EFiled: Aug 8 2008 2:39PM EDT
Transaction ID 20998053
Case No. 2015-VCN
COURT OF CHANCERY
OF THE
STATE OF DELAWARE
JOHN W. NOBLE
VICE CHANCELLOR
417 SOUTH STATE STREET
DOVER, DELAWARE 19901
TELEPHONE: (302) 739-4397
FACSIMILE: (302) 739-6179
August 8, 2008
Carmella P. Keener, Esquire
Rosenthal, Monhait & Goddess, P.A.
919 Market Street, Suite 1401
Wilmington, DE 19801
Scott M. Tucker, Esquire
Chimicles & Tikellis LLP
One Rodney Square
Wilmington, DE 19801
S. Mark Hurd, Esquire
Morris, Nichols, Arsht & Tunnell LLP
1201 N. Market Street
Wilmington, DE 19801
Catherine G. Dearlove, Esquire
Richards, Layton & Finger, P.A.
One Rodney Square
Wilmington, DE 19801
David C. McBride, Esquire
Young Conaway Stargatt & Taylor, LLP
1000 West Street, 17th Floor
Wilmington, DE 19801
R. Bruce McNew, Esquire
Taylor & McNew LLP
2710 Centerville Road, Suite 210
Wilmington, DE 19808
Re:
In re William Lyon Homes Shareholder Litigation
Consolidated C.A. No. 2015-VCN
Date Submitted: August 7, 2008
Dear Counsel:
Plaintiff-Intervenor Alaska Electrical Pension Fund (“Alaska”) has moved to
compel the production of three emails between Defendant General William Lyon,
(together with Defendant, William H. Lyon, the “Lyon Defendants”) and his
August 8, 2008
Page 2
attorneys regarding conversations with one of Alaska’s attorneys.
The Lyon
Defendants have withheld the emails under the attorney-client privilege.1 Alaska
concedes that the emails would ordinarily be protected by the privilege but argues
that, under these circumstances, the emails fall within the so-called “at issue”
exception and must be produced.
The only issue remaining in this shareholder class action is a determination
of whether, and to what extent, if any, Alaska caused the increase in the final
consideration paid in connection with settlement of this action challenging the
efforts of the Lyon Defendants to acquire all of the publicly held stock of Nominal
Defendant William Lyon Homes, a Delaware corporation (the “Company”), and,
thus, is entitled to an award of attorney’s fees. Alaska begins with a rebuttable
presumption of causation.2 The Lyon Defendants maintain, however, that Alaska’s
then-pending lawsuit in California (the “California Action”) did not, in any way,
contribute to their decision to increase the price of their underlying tender offer
from $100 to $109 per share (the “Final Price Increase”).
1
The Lyon Defendants also assert the work product doctrine in their effort to withhold two of
the three emails.
2
Alaska Elec. Pension Fund v. Brown, 941 A.2d 1011, 1016 (Del. 2007).
August 8, 2008
Page 3
Discovery on the issue of causation is ongoing, and Alaska now seeks to
compel production of three privileged emails. Alaska contends that what the Lyon
Defendants knew and thought about the risks posed by the California Action at the
time of the Final Price Increase is “at issue” in this phase of the litigation, and,
thus, it claims that the attorney-client privilege has been waived with respect to any
communications reflecting how the Lyon Defendants may have assessed that
action. The Lyon Defendants respond that they have carefully structured their
challenge to Alaska’s presumption of causation in such a way as to avoid placing
the advice of their legal counsel at issue (thereby waiving the privilege). Instead,
they are relying solely upon objective, non-privileged facts about their negotiations
with Chesapeake Partners, L.P. (“Chesapeake”), a large shareholder of the
Company whose shares, ultimately, were necessary to meet the “Majority of the
Minority” condition of the underlying tender offer, and upon their objective, nonprivileged knowledge of the California Action.
