Delta Fin. Corp. v MorrisonAnnotate this Case
Decided on August 12, 2008
Supreme Court, Nassau County
Delta Financial Corporation, in its individual capacity and as Initial Member of DELTA FUNDING RESIDUAL EXCHANGE COMPANY, LLC, Plaintiff,
James E. Morrison, DELTA FUNDING RESIDUAL MANAGEMENT, INC. and DELTA FUNDING RESIDUAL EXCHANGE COMPANY, LLC, Defendants.
DELTA FUNDING RESIDUAL EXCHANGE COMPANY, LLC and DELTA FUNDING RESIDUAL MANAGEMENT, INC., Plaintiffs,
DELTA FINANCIAL CORPORATION, SIDNEY A. MILLER, HUGH MILLER, MARC E. MILLER, RICHARD BLASS and ARNOLD B. POLLARD, Defendants.
The attorneys involved in the case and who were present at the hearing on this matter were as follows:
Representing Delta financial Corporation:
Loeb & Loeb, LLP
Attention: Eugene Licker, Esq.
345 Park Avenue
New York, New York 10154
Certilman Balin Adler & Hyman
Attention: M. Allan Hyman, Esq.
90 Merrick Avenue - 9th Floor
East Meadow, New York 11554
Christopher A. Byrne, Esq., P.C.
Attention: Christopher A. Byrne, Esq.
1050 Connecticut Avenue N.W. - Suite 5
Washington, D.C. 20036-5303
Arent Fox, LLP
Attention: Gary C. Tepper, Esq.
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036
Representing Tom Brown and his law firm:
Oran, Elsen & Lupert, LLP
Attention: Thomas A. Brown, Esq.
875 Third Avenue
New York, New York 10022
Representing Christopher A. Byrne Esquire
Gage Spencer & Fleming, LLP
Attention: William B. Fleming, Esq.
410 Park Avenue
New York, New York 10022
Representing the law firm of Arent Fox, specifically Hunter Carter and Gary Tepper; also representing Tom Brown of the law firm of Orans Elsen Lupert and Brown, as well as the LLC :
Bracken & Margolin, Esqs.
Attention: John P. Bracken, Esq.
1 Suffolk Square, Suite 300
Islandia, New York 11749
Ira B. Warshawsky, J.
In or about July 2003, Delta Financial Corporation ("DFC") filed a lawsuit against Delta Funding Residual Exchange Company, LLC ("DFREC"), its management company, Delta Funding Residual Management, Inc. ("DFRM") (collectively known hereinafter as the "LLC") and James Morrison, individually, the CEO of what has been denominated the LLC, after the LLC withheld certain distributions allegedly due to DFC under the terms and conditions of a number of agreements entered into between the LLC and DFC regarding the 2001 Exchange (as defined below). On or about September 11, 2003, the LLC commenced its own action against DFC and individual defendants Sidney A. Miller, Hugh Miller, Marc E. Miller, Richard Blass and Arnold B. Pollard (collectively the "Individual Defendants") for approximately $110 million plus interest for, inter alia, fraud and breach of contract regarding the exchange of assets between the LLC and DFC in and about August 23, 2001 (the "2001 Exchange").[FN1]
In December 2007, DFC filed for bankruptcy protection under Chapter 11 in the United States Bankruptcy Court for the District of Delaware. According to §361(a) of the Bankruptcy Code (the "Code"), the action by the LLC against DFC is stayed. In addition, Counsel for the Individual Defendants and the LLC have entered into a stipulation extending the stay to preclude this Court from moving the action forward against the Individual Defendants until September 18, 2008, which was So Ordered by the Bankruptcy Court. (the "Stipulation").[FN2]
In a decision dated October 11, 2007, this Court concluded, inter alia, that the LLC's assertion of privilege over fifty-five e-mail communications (the "e-mails") and the submission of those e-mails to the Court-Appointed Discovery Referee, Michael Cardello, Esq. for an in camera review, which was subsequently reviewed in camera by the Court was, as defined in Part 130 of the Rules of Chief Administrator (22 NYCRR 130-1.1(a) and (c) (1,2, and 3)), frivolous conduct as the e-mails could not have been protected by either the attorney-client privilege and/or the litigation committee privilege (the "October 11, 2007 Decision"). Instead of immediately imposing sanctions upon the LLC and/or its counsel for this frivolous conduct, the Court set down the matter for a hearing and permitted the LLC to show cause why the Court should not sanction the LLC and/or its counsel for such conduct (the "Order to Show Cause").
