability Ins. Co. of Wisconsin, 131 F.R.D. 63, 69-70 (D.N.J. 1990) (stating in dicta that New Jersey test was satisfied where subrogee sought privileged communications between subrogor and its insurer because the "extent of coverage and the circumstances surrounding the negotiation of the loan receipt agreement [between the subrogor and its insurer]" were material and relevant to issue of whether subrogee or insurer was responsible for subrogor's loss). Inasmuch as the Dome Petroleum court did not expressly find that the information concerning the loan receipt agreement negotiations could not be obtained from a less intrusive source, it appears that the court implicitly so held. In other words, where contract interpretation is at issue, the underlying contractual negotiations cannot be obtained from a less intrusive source than the contract negotiators themselves.
Second, the attorney-client privilege does not extend to communications made "in the course of legal service sought or obtained in aid of the commission of a crime or a fraud." N.J.S.A. 2A:84A-20(2)(a) (West 2003) (a.k.a. N.J.R.E 504). New Jersey law provides that "fraud be given the broadest interpretation" and that it "includes virtually all kinds of deception and deceit, even though they might not otherwise warrant criminal or civil sanctions." Ocean Spray Cranberries, Inc. v. Holt Cargo Sys., Inc., 785 A.2d 955, 959 (N.J.Super.Ct. Law Div. 2000) (citations omitted) (citing Fellerman v. Bradley, 99 N.J. 493, 503 (N.J. 1985). In order to avail itself of the crime-fraud exception, RM "must make a prima facie showing of fraud" — which must be based on "evidence other than the contested communication itself." Id. at 960. This prima facie showing is essentially the probable cause requirement set forth by the Second Circuit Court of Appeals inasmuch as "both require that a prudent person have a reasonable basis to suspect perpetration or attempted perpetration of a fraud or crime." Id. at 960-961 (emphasis added). Accordingly, RM satisfied this showing where it demonstrated a reasonable basis to suspect that defendants knew or should have known (1) that FCE had sold several thousand off-specification closures, (2) that Schedule 3.8 of the Agreement disclosed that 194 off-specification units were "certified" as compliant by FCE, (3) that RM had an erroneous belief as to the scope of FCE's off-specification liability — i.e., believing FCE's liability to be for 194 units rather than several thousand units — and (4) that RM's understanding of the scope of the off-specification liability was based upon defendants' representations or omissions. Moreover, the lone case cited by defendants — Nat'l Utility Serv. v. Sunshine Biscuits, Inc., 694 A.2d 319, 322-324 (N.J.Super.Ct.App.Div. 1997) (holding that crime-fraud exception to the attorney-client privilege was inapplicable because memorandum from in-house counsel suggesting that contractual liability existed did not preclude trial counsel from asserting lack of contract as an affirmative defense three years after memo was written) — is readily distinguishable. Consequently, defendants may not claim the attorney-client privilege or work-product protection with respect to any communications made on or before November 20, 1997 related to the Disputed Issues.
Ocean Spray, at 959 (holding that the work-product doctrine is also subject to the crime-fraud exception).
See In re Grand Jury Subpoena Duces Tecum, 731 F.2d 1032, 1039 (2d Cir. 1984) ("[T]he fraudulent nature of the [client's] objective need not be established definitively; there need only be presented a reasonable basis for believing that the objective was fraudulent."); Ocean Spray, at 959 (crime-fraud exception also applies where attorney is unaware of the fraud).
Defendants contend that there is a critical difference between off-specification closures (i.e., several thousand) and the 194 that were "certified" as compliant. Nonetheless, if defendants were aware of and responsible for RM's allegedly erroneous belief as to the meaning of paragraph 3 of Schedule 3.8, any difference between off-specification disclosures and "certified" disclosures would be irrelevant with respect to plaintiff's claims sounding in fraud.
Cf. In re Grand Jury Subpoena Duces Tecum, 731 F.2d 1032, 1039-1041 (2d Cir. 1984) (holding that the crime-fraud exception applied and requiring disclosure of communications related to defendant's sale of its subsidiary where the timing and nature of the transaction suggested a fraudulent intent or motive); U.S. v. Gasparik, 141 F. Supp.2d 361, 372 (S.D.N.Y. 2001) (finding crime-fraud exception applicable where "preparation of a registration statement was a necessary step in permitting the fraudulent stock purchase scheme"); Glidden Co. v. Jandernoa, 173 F.R.D. 459, 481-482 (W.D.Mich. 1997) (applying crime-fraud exception under Michigan law and noting that "the wrongdoing (if any there was) would consist in the alleged nondisclosures and misstatements upon which [plaintiff] claims to have relied").
Third, defendants have waived any attorney-client privilege or work-product protection that otherwise might have attached to any documents that were left in the possession of FCE after November 20, 1997. See In re Grand Jury Subpoenas, 734 F. Supp. 1207, 1213 (E.D.Va.) (holding that parent waived attorney-client privilege with respect to documents left in subsidiary's possession after sale of the subsidiary), rev'd on other grounds, 902 F.2d 244 (4th Cir. 1990). Accordingly, defendants may not claim the attorney-client privilege or work-product protection with respect to any documents that were left in FCE's possession after it had been purchased by RM.
