Opinion
96 Civ. 7874 (RWS).
April 26, 2002.
ERIC SEILER, ESQ., ROBERT J. LACK, ESQ., KATHERINE L. PRINGLE, ESQ., LEE D. SOSSEN, ESQ., FRIEDMAN KAPLAN SEILER, New York, NY., Of Counsel BROWN RUDNICK BERLACK ISRAELS New York, NY., Attorneys for Plaintiffs.
ROGER J. HAWKE, ESQ., A. ROBERT PIETZRAK, ESQ., ANDREW W. STERN, ESQ., SIDLEY AUSTIN BROWN WOOD, New York, NY., Of Counsel, Attorneys for Defendant.
O P I N I O N
Plaintiffs Granite Partners L.P., Granite Corporation, and Quartz Hedge Fund (collectively the "Funds") have moved for an order in limine to preclude the introduction of evidence that employees of defendant Merrill Lynch, Pierce, Fenner Smith Inc. ("Merrill") communicated with in-house counsel and relied upon his advice in determining how to conduct the liquidation of the Funds' CMOs.
This motion is one of a number of in limine motions presented to the Court at a hearing on April 24, 2002. Because of the time sensitive nature of the relief ordered in this motion, it is treated separately from the other motions, which will be dealt with in a later order.
For the following reasons, that motion is denied. However, plaintiffs may conduct depositions as ordered below.
FACTS
The facts underlying this dispute are stated in greater detail in Primavera Familienstifung v. Askin, 130 F. Supp.2d 450 (S.D.N.Y. 2001), familiarity with which is presumed.
In-house counsel Michael McGovern ("McGovern") met with the Merrill employees in charge of the liquidation, Gary Rupert ("Rupert") and Jeffrey Kronthal ("Kronthal"), to discuss the liquidation of the Funds' securities, following Merrill's margin call on March 30, 1994. At the meeting, they
met to determine the best method by which to liquidate the Funds' repo positions. In addition to seeking and receiving the advice of in-house counsel, the terms of the governing agreements — the PSA Agreement and the repo trade confirmations — were reviewed. Based upon these conversations and the governing agreements, Rupert, McGovern, and [Kronthal] decided to liquidate the repo positions by selling the securities in an auction in which the securities would be sold to the highest bidder.
Kronthal Affidavit (May 2, 2000).
At the start of this litigation, Merrill asserted the attorney-client privilege in association with this meeting. Merrill's counsel refused to allow the Funds to discover what happened when Merrill's executive and lawyers met, including whether they considered relevant market information, whether they considered the number of participants that should be included in the auction, how they determined whom to include, or whether they considered sending the bid lists to retail customers. In short, they were not permitted to discover what advice McGovern gave, if any, and whether Merrill followed that advice.
On December 9, 1999, Merrill at least partially waived that privilege in a stipulation that was so ordered by the Court on December 13, 1999. That stipulation states:
(1) Merrill Lynch's waiver of the attorney-client privilege shall be strictly limited to Mr. McGovern's knowledge of the Margin Calls and the subsequent liquidation of certain securities that had been held by Merrill Lynch in connection with repurchase transactions between Merrill Lynch and the Funds, as described in matter number 1 of the Deposition Notice.
(2) Merrill Lynch shall not have waived the attorney- client privilege, nor any other applicable privilege, with respect to any knowledge, communications, or thought processes of Mr. McGovern except as specifically set forth in paragraph 1, above, nor shall Merrill Lynch have waived in any respect the attorney-client privilege, nor any other applicable privilege.
Stipulation and Order, December 13, 1999.
The stipulation defines its parameters with reference to matter number one of the deposition notice for McGovern, which states:
1. The margin calls made by Merrill on the Funds in March of 1994, including the following subjects:
(a) the decision to issue margin calls, including the identity of the individuals who participated in the decision to make margin calls, the policies, facts or documents on which that decision was based, and the reasoning behind that decision;
(b) determination of the amount of the margin calls, including the identity of the individuals who participated in that determination, the policies, facts or documents on which that determination was made, and the calculation of the margin call amounts[.]
The Funds' Deposition Notice, November 4, 1999.
On December 22, 1999, plaintiffs' counsel deposed McGovern for approximately three hours and asked him numerous questions about legal advice concerning the margin calls made on the Funds.
DISCUSSION
The Funds seek to preclude Merrill's affirmative defense that it relied on advice of counsel, stating that Merrill has "asserted attorney-client privilege to block all discovery into the interactions with its attorneys."