In the October 11, 2007 Decision, this Court held that no privilege could have been asserted
as to the e-mails as no attorney was a participant in the communications and no litigation
committee privilege could have attached as evidenced by an e-mail dated March 28, 2005 from
James Morrison ("Mr. Morrison") to Wayne Teetsel ("Mr. Teetsel") and Harrison Bubrosky
("Mr. Bubrosky") (the "March 28, 2005 e-mail"). In the Court's view, the March 28, 2005 e-mail
clearly indicates that no litigation committee could have existed prior to March 28, [*2]2005. That e-mail read:
I, the board would like to establish a litigation committee,' or something similarly
named. The purpose would be to work closely with counsel and me to monitor the details of the
litigation as it goes forward. Is this something you all can and will do? I am looking into the
implications of this re " - ... attorney/client privilege. Now we should have an answer by
A brief description of the relevant facts is warranted. In or about November, 2006, DFC served a subpoena upon non-party Jefferies & Company, LLC, an investment bank ("Jefferies"), which requested the production of documents as well as the deposition of Mr. Bubrosky, an executive vice president of Jefferies representing Jefferies' interest in the LLC and member of the alleged litigation committee ("Litigation Committee")[FN3]. Counsel for Jefferies produced a number of documents to DFC and withheld a number of documents, which according to Jefferies, were privileged. Those documents were not the subject of this determination. Apparently, in addition to counsel for Jefferies conducting a review of the responsive documents to determine whether to assert privilege and withhold them from production, the responsive documents were made available to counsel for the LLC for its own review for privilege prior to the production being served upon DFC (as per Mark Noel, Esq., counsel to Jefferies in an e-mail of January 31, 2007). Apparently, as a result of the LLC's review, LLC directed the e-mails be withheld from the production from the responsive documents to DFC based upon the LLC's assertion of its own privilege. Based upon the submissions by counsel in response to the Order to Show Cause, the assertion of the LLC's privilege over the E-Mails for which Jefferies & Co. had not claimed privilege, was made by Christopher Byrne, Esq., then counsel for the LLC, in January 2007, but no later than February 27, 2007 (e-mail Byrne to Kosack).
After receipt of the produced documents and the privilege log dated March 2, 2007, DFC objected to the assertion of privilege over the e-mails. In addition, during the deposition of Mr. Bubrosky in or about June, 2007, and in subsequent correspondence dated July 16, 2007, counsel for KPMG challenged the assertion of privilege over the e-mails and demanded production of the same. Notwithstanding, counsel's demand, LLC maintained the assertion of privilege over the e-mails (when the court uses the term LLC, it could have been one of several lawyers or law firms who spoke for the LLC). As a means to resolve the issue, counsel for the parties agreed to have the Court-Appointed Discovery Referee, Michael Cardello, Esq. conduct an in camera review of the e-mails. Mr. Cardello directed the LLC to submit the e-mails to him along with a brief and concise cover sheet for each document to substantiate the assertion of privilege over the e-mails which were received by Mr. Cardello on or about September 7, 2007. Soon thereafter, Mr. Cardello conducted his in camera review of the e-mails. Upon completion of his in camera review, Mr. Cardello determined that several fundamental issues needed to be resolved by this court, and not him, prior to any determination regarding the LLC's assertion of privilege over the e-mails. Mr. Cardello believed that the court [*3]needed to rule first upon the issues regarding; (1) if and when a litigation committee was formed, and if formed, (2) who were members of the litigation committee and at what time. The court agreed.
On September 20, 2007, the court held a settlement conference in yet another attempt to settle all the consolidated matters. It was during this settlement conference that the Court informed counsel for the parties that the court was, in fact, going to conduct its own in camera review of the e-mails for the asserted claim of privilege by the LLC. Unbeknownst to the court and Mr. Cardello at the time, Christopher A. Byrne, Esq., counsel for the LLC, had been instructed by new lead counsel Thomas Brown, Esq., to remain silent during the settlement conference. Until September 20, 2007, Mr. Byrne, along with Mr. Tepper, of Arent Fox, both of Washington, D.C. had represented the LLC.[FN4]Since September 21, 2007, counsel of record and lead counsel for the LLC has been Orans, Elsen, Lupert & Brown, specifically Thomas Brown.
Apparently, as a result of change in lead counsel and some concern that the court was now
going to conduct its own in camera review of the e-mails, on September 21, 2007, Mr.
Tepper, thinking "something was awry" (T-329), contacted Mr. Cardello to request additional
time to permit new lead counsel, Mr. Brown, to review the e-mails to decide if the LLC still
wanted to assert privilege over the e-mails. Mr. Cardello informed counsel that he had one week
to conduct his review and report back. On Thursday September 27, 2007, Mr. Brown informed
Mr. Cardello, via e-mail, that upon Mr. Brown's review, the LLC has decide to withdraw its
assertion of privilege as to all but parts of six e-mails that comprised the e-mails. However, this
change of heart on behalf of the LLC came after the court's painstaking review of all the e-mails
and the related law.
THE ARGUMENT AGAINST SANCTIONS BY NEW COUNSEL
TOM BROWN OF ORANS, ELSEN LUPERT & BROWN, LLP
New counsel for the LLC, Mr. Brown, of Orans Elsen, Lupert & Brown, LLP, who was retained and appeared as counsel for the LLC at the September 20, 2007 settlement conference (who also represented Stonehill), argues in his submission to the court that his firm relied upon sworn testimony and case law precedence in believing that a committee had been formed in 2003 and that its discussions with counsel and discussions about counsel's advice are protected by the attorney client privilege. Mr. Brown relies on the testimony of Mr. Byrne (he had been deposed on August 28, 2007, as well as after the court's decision of October 11, 2007) to support the claim that they believed a Litigation Committee had been formed in 2003 and its members were Mr. Teetsel of Stonehill, Mr. Bubrosky of Jefferies & Co., and Mr. Morrison, the only officer of the LLC, its only director (once referred to as the "chief cook and bottle washer" by Mr. Byrne), and who had and has no ownership interest in the LLC. Mr. Brown also cites the court to selective sections of the testimony of Bubrosky, Teetsel and Morrison as to when a litigation "group" was formed.