See also In re In-Store Advertising Sec. Litig., 163 F.R.D. 452, 458 (S.D.N.Y. 1995) (citing In re Grand Jury Subpoenas and holding that "where confidential attorney-client communications are transferred from a corporation selling assets to the corporation buying assets, the privilege is waived as to those communications").
Inasmuch as defendants' attorney-client privilege, if any, yields to several exceptions provided for by New Jersey law and/or has been waived, this Court need not address whether the attorney-client privilege was held by both Huber and FCE — and whether FCE could properly waive such. Accordingly, in light of the parameters of defendants' attorney-client privilege, as set forth above, this Court declines to fulfill its promise to review the several boxes of documents heretofore submitted in camera. The defendants shall make available all communications made on or before November 20, 1997 related to the Disputed Issues. Nonetheless, the parties may request in camera review of any specific documents about which questions remain — as opposed to the undifferentiated mass of documents previously submitted.
Such analysis would require this Court to determine — with respect to each communication — whether the communication was made in the course of rendering legal advice as opposed to general business advice. See e.g., McCaugherty v. Siffermann, 132 F.R.D. 234, 237-238 (N.D.Cal. 1990) (reviewing transaction where parent and subsidiary shared goal of selling failed savings and loan institution under parent's control and holding that "[i]n this setting, (where there is a clear business purpose in the environment in which the communications occurred), the court should sustain an assertion of privilege only when there is a clear evidentiary predicate for concluding that each communication in question was made primarily for the purpose of generating legal advice.").
This includes deposition testimony and any previous discovery responses that require supplementation.
Turning to the merits of defendants' motion, defendants seek RM's Reliance Materials, which RM is withholding on grounds of privilege or work-product protection. Although defendants have allegedly failed to comply with certain procedural requirements, this Court will overlook any such inadvertencies and address the merits of defendants' motion in an attempt to expedite a discovery dispute that has created a logjam for far too long.
RM does not advocate inconsistent positions by claiming that FCE may waive any privilege that it holds while nonetheless maintaining that RM has a privilege independent of FCE, especially for communications generated before November 20, 1997 — i.e., a period when FCE was not yet a subsidiary of RM. As noted in RM's brief, the cases cited by defendants are distinguishable. Accordingly, neither judicial estoppel nor selective waiver is applicable.
Inasmuch as defendants concede the "fallacy of [the "dual role"] legal argument," in their papers opposing RM's motion, this Court need not address defendants' half-hearted application of the same argument in defendants' motion. See Defs.' Mem. In Support of Cross-Motion, at 12.
The documents authored or received by defendant H. Milton Hoff — which RM claim to be privileged — are protected by the attorney-client privilege. Indeed, FCE is the privilege holder, not Hoff. Moreover, inasmuch as RM contends that it has withheld no document authored or received by Hoff on or before November 20, 1997, this Court need not address whether RM, in fairness, should disclose documents authored or received by Hoff after such date, unless such bears on his knowledge before November 20, 1997.
See Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 349 (1985); Polycast Tech. Corp. v. Uniroyal, Inc., 125 F.R.D. 47, 49 (S.D.N.Y. 1989).
See RM's Opposition Brief, at 17 ("RM has withheld no document that relates to Mr. Hoff's knowledge at or before the time of the Stock Purchase Agreement ***").
Defendants are free to bring to this Court's attention any documents authored or received by Hoff before November 20, 1997 that are being withheld. Cf. Johnson Matthey, Inc. v. Research Corp., 2002 WL 1728566, at *2 (S.D.N.Y. 2002) (noting that "even if the privilege holder does not attempt to make use of the privileged communication, he may waive the privilege if he makes factual assertions the truth of which can only be assessed by examination of the privileged communication.") (citation omitted).
This Court declines to recognize the privilege of self-critical analysis at this time. See Robinson v. U.S., 205 F.R.D. 104, 108-109 (W.D.N.Y. 2001) (noting that the self-critical analysis privilege has not been adopted by the Second Circuit Court of Appeals and has been rejected in this district). Accordingly, neither party may rely upon the self-critical analysis privilege as a basis for withholding documents.
A motion to compel must be filed with the court that issued the subpoena in issue. In re Sealed Case, 141 F.3d 337, 341 (D.C. Cir. 1998) (holding that Rule 45 of the Federal Rules of Civil Procedure ("FRCvP") "allows enforcement of a subpoena following objections only `pursuant to an order of the court by which the subpoena was issued.' [FRCvP] 45(c)(2)(B). *** [The language of FRCvP 45] suggests that only the issuing court has the power to act on its subpoenas. *** Subpoenas are process of the issuing court, and nothing in the Rules even hints that any other court may be given the power to quash or enforce them.") (emphasis added) (citations omitted). Accordingly, any motion to compel directed toward Joseph M. Rigot must be filed with the District Court for the Southern of District of Ohio — the court from which the Rigot subpoena was issued.