After considering the matter and the parties’ arguments, the Court concludes
that the Lyon Defendants have not put their attorney-client communications at
issue, and, therefore, they have not waived attorney-client privilege. The necessary
corollary to their refusal to produce the privileged communications, however, is
August 8, 2008
Page 4
that they may not rely upon those communications or other privileged
communications from their attorneys to rebut Alaska’s presumption of causation
and to support their contention that the California Action had no impact on the
Final Price Increase; that, however, is their tactical choice and one, of course, that
they are free to make. Accordingly, because the Lyon Defendants have thus far
successfully tip-toed around placing attorney-client privileged communications “at
issue,” Alaska’s motion to compel will be denied.
I. BACKGROUND
A brief review of the relevant background facts is necessary to place
Alaska’s motion to compel in context.
On March 17, 2006, General Lyon commenced a tender offer to purchase all
the outstanding shares of the Company for $93 per share, subject to a non-waivable
“Majority of the Minority” condition (the “Tender Offer”). Shortly thereafter,
three purported shareholder class actions—two in Delaware (consolidated, the
“Delaware Action”) and the California Action—were filed alleging various
disclosure and fiduciary duty claims. The Delaware Action moved forward on an
expedited schedule, and the Lyon Defendants and the California court consistently
urged Alaska to coordinate with or participate in the Delaware Action.
August 8, 2008
Page 5
On April 10, 2006, the parties in the Delaware Action executed a
memorandum of understanding memorializing terms of a settlement agreement
resulting in an increase in the price of the Tender Offer to $100 per share (the
“Original Settlement”).
Confirmatory discovery in support of the Original
Settlement continued throughout the month of April. Meanwhile, in California,
Alaska declined to join in the Original Settlement and continued to maneuver in an
effort to advance its claims there. Those efforts met with limited, if any, success.
Notwithstanding the increase in the price of the Tender Offer, as of April 24,
2006, the date the Tender Offer was set to expire, General Lyon had not yet
received a sufficient number of tendered shares to satisfy the “Majority of the
Minority” condition of the offer. Accordingly, he extended the deadline for the
Tender Offer to April 28, 2006, but he remained concerned that he might not be
able to complete the Tender Offer as planned. Thus, that same day, General Lyon
consulted with his financial advisor, Lehman Brothers (“Lehman”), and developed
a strategy to seek out the non-tendering common stockholders of the Company,
including Chesapeake, and to convince them to tender.
Lehman contacted
Chesapeake, and, on April 27, 2006, Chesapeake agreed to tender its shares for
$109 per share. On May 1, 2006, General Lyon announced that he was increasing
August 8, 2008
Page 6
the price of the Tender Offer to $109 per share for all the Company’s stockholders
who tendered their shares before the expiration of the Tender Offer (i.e., the “Final
Price Increase”).
The Original Settlement in the Delaware Action was revised to reflect the
Final Price Increase. In addition, in the final stipulation of settlement in the
Delaware Action, the Lyon Defendants agreed not to object to an award not
exceeding $1.2 million in attorneys’ fees to the plaintiffs’ attorneys. The Lyon
Defendants and Alaska then agreed to stay the California Action, and Alaska
intervened in the Delaware Action to submit its application for an award of
attorneys’ fees.
II. THE PARTIES’ CONTENTIONS
Because Alaska did not enter into the Original Settlement in the Delaware
Action, and because the Final Price Increase occurred while the California Action
was the only pending lawsuit, Alaska is presumed to have caused (or at least
contributed to) the increase in the settlement consideration paid to the plaintiff
shareholder class.3 The Lyon Defendants challenge that presumption and argue
that the Final Price Increase was attributable solely to the negotiating leverage of
3
Alaska Elec. Pension Fund, 941 A.2d at 1016.
August 8, 2008
Page 7
Chesapeake in connection with the “Majority of the Minority” condition of the
Tender Offer. Alaska takes the position, however, that with the Lyon Defendants’
argument that the Final Price Increase is attributable solely to Chesapeake, then
they also are arguing that they placed no value on the claims in the California
Action and were not motivated by its pendency; in seeking to ascertain whether
and why the Lyon Defendants did not consider the California Action in negotiating
the Final Price Increase, Alaska assumes that they relied on advice of their
attorneys, which necessarily places certain attorney-client communications at
issue.