Mr. Brown also refers to an affidavit of Mr. Daniel C. Malone, a former attorney of the LLC, as to his involvement with the "Litigation Committee" from May 2005 to September 2006.
In addition, Mr. Brown argues that his firm did not have anything to do with the assertion [*4]of privilege over the original fifty-five e-mails and only learned of the size of the in camera review at the September 20, 2007 settlement conference. Mr. Brown also states that he subsequently reviewed the e-mails and determined that other than portions of six e-mails, the other e-mails were not protected by the attorney-client or work product privilege and that the Court should not have been asked to spend the considerable time necessary to review them. Furthermore, Mr. Brown argues that in any event, even if no formal committee had been established, Messrs. Morrison, Teetsel, and Bubrosky had the right under the joint interest privilege to meet and discuss legal advice about the case in confidence, including before the lawsuit was filed in 2003. Therefore, the assertion of privilege was proper.
SANCTIONS BY ARENT FOX
Submitted with the submission from the LLC was the affidavit of Hunter T. Carter, Esq., from Arent Fox in New York. Arent Fox represented the LLC until February, 2008. Mr. Carter states in his submission that neither Mr. Tepper, another Arent Fox partner nor he, were involved in the creation, operation, communications with, or defense of the Special Litigation Committee or its communications. Mr Carter contends that he and Mr. Tepper formed a reasonable belief that such a committee existed and its communication was privileged. Mr. Carter states that his belief was based upon several things. According to Mr. Carter, it made sense to him that in light of reason and his experience that the largest investors of the LLC have a joint interest in the progress of the litigation, its costs, and its prospects, and would therefore normally demand access to privileged communications and advice to monitor the case and their investment in the LLC. Mr. Carter contends that he and Mr. Tepper had little reason to doubt that the litigation committee existed and its work included the sharing of information and advice from counsel.
Mr. Carter also points out in his Affidavit that as a result of a division of labor, Arent Fox had virtually nothing to do with the review of the fifty-five e-mails. In fact, apparently Arent Fox's only involvement in the process was to contact the Discovery Referee to request time to complete a new review of the e-mail, which was subsequently, performed by Mr. Brown. Accordingly, Mr. Carter respectfully submits that sanctions are not warranted or needed.
THE ARGUMENT AGAINST SANCTIONS
FORMER COUNSEL CHRISTOPHER A. BYRNE
As discussed at length above, up to September 20, 2007, Mr. Byrne was lead counsel for the LLC. In his submission in opposition to the court levying sanctions on the LLC and/or its counsel, Mr. Byrne asserts that in retrospect his decision not to waive privilege to the e-mails and to fully assert it was not a good decision, but one made in good faith. Under the division of labor for the LLC counsel, Mr. Byrne was responsible for the review and analysis of the documents provided to the LLC from counsel for Jefferies. It was Mr. Byrne who decided to assert the privilege and it was he who decided not to waive it notwithstanding the opposition to the assertion of privilege by both DFC and KPMG.
According to Mr. Byrne, he witnessed the formation of the Litigation Committee in or about June 2003 when Mr. Teetsel and Mr. Bubrosky agreed to serve on the committee formed by Mr. Morrison to advise the LLC and Mr. Morrison on such matters as the DFC situation, potential litigation and any litigation that might ensue, and share insight into some aspects of potential litigation and future litigation. Mr. Byrne also stated that as counsel to LLC, he had [*5]occasion to meet with the members of the litigation committee by telephone or in person.
Did Byrne meet with Bubrosky and Teetsel, two heavy financial investors who wanted to know where their money was going? Apparently so. That does not make them a Litigation Committee and, in any event, no communications amongst counsel and these men are at issue.
With regard to the e-mails in question and their submission to the Discovery Referee, Mr. Byrne explains that he felt constrained, "given the need to preserve LLC's position, to assert the privileges and to protect the privilege to the fullest extent possible given the circumstance of the LLC and the procedure available through the Discovery Referee to resolve the issue." One must truly ask what does that mean? He asserts the privilege to assert the privilege. Mr. Byrne contends that his decision to assert the privilege was made on a good faith basis upon what he believed in terms of the existence of the Litigation Committee as of June, 2003 given the state of the law and facts and, therefore, sanctions are not warranted. Of course, if Mr. Byrne could have remembered actually reviewing the documents to which he asserted the privilege that would have been helpful. If he could have recalled the alleged conversation with Morrison in July of 2007 when Morrison allegedly gave him an explanation for the March 28, 2005 smoking gun e-mail, an e-mail that Jefferies' counsel thought was important to bring to his attention, that would also have been helpful. In sum and substance, Mr. Byrne's assertion of privilege to the e-mail submissions was a knee-jerk reaction to what the court calls "privilege paranoia." The fear that if you do not assert the attorney-client privilege or something akin to it, you would be charged to have waived it.