"It is well-established that when a party asserts a defense, such as the advice of counsel defense, that makes an attorney's advice an issue in the litigation, that party waives the attorney client privilege." Inmuno Vital v. Telemundo Group, 203 F.R.D. 561, 564 (S.D.Fla. 2001) (citing Rhone-Poulenc Rorer Inc. v. Home Indemnity Co., 32 F.3d 851, 863 (3d Cir. 1994). By asserting the defense, "that advice becomes a factual issue," and "factual issues must be produced on request." Vicinanzo v. Brunschwig Fils, 739 F. Supp. 891, 894 (S.D.N.Y. 1990) (citing Hickman v. Taylor, 495 U.S. 507 (1947) for the latter proposition). Further, several courts have held that failure to make full disclosure during discovery constitutes a waiver of the advice-of-counsel defense. Vincinanzo, 739 F. Supp. at 894; Trouble v. Wet Seal, 179 F. Supp.2d 291, 304 (S.D.N.Y. 2001) (precluding advice of counsel defense because defendant waived defense "by objecting, based on the attorney-client privilege, to [plaintiff's] discovery requests").
The Ninth Circuit recently addressed the issue in Columbia Pictures Indus. v. Krypton Broadcasting of Birmingham, 259 F.3d 1186 (9th Cir. 2001). There, the district court had earlier ruled that the defendant could not rely on the advice of counsel defense because of his assertion of the attorney-client privilege during deposition. Id. at 1195. On remand from the Supreme Court, the plaintiff filed a motion in limine to reaffirm that ruling. Id. In opposition, the defendant offered "to make himself available for deposition on the issue." Id. The district court rejected this offer, stating that it was too late. Id. The Ninth Circuit affirmed this decision, holding that the district court was within its discretion in precluding the defendant from relying on advice of counsel. Id. The defendant "sought to argue that he continued his infringing activities based on the advice of his attorney, while at the same time refusing to answer questions regarding relevant communications with counsel until the `eleventh hour.'" Id. (citing William A. Schwarzer, et al., Federal Civil Procedure Before Trial, ¶ 11:37, at 11-29 (2000) ("[T]he court may fashion remedies to prevent surprise and unfairness to the party seeking discovery . . . [such as] where the party claiming privilege during discovery wants to testify at the time of trial, the court may ban that party from testifying to matters claimed to be privileged.").
In December 1999, Merrill waived at least a portion of its attorney-client privilege. There is no question that testimony related to the issue detailed in matter one of the Deposition Notice, i.e. legal advice related to margin calls, is admissible. By June 6, 2000, Merrill had entirely waived any attorney-client privilege with regard to the advice on margin calls and liquidation given at the meeting in question when it submitted its motion for summary judgment and asserted an affirmative advice of counsel defense. Yet at no time since December 1999 have the Funds indicated any desire to reexamine anyone present at the meeting with regard to the issue of advice on liquidation. Presumably, the Funds were not aware that the affirmative defense waived Merrill's attorney-client privilege. And in any case, Merrill had made strenuous objections to any such questioning prior to December 1999.
There is some dispute between the parties. Merrill construes the waiver as a waiver of the privilege with regard to the margin calls and the liquidation. The Funds, however, state that the stipulation, due to the reference of the deposition notice, only concerns the privilege with regard to margin calls. In any case, as discussed below, Merrill waived both portions when it filed its motion for summary judgment and stated as an affirmative defense that it intended to rely on advice of counsel in that regard.
Therefore, it would be unfair to allow Merrill to introduce evidence regarding advice of counsel with regard to the liquidation as things stand now. Given Merrill's certain waiver of the privilege almost two years ago, and the fact that plaintiffs do not allege that Merrill has continued to object to discovery on the privileged material in that two-year span, it would also be unfair to prevent Merrill from introducing evidence regarding advice of counsel.
This dilemma is fortunately not intractable. By permitting limited discovery in the two weeks before trial, the Funds may properly prepare for the advice-of-counsel defense and Merrill will not be punished for what amounts to, at most, a sin of omission in not telling the Funds that its privilege had been waived.
The Funds rely on Columbia Pictures for the proposition that it is too late to order discovery. That case is not as on point as the Funds suggest. First, the Ninth Circuit merely held that the district court's actions were well within its discretion — a different matter than holding that discovery may never be ordered in a case such as is presented here. Further, the defendant's offer to be deposed came after the case had already gone all the way to the Supreme Court and been remanded. That is not even an "eleventh hour" request — it is more like a twelfth or thirteenth hour request.
The Funds do not face as great prejudice as the plaintiffs in Columbia Pictures. This trial has not even begun yet. Further, it is set to begin in about two weeks, on May 9, 2002. Fourteen days should provide ample time to depose McGovern, Rupert and Kronthal on the limited issue of advice given with regard to the liquidations and whether it was taken. In oral argument, the Funds claimed that they will be prejudiced because they lacked this information at the start of discovery, and thus did not have the opportunity to inquire of other parties whether the advice they presumably will discover was reasonable. However, the Funds should have dealt with this issue in December 1999, or June 2000, rather than wait to the eve of trial.
Prior to May 9, 2002, the Funds may depose Kronthal, McGovern, and Rupert on the limited issue of the advice of counsel with regard to the liquidations and whether Merrill heeded that advice.
It is so ordered.