The three emails that are the subject of Alaska’s motion to compel were
exchanged among the Lyon Defendants and their attorneys and are plainly subject
to the attorney-client privilege. Given the timing of the emails—in the interim
between the Original Settlement and the announcement of the Final Price
Increase—Alaska seeks to discover whether those emails contain any advice or
other information regarding the Lyon Defendants’ consideration and valuation of
the California Action. The Lyon Defendants resist production of the privileged
communications on the grounds that they have not placed the advice of counsel
August 8, 2008
Page 8
with respect to their consideration of the California Action “at issue,” and,
therefore, they contend they have not waived attorney-client privilege.
III. ANALYSIS
The attorney-client privilege generally protects confidential communications
between a client and his attorney acting in her professional capacity.4
The
privilege can be waived, however, where, for example, a party places an otherwise
privileged communication “at issue” in the litigation. Thus, the so-called “at
issue” exception to the attorney-client privilege applies where either “(1) a party
injects the privileged communications themselves into the litigation, or (2) a party
injects an issue into the litigation, the truthful resolution of which requires an
examination of confidential communications.”5
The “at issue” exception is
grounded on notions of fundamental fairness and recognizes that “a party cannot
take a position in litigation and then erect the attorney-client privilege in order to
shield itself from discovery by an adverse party who challenges that position.”6
4
Moyer v. Moyer, 602 A.2d 68, 72 (Del. 1992).
DONALD J. WOLFE, JR. & MICHAEL A. PITTENGER, CORPORATE AND COMMERCIAL PRACTICE IN
THE DELAWARE COURT OF CHANCERY § 7.02[c][2], at 7-28 (2008).
6
Id. (quoting Sealy Mattress Co. of NJ, Inc. v. Sealy Inc., 1987 WL 12500, at *6 (Del. Ch.
June 19, 1987); see also Tackett v. State Farm Fire & Cas. Ins. Co., 653 A.2d 254, 259 (Del.
1995) (“The courts of this State have refused to allow a party to make bare, factual allegations,
the veracity of which are central to resolution of the parties’ dispute, and then assert the attorney5
August 8, 2008
Page 9
In attempting to rebut Alaska’s presumption of causation, the Lyon
Defendants have not relied upon the specific emails Alaska seeks to discover, nor
have they directly injected those specific communications into this litigation, in
support of their substantive arguments to rebut the presumption.7 The debate here
centers around whether the Lyon Defendants’ challenge to Alaska’s presumption
of causation, and their reliance exclusively on objective, non-privileged evidence
of their negotiations with Chesapeake in support thereof, implicitly and necessarily
places at issue their consideration vel non of the California Action in determining
the Final Price Increase.
In other words, in a zero-sum construct where, by
definition, the Final Price Increase can be attributed only to two possible sources of
causation—Chesapeake or Alaska—if the Lyon Defendants position is, “We only
considered Chesapeake,” then, by implication, they also are saying, “We did not
consider Alaska.”
In order to establish the veracity of that statement and to
ascertain the reason why the Lyon Defendants did not consider Alaska to be a
factor in Final Price Increase, one would expect the advice of an attorney to surface
eventually.
client privilege as a barrier to prevent a full understanding of the facts disclosed.” (citations
omitted)).
7
See generally General Wm. Lyon and Wm. H. Lyon’s Supp. Br. re: Alaska Elec. Pension
Fund’s App. For an Award of Atty. Fees and Expenses.
August 8, 2008
Page 10
The Lyon Defendants nevertheless have adopted a particular tactic and
strategy—exclusive reliance on objective, non-privileged facts—in their challenge
to Alaska’s presumption of causation in order to avoid placing directly “at issue”
any advice they may have received from their attorneys regarding the California
Action. Candidly, the line they seek to walk here is very fine and a line about
which one may readily harbor considerable doubt about whether they will maintain
it successfully.