The court ordered a hearing on the subject of sanctions which was held over a two day period in late February, 2008. While the court still believes that the concept of a Litigation Committee was actually an afterthought and was not actually discussed in or about June, 2003 or anytime earlier than March 28, 2005, the court does not believe that attorneys Tepper and Carter had anything to do with the review, submission of the e-mails to the Discovery Referee or any formulate of strategy regarding the submission and maintenance of the position of privilege regarding the e-mails. It was clear to the court that a division of labor was in place amongst counsel for the LLC and Arent Fox lawyers had nothing to do with the position taken by the LLC regarding the e-mails. The court also finds that given Messrs. Tepper and Carter's level of involvement or lack thereof, Messrs. Tepper and Carter could have believed in good faith that a Litigation Committee actually existed from June, 2003. However, the court actually does not believe the nuances of a Litigation Committee privilege ever occurred to these lawyers. Attorney-client privilege? Perhaps. However, it is the court's view that the Litigation Committee privilege was an afterthought. Therefore, this Court finds that with respect to attorneys Tepper and Carter, sanctions are not warranted as their conduct in this matter was reasonable and not frivolous in anyway with regard to the e-mails.
With regard to Mr. Brown, the court finds that he had nothing to do with the review or submission of the e-mails to the Discovery Referee or any formulate of strategy regarding the submission and maintenance of the position of privilege regarding the e-mails. In fact, Mr. Brown and his firm were not retained by the LLC until September 20, 2007 (at least to the court's knowledge), obviously well after the submission of the e-mails to the Court-Appointed Discovery Referee. In fact, the court finds that Mr. Brown, after assuming lead counsel status, undertook to re-review the e-mails and pare them down, which he did. On September 27, 2007, Mr. Brown informed the Court-Appointed Discovery Referee that the LLC was asserting [*6]privilege to only a portion of six e-mails (out of fifty-five). Therefore, this court finds that sanctions against Mr. Brown are not warranted.
JOINT INTEREST PRIVILEGE
In Dupler v. Deering, 397 F. Supp. 1146 (D.SC. 1974), the court created a "community of interest" test. Mr. Brown as well as Mr. Bracken have invoked this test to protect the fifty-five e-mails or at least to provide a reasonable basis for the LLC to have claimed a privilege protection for those e-mails.
In Dupler (a patent infringement case) the issue was communications between a parent and subsidiary corporation and the entities did not use a common attorney. The court ruled that the communication between the French corporation (owner of the patent) and some of its subsidiaries were covered by attorney-client privilege because there was a sufficient "community of interest" among them. The court held there had to be an identical legal interest for the privilege to apply. "The key consideration is that the nature of the interest be identical, not similar, not solely commercial..." The court further stated "... if a corporation with a legal interest in an attorney-client communication relays it to another related corporation, the attorney-client privilege is not thereby waived. If the communications were relayed to an unrelated third-party corporation, the privilege would be waived." 397 F. Supp. at 1172. Bottom line interrelated corporate communications will not waive the attorney-client privilege.
Although the court does not necessarily agree that a joint-interest or common interest privilege could exist in this case, it should be clear now that none of the e-mails that Mr. Byrne claimed were privileged conveyed attorney-client communications. The communications neither involved an attorney nor anything he said to the members of the LLC. These e-mails were between Morrison, Bubrosky and Teetsel. None of the above are attorneys. Did Jefferies and Stonehill have a joint interest? Of course they did, to make money on their investment (an investment made after the "loss" had occurred to the LLC). None of the discussions as reflected in the e-mails involved an attorney. Nothing about them is related to the legal argument of "joint privilege" and the cases cited by the LLC's multiple counsel are absolutely irrelevant. It is all about business in the commercial world. Bank Brussels Lambert v. Credit Lyonnais (Suisse) S.A. v. Banque Paribas (Suisse) S.A., 160 F.R.D. 437, 446.
Thus, the court has found there was no attorney communication, directly or indirectly, to Morrison to be conveyed to Teetsel or Bubrosky, conveying legal advice nor any request for legal advice made to Morrison by Teetsel or Bubrosky to be conveyed to Byrne within these e-mails. In any event, the "community of interest" test or "common interest" test is an after thought of the attorneys to justify their actions. It did not exist until after the court's decision of October 11, 2007 and was never claimed on any privilege log submitted to the adverse parties nor to the court.
This court has never ruled that there is no Litigation Committee privilege - quite the opposite. However, three men in a room, especially when none of them is an attorney, without more does not serve to create a Litigation Committee.