With respect to RM's refusal to produce documents in response to document requests 2-6, 10-11, and 16-17, RM's objections are improper. First, this Court finds it dubious for a plaintiff to claim that the phrase "the subject matter of this litigation" is vague and ambiguous; if it were, it would be due to the manner in which the Complaint was drafted. In any event, RM will not be allowed to continue with this objection. Second, even where a legitimate objection to a discovery request exists, such objection does not permit the objecting party to refuse to produce any documents whatsoever. Rather, the objecting party should produce any documents that are clearly requested or claim such to be privileged while objecting as to the remainder. See FRCvP 34(b). Furthermore, to the extent that plaintiff considers "contracts proposed" or "assurances" to be vague or ambiguous, plaintiff shall meet and confer with defendants to clarify such requests. Accordingly, RM will be ordered to supplement its responses to document requests 2-6, 10-11 and 16-17 as necessary.
Although defendants ask this Court to require plaintiff to "supplement its responses to document requests 1, 7-9, 12-15, and 18" in their prayer for relief, no basis therefor is offered. Accordingly, such request has will not be granted.
Defendants' complaints concerning RM's interrogatory responses are likewise well-founded. First, as noted above, the phrase "the subject matter of this litigation" is neither vague nor ambiguous. Second, RM's objection that the information sought may be "elicited through deposition testimony" is improper because a responding party may not dictate which discovery device the requesting party should employ or in what order they should be employed. See FRCvP 26(d) ("methods of discovery may be used in any sequence"). Third, RM must — when relying upon FRCvP 33(d) to answer an interrogatory — specify by category and location the documents from which each interrogatory answer may be derived. See FRCvP 33(d). Defendants shall also so comply with FRCvP 33(d). Accordingly, RM will be ordered to supplement interrogatories 1-6, 8-12, and 14-20 and defendants will also be ordered to comply with FRCvP 33(d).
See also Compagnie Francaise d'Assurance Pour le Commerce v. Phillips Petroleum Co., 105 F.R.D. 16, 43 (S.D.N.Y. 1984) (rejecting objection that interrogatory sought information "more appropriately elicited at depositions" because interrogatories may help the requesting party avoid unnecessary — and costlier — depositions); In re Potash Antitrust Litig., 161 F.R.D. 405, 409 (D.Minn. 1995) (same); cf. Starlight Intern. Inc. v. Herlihy, 186 F.R.D. 626, 640 (D.Kan. 1999) ("A party may not properly answer an interrogatory by referring generically to testimony given upon deposition.") (emphasis added).
See also Natural Resources Defense Council, Inc. v. Fox, 1996 WL 497024, at *4-5 (S.D.N.Y. 1996) (finding response defective for failing to specify responsive documents as required by FRCvP 33(c), now FRCvP 33(d)). T.N. Taube Corp. v. Marine Midland Mortg. Corp., 136 F.R.D. 449, 455 (W.D.N.C. 1991) ("[D]irecting the opposing party to an undifferentiated mass of records is not a suitable response to a legitimate request for discovery.") (citation omitted).
The parties are encouraged to adopt more reasonable discovery positions in the future.
With respect to the documents situated in Houston, RM shall segregate for defendants the responsive documents if such documents have already been reviewed for privilege; otherwise RM is only obligated to make the documents available for defendants' inspection.
See Bd. of Educ. of Evanston Tp. High Sch. Dist. No. 202 v. Admiral Heating Ventilating, Inc., 104 F.R.D. 23, 36 n. 20 (D.C. Ill. 1984).
Finally, in a letter dated April 8, 2003, the parties requested that the discovery deadline be extended until six months after this Order issues. This Court's April 15, 2002 Scheduling Order will be vacated and another FRCvP 16(b) conference will be scheduled.
Accordingly, it is hereby ORDERED that plaintiff's motion to preclude defendants' assertion of the attorney-client privilege is granted, that defendants shall make available all communications made on or before November 20, 1997 related to the Disputed Issues, that defendants have waived any privilege associated with any document retained by FCE after November 20, 1997 and that — within fifteen business-days of the date of the filing of this Order — defendants shall supplement previous discovery responses as necessary in light of this Memorandum and Order; and it is further ORDERED that defendants' cross-motion to compel discovery is granted in part and denied in part, that plaintiff — within fifteen business-days of the date of the filing of this Order — shall (a) produce or make available for inspection all responsive and non-privileged documents requested by document requests 2-6, 10-11, and 16-17, (b) supplement its responses to interrogatories 1-6, and 8-12, and 14-20, (c) specify by category and location the documents from which its interrogatory answers may be derived as required by FRCvP 33(d), (d) supplement all interrogatory answers that object on the purported basis that the information sought may be "elicited through deposition testimony" and (e) segregate and produce all responsive documents located in Houston if plaintiff has already reviewed such documents for privilege, that defendants' motion is otherwise denied, that defendants shall specify by category and location the documents from which their interrogatory answers may be derived where they relied upon FRCvP 33(d) and that this Court's April 15, 2002 Scheduling Order is vacated and that a further FRCvP 16(b) conference shall be scheduled.