That said, however, at present, by relying exclusively upon
objective, non-privileged facts about their negotiations with Chesapeake and the
Lyon Defendants’ objective, non-privileged knowledge of the California Action in
seeking to rebut the presumption of causation, the Lyon Defendants have not
placed their attorney-client privileged communications regarding the California
Action directly “at issue,” and the Court finds no persuasive reason to ignore that
tactical choice and preclude assertion of the attorney-client privilege.
The more difficult aspect of the parties’ debate is whether the Lyon
Defendants’ challenge to Alaska’s presumption of causation is one that raises an
issue in the litigation “the truthful resolution of which requires an examination of
confidential communications.” The Lyon Defendants have contended that they did
not “inject” any such issue into this litigation. Because the increase in share price
August 8, 2008
Page 11
was caused either by California or Alaska (or both in whatever proportion),
however, the Lyon Defendants are necessarily, either explicitly or implicitly,
arguing that they were not motivated at all by the existence of the California
Action. That, of course, is an inevitable contention in the face of a rebuttable
presumption of causation in cases of this nature.8 Thus, the issue of whether or not
the Lyon Defendants were in any way induced by the pendency of the California
Action is an issue which must be deemed to have been injected by them into this
litigation. Although an examination of the Lyon Defendants’ communications
with their attorneys undoubtedly would be helpful in resolving that question,
access to such communications cannot be said to be “required” in order to achieve
a “truthful resolution” of the factor(s) motivating them to increase their offer.
Alaska has an upcoming opportunity to depose the Lyon Defendants and
their defense counsel. Through those depositions, Alaska will be able to probe the
extent of the witnesses’ objective knowledge regarding the California Action and,
8
Under Alaska’s view of the “at issue” exception, it would always (or, perhaps, almost always)
be applicable in these circumstances. Indeed, Alaska has suggested that, because this is litigation
about litigation, an accurate observation as far as it goes, the attorney-client privilege will have
to give way in order to gain access to the “truth.” The attorney-client privilege—as with any
privilege—can always be seen as impairing access to the “truth.” That avoiding the protection of
the privilege would be beneficial for resolving a dispute does not constitute a reason for denying
a party the benefit of the privilege.
August 8, 2008
Page 12
presumably, the basis for the Lyon Defendants’ asserted non-consideration of the
California Action in arriving at the Final Price Increase. If the Lyon Defendants
can continue to execute their strategy and can answer Alaska’s proper questions
regarding the Final Price Increase without placing the advice of their attorneys
concerning the California Action “at issue,” then they are entitled to do so and to
continue to protect from discovery the privileged attorney-client communications.
A necessary consequence of the Lyon Defendants’ strategy, however, is that
they will not be able to rely upon privileged communications from their attorneys
to rebut the presumption that Alaska was a cause behind the Final Price Increase.9
In other words, they cannot now assert the attorney-client privilege as a shield to
protect from disclosure any privileged communications regarding the California
Action, and later use those or similar communications as a sword in an effort to
prove that at the time of the Final Price Increase they did not consider the
California Action and, therefore, that Alaska was not a cause. Thus, in light of
their tactical choice, whether the Lyon Defendants will be able to rebut Alaska’s
presumption of causation in the Final Price Increase without resorting to attorney9
See WOLFE & PITTENGER, supra note 5, § 7.02[c][2], at 7-32 (2008) (citing Mentor Graphics
Corp. v. Quickturn Design Sys., Inc., Del. Ch. C.A. No. 16584 & 16588 (Oct. 23, 1998), Bench
Ruling at 505).
August 8, 2008
Page 13
client privileged communications is an open question, but it is a risk they appear to
be choosing to run.
IV. CONCLUSION
For the foregoing reasons, the Court concludes that the Lyon Defendants
have not waived their attorney-client privilege by placing the three emails “at
issue.”10 Accordingly, Alaska’s motion is denied.
IT IS SO ORDERED.
Very truly yours,
/s/ John W. Noble
JWN/cap
cc: Register in Chancery-K
10
With this conclusion, it is not necessary to address separately the Lyon Defendants’ work
product doctrine contentions.