Mr. Morrison did not truly seek the advice of Teetsel and/or Bubrosky. He placated them so he would not lose his job. The LLC's legal action created a sinecur for Morrison. He had everything to gain and nothing to lose by continuing the litigation. It is all about money, and in the opinion of the court, not any monies that might be owed to the LLC by DFC, but rather the fees that were earned and continued to be earned by Morrison, a defendant in this action and an employee of the LLC.[*7]Various affidavits were submitted to the court on behalf of the LLC and its various attorneys. The Court feels compelled to comment upon them.
Mr. Malone: Malone's contact with Teetsel and Bubrosky was from May 2005 to October 2006, however, the court is more concerned with the time prior to March 28, 2005. Mr. Malone's use of language, when referring to what Teetsel did, is far from enlightening, for example, "It is my understanding Mr. Teetsel communicated. . ." (Paragraph 5). His reference to meeting with Teetsel and Bubrosky is meaningless as to Litigation Committee communication privilege.
In Malone's affidavit, paragraph 8, he refers to direct attorney-client communication - not challenged - nor at issue. However, the court has never declared that Bubrosky or Teetsel, as major financial members of the LLC, clients of any of the LLC attorneys. In fact, it was made clear to the court early on in the litigation that Morrison was the one and only person who represented the LLC and its members. In the words of Mr. Byrne, "Morrison was the chief cook and bottle washer."
Malone's affidavit, paragraph 6, related to conversations with Bubrosky in the first half of 2006. What a memory. If they spoke about KPMG to Mr. Bubrosky, which I doubt they did, then there was a waiver of any privilege. In any event, it is not attorney-client communications that were at the heart of the Litigation Committee privilege. In fact, there were none.
Hunter Carter was another lawyer who represented the LLC from January 20, 2005 to July 19, 2005, and again as of September 23, 2005. The Court has previously ruled on Mr. Carter's role in the privilege log or lack thereof. He makes reference to a special Litigation Committee. He believed it existed and its communications among members were privileged.
a) His affidavit is based upon "reasonable belief."
b) In paragraph 7 he states it was logical to assume communication with members would be confidential. In paragraph 8 he states, "[w]e also understood that the testimony of Teetsel and Bubrosky established that there was a special Litigation Committee." [Emphasis supplied].
Mr. Carter's affidavit has little to no bearing on the issue at hand. From his testimony, (T-342), he had no connection to the privilege log. He never met Mr. Bubrosky, but worked with Teetsel on the settlement conference.
Any statement from these counsel that they would have presented the e-mail review differently if they believed the court was going to review it and not merely the Discovery Referee is a) insulting to the Referee, and b) provides an insight to their lawyering style in this hotly contested matter.
James Morrison also submitted an affidavit in response to the Court's order to show cause on sanctions. One would have hoped that an affidavit from a party who was the keystone to any alleged Litigation Committee would have been enlightening. The only words that can describe it are, "revisionist history" and the best single word "incredible."
James Morrison testified at the hearing. Initially, it should be clear that he played no role in reviewing any e-mails or in creating or reviewing the privilege log (T-135). In fact, he does not know who reviewed the e-mails for privilege.
Morrison testified Mr. Bryne did not learn about the March 28, 2005 e-mail until the summer of 2007. Perhaps what he meant was that Mr. Byrne did not learn what Mr. Morrison meant by the March 28, 2005 e-mail until July 2007. Yet, Mr. Byrne supposedly had reviewed them in January 2007, or at least no later than the end of February 2007. He, Morrison, was [*8]alerted to Byrne's "lack of knowledge" during a conference held at the offices of Arent Fox in Washington, D.C. in July 2007. Counsel for Jefferies raised it because it was on a privilege log and they had some concern about it. (T-134-135). Morrison says he was called into an office used by Byrne in the offices of Arent Fox and explained to Byrne what the e-mail meant. Mr. Byrne testified the first he remembered seeing the March 28, 2005 e-mail was shortly after October 12, 2007 (after the court's decision ordering a sanctions hearing). He also said that since it was part of a submission to the Referee, he must have seen it earlier, but had no independent memory of seeing it. The pertinent parts of the e-mail that drew the court's attention in September 2007 and apparently the attention of counsel to Jefferies in July 2007 reads as follows (the writer is Mr. Morrison): I, the board would like to establish a litigation committee,' or something similarly named. The purpose would be to work closely with counsel and me to monitor the details of the litigation as it goes forward. Is this something you all can and will do? I am looking into the implications of this re " - ... attorney/client privilege. Now we should have an answer by tomorrow. [Mr. Byrne says he was never contacted by Morrison on this issue.]
Mr. Morrison testified at the hearing that the e-mail did not really mean what it said. Rather, it was: In response to an issue raised by Mr. Bubrosky a few days prior to this March 28th date, Mr. Bubrosky had indicated that because KPMG served as auditors for Jefferies, he was having - - his ability to participate in the discussions re the litigation committee that involved KPMG were going to be limited - - in fact, restricted - - and that was going to cause them an issue, again, from him being able to participate in the KPMG portion of the discussions for the litigation committee and I wrote this. In hindsight reading it, I wish it was more clear in terms of what I was exactly saying, but what I was precisely wanted to get at is an offer that I made to them, to Jefferies, to consider a replacement for Jefferies on the litigation committee. And, in my view, that didn't necessarily mean finding another member of the LLC to take the place of Jefferies. What I was asking and wanting to say here is that, Jefferies, would you like to appoint an outside person to be your representative regarding KPMG matters for the litigation committee?'
Mr. Morrison's testimony on this issue is truly amazing and in the view of the court, once again, incredible.
Mr. Byrne submitted an affidavit in support of his position that sanctions are not warranted. Mr. Byrne continually uses phraseology such as "my understanding was" referring to the role of Bubrosky on the Litigation Committee (paragraph 21).
In paragraph 22 of the Byrne affidavit, Mr. Teetsel was a member of the Litigation [*9]Committee from its inception in or about June 2003 through August 2007.
As to Mr. Bubrosky, he was a member from June 2003 through May 2007 except in 2004-2005. Byrne stated Bubrosky was circumspect about his role because of KPMG conflict (paragraph 23).
In paragraph 24 - Bubrosky would not and could not participate in discussions or decisions regarding KPMG.However, multiple e-mails were sent to him by Morrison discussing the whole case (including KPMG) which could be considered to have waived any alleged privilege and an experience lawyer would have known it and Mr. Byrne is an experienced lawyer.
Mr. Bodansky, (Nixon Peabody), another lawyer who had represented the LLC, also submitted an affidavit dated October 17, 2007. He speaks about his initial engagement until December 2004. He also recalls a conference call with miscellaneous players included Bubrosky and Teetsel. Simply put, this is irrelevant. None of the e-mails involved attorney-client communications.
Giving Bubrosky and Teetsel the persona of company directors or officers (which they are not) but rather representing influential members of the LLC (which they were), these communications would be at best attorney-client (and that's a stretch) communications - not the communication from a non-lawyer (Morrison) to alleged Litigation Committee members. In fact, a court could rule that any attorney-client privilege that did exist was waived by including these men (these non-officers, non-board members and for our purposes non-entities) in the discussions.
If their affidavits were presented to prove to the court that there was a Litigation Committee in June of 2003, they fail. Once again, it was the money these men worried about - their investment. Two individuals, representatives of two corporations that are members of an LLC who converse with the LLC's CEO (Morrison), its only officer and director, about their investment does not make a Litigation Committee, much less a Litigation Committee with privilege protection for every hiccup they uttered.
Does a lawyer meeting with major shareholders of an LLC to update them on litigation matters equate to a Litigation Committee cloaked with privilege? No, not necessarily. However, that is not the issue now nor was it the issue regarding the fifty-five e-mails to which the LLC claimed privilege protection during the communications between Morrison, Bubrosky and Teetsel, all non-lawyers.
Mr. Morrison, besides testifying at the hearing ordered by the court, was also deposed during the summer of 2007 prior to the court's decision on the e-mails.
It is clear that during e-mail discussions amongst Morrison, Bubrosky and Teetsel, no legal advice was given or asked for. There were never minutes of any meeting whether the meeting was in person, on the phone, or electronically. The court further finds that any discussions amongst these three men about the cost of litigation does not equate to legal advice and is not deserving of the important protection provided by the attorney/client privilege, a Litigation Committee privilege, nor the "joint interest" privilege. Mr. Byrne has argued that whenever Mr. Morrison used the word "my" in an e-mail, it was meant to include the lawyer (as though the lawyer was speaking, my = we (Morrison and Byrne). This court rejects this unusual translation of the English language.
It is clear from Mr. Teetsel's testimony that: (1) no other LLC member (individual or corporate investor) knew about it (Litigation Committee), (2) that there were no minutes, (3) that [*10]Bubrosky was not to be involved with KPMG issues, (4) there was no corporate resolution creating it, (5) the LLC has no outside Board of Directors, (6) its only director is Morrison and it has no other officers beside Morrison, (7) there were no formal agendas distributed to himself and Bubrosky, and (8) their "meetings" (a very generous term) were, at best, ad hoc.
BUBROSKY PARTICIPATION IN THE CREATION
OF AND SERVICE ON THE LITIGATION COMMITTEE
Mr. Bubrosky was deposed and also testified at the hearing. What can be concluded from Mr. Bubrosky's testimony? He denies any legal advice was being provided. Rather, Byrne was selling his services. He compared a Litigation Committee, which he says was referred to as a litigation group, to an investment committee, and that is exactly what these men were, investors interested in their investment. If there was a Litigation Committee, his service on it stopped before July 2004.
Because of such a statement Mr. Kornfeld (counsel to KPMG) demanded documents from the privilege log after July 2004 be produced (because of Bubrosky's denial of participation after that time).
There is no issue that Mr. Bubrosky had an abiding interest in the litigation. He was pushing hard to get his money out. As he at one point said in reference to the litigation and his obvious view of Mr. Morrison, "It's all Jim. Jim, Jim, Jim." In fact, he had discussed replacing Morrison, but no one wanted to do it. (It is not clear with whom this discussion took place.)
As to a settlement conference held in April 2006 by the court, Bubrosky said he was never asked to participate in a settlement conference with the court. This either proves that since he was not on the committee, they would not have contacted him or LLC's counsel was not truthful to the court as to the participation of Bubrosky in April 2006. The court strongly suggested to Mr. Byrne to have major members of the LLC participate in a settlement conference in April 2006 because Morrison was not a member, was the only officer, the only director, and stood to gain financially by the continuation of the litigation. In fact, the LLC ignored the court and said it was too short a time to produce an LLC member to attend the settlement conference (at one point saying the LLC members would have to vote on such a representative). Apparently, Mr. Byrne had forgotten that Teetsel and Bubrosky existed, unless, of course, there was no Litigation Committee.
A summation of Mr. Byrne's testimony regarding the March 28, 2005 e-mail:
1. He was not copied on it. (Correct.)
2. In a deposition of October 27, 2007, he says he first saw it on or about October 12, 2007.
3. In his testimony at the hearing, he recalled seeing the March 28, 2005 e-mail on July 9, 2007 and was not aware of its contents until then. He denied seeing the e-mails in February or March 2007 when Jefferies asked the LLC to review them. He does recall being asked to look at them prior to July 2007 (does not recall when).
4. He says he took it (March 28, 2005 e-mail) to Morrison to explain it. He then concluded there was no problem. (T-168). He then requested the e-mail from Jefferies' counsel (e-mails he had allegedly reviewed in February of 2007).
5. Byrne's attorney was concerned with attorney-client privilege and did not want Byrne answering questions about the March 28, 2005 e-mail during the October 27, 2007 deposition.
6. Mr. Byrne then says he must have seen it because it was part of the submission to Mr. [*11]Cardello. During his deposition, he recalled that he had seen them in July 2007. (Deposition of October 27, 2007, page 307).
"But I want to make sure I don't cross the line of any privilege." But still says he did not recall seeing it until October 12, 2007 or later (until he changed his mind at the hearing).
An amazing Q and A takes place during a deposition of Mr. Byrne (October 29, 2007) by DFC's counsel prior to our hearing, but after the court ordered a sanctions hearing on issue of frivolous conduct and had issued its decision of October 11, 2007.
Q. "Were you involved in reviewing documents identified on this privilege log in an effort to protect the LLC's privilege?"
This clearly call for a yes or no answer - yet what follows are six pages of convoluted dialogue by Tom Brown, new counsel to the LLC, serving also as Stonehill's counsel, and Mr. Fleming, Mr. Byrne's personal counsel.
First, Mr. Brown claims privilege as to whether Byrne could answer that question - then he claims relevancy - an irrelevant argument.
Ms. Vasey's (for DFC) questioning was aimed at trying to refresh his memory since if he worked on the Jefferies privilege log then one would think he would remember an e-mail that he claims is privileged. He eventually answered on page 314 of the deposition "yes", he was involved in the review of the privilege log.
This dialogue reflects what the court calls "privilege paranoia." If we compare Mr. Brown to a painter, he is Jackson Pollack flinging a bucket of "privilege" all over his canvas as compared to Seurat and the style known as pointillism. Pointillism is what the court would expect of the artistic lawyer.
If this (Exhibit 77 of EBT, the privilege log dated March 2, 2007) truly could not refresh Byrne's recollection, it supports the frivolous manner in which counsel dealt with the e-mails privilege area, and on page 317 of the deposition he stated, "It independently doesn't refresh my recollection." (Deposition of October 29, 2007).
The continued ludicrousness of attorney-client privilege objection as used here is exemplified by the following exchange.
Deposition of Mr. Byrne, October 29, 2007, page 318, lines 9 - 15:
QMr. Byrne, do you know whether Mr. Morrison ever received any
complaints from LLC members regarding the expenditure of LLC funds that
MR. BROWN: Objection. I direct the witness not to answer on the
grounds of attorney/client communication.
MR. VASEY: Whether Mr. Morrison received complaints from an
LLC member - - I'm not seeking the communications that Mr. Morrison had
with Mr. Byrne regarding these complaints. I just want to know whether
Mr. Morrison ever received complaints from LLC members. And that
can be answered by a yes or a no.
How a complaint received by Mr. Morrison, a non-lawyer, from an LLC member, and Byrne's knowledge of this complaint, could be privileged is unbelievable especially since the court received a complaint from an LLC member and forwarded it to all counsel through the [*12]Court-Appointed Referee. Said complaint was cc'd to Morrison. The fact that Byrne could only know if Morrison received it is by communicating with Morrison does not mean the knowledge of the communication is privileged.
Not every communication between a client and an attorney is privileged. The privilege is limited to communications not disclosure of the underlying facts by those who communicated with the attorney. Upjohn Co. v United States, 449 US 383, 395-396 (1981). In order for the privilege to apply, the communication from attorney to client must be made "for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship." Rossi v Blue Cross & Blue Shield, 73 NY2d 588, 593 (1989). The communication itself must be primarily or predominantly of a legal character, Id. at 594; Spectrum Systems Int'l. Corp. v. Chemical Bank, 78 NY2d 371, 377-78 (1991), and the mere fact that Morrison received such a complaint from a non-party (question to be answered yes or no) and told his attorney, does not cloak the communication under the attorney-client privilege. The court only comments on this to note the atmosphere in which this case proceeded for the last four years. During the over four years this court had handled this matter, it has been the recipient of a high level of legal argument on a panalopy of issues.
Mr. Brown tells us how something that is not work product becomes work product (during a deposition). Mr. Byrne tells us when Morrison uses the word "my", (i.e. "my opinion"), it really means "the attorney" said or the attorney told me to say, and by inference when Morrison spoke in the first person "I" it was Byrne talking.
Mr. Brown tells us that non-lawyers (Morrison, Teetsel and Bubrosky) cannot make decisions on or discuss funding of litigation without the advice of counsel or implicating the advice of counsel. Thus, according to Mr. Brown, every time these three men discussed funding the litigation they were "implicating the advice of counsel" and the discussion was privileged. The court rejects this theory. It is legal argument of this nature that, rather than strengthening the attorney-client privilege, a privilege that is historically at the heart of the attorney-client relationship, it weakens it.
This court previously ruled, and restates now, that the actions of the LLC (through Mr. Morrison and Christopher Byrne as lead counsel) resulted in what the Rules of Chief Administrator (Part 130) (22 NYCRR 130-1.1(a)(c)(1-3) define as frivolous conduct:
Conduct is frivolous if:
1. It is completely without merit in law or fact and cannot be supported
by a reasonable argument for an extension, modification or reversal of
2. It is undertaken primarily to delay or prolong the resolution of the
litigation, or to harass or maliciously injure another; or
3. It asserts material factual statements that are false.
The court further finds there was neither a reasonable nor good faith basis to assert the privilege.
The LLC intentionally presented to the court for review fifty-five e-mails contending privilege protection of their contents (attorney-client, Litigation Committee), either without [*13]reading them, or having read them rejecting the plain English meaning of their contents. A contention by Mr. Byrne that he believed a Litigation Committee existed in 2003 does not support this wholesale claim of Litigation Committee privilege as to everything said by these three men in a room (virtually speaking) is a privileged communication. There is no law to support it.
Based upon this court's prior rulings on the existence of a Litigation Committee and the "plain English" reading of the e-mail from March 28, 2005, a claim of Litigation Committee privilege is without merit in law or fact.
Finally, in light of the procedural history of this case and the rulings of the court, such a claim as addressed to the fifty-five e-mails could only have been undertaken to delay or prolong the litigation and/or to harass or annoy another (KPMG and DFC).
The review of the e-mails by Mr. Byrne was either negligently done, not done at all, or done
in so grossly negligent a fashion that it violates the tenure of 130-1.1(c) and that the offering of
these fifty-five e-mails under a claim of privilege is frivolous conduct.
The court further finds that though Mr. Byrne may have had a reasonable basis for his conclusion that there was once something akin to a Litigation Committee (an area of law with which he admits he had no prior experience) he could not have offered the e-mails to the court claiming privilege protection if he had actually read the e-mails.
It is clear that Mr. Byrne has told the court of his lack of memory of reviewing the privilege log, of reading the e-mails, or discussing them with Morrison. However, his memory has dramatically changed from deposition to affirmation to deposition to hearing (2007-2008).
The court firmly believes that the conduct of Mr. Byrne as well as the LLC is frivolous conduct with respect to the e-mails and whether said conduct was negligent conduct, grossly negligent conduct, overwork of counsel, or merely a laissez faire attitude toward the whole process of the privilege log is irrelevant.
The LLC and Christopher Byrne are each sanctioned $5,000.00. Said sums are to be payable to The Lawyers' Fund for Client Protection of the State of New York, 119 Washington Avenue, Albany, New York 12210, within thirty (30) days of the date of this decision.
It is SO ORDERED.
Dated: August 12, 2008
Footnote 1: In and about July, 2004, the LLC commenced an action against the accounting firm of KPMG ("KPMG"), the auditor of DFC, for approximately $110 million plus interest for, inter alia, negligent misrepresentation and professional negligence with regard to KPMG's audit of DFC and certification of various SEC documents related to the 2001 Exchange (the "KPMG Matter"). On October 22, 2007, the LLC and KPMG reached a settlement and the KPMG Matter has been discontinued.
Footnote 2:Bankruptcy Counsel for DFC has made a motion in the adversary proceeding in the bankruptcy case to extend the stay to the Individual Defendants which is scheduled for a hearing on August 18, 2008.
Footnote 3: The issue of the LLC Litigation Committee was the subject of a Short Form Order dated January 26, 2007 by this Court which expressly stated at that time in that decision that the Court makes no determination regarding the validity of the existence of the "Litigation Committee." This decision as well does not render a determination on the validity of the "Litigation Committee."
Footnote 4: The two largest members of the LLC are Stonehill Capital ("Stonehill") and Jeffries represented respectively by Tom Brown, Esq. of Orans, Elsen , Lupert and Brown, LLP and Brian Herman, Esq. of Morgan Lewis & Bockius, LLP.