Opinion
Case No. 9:17-bk-1712-FMD Adv. Pro. No. 9:18-ap-531-FMD
11-01-2019
In re: ATIF, Inc., Debtor. Daniel J. Stermer, as Creditor Trustee, Plaintiff, v. Old Republic National Title Insurance Company, Old Republic National Title Holding Company, and Attorneys' Title Fund Services, LLC, Defendants.
Chapter 11 ORDER DENYING IN PART AND GRANTING IN PART DEFENDANTS' MOTION FOR RECONSIDERATION
THIS PROCEEDING came before the Court without a hearing to consider Defendants Old Republic National Title Holding Company's and Old Republic National Title Insurance Company's Motion for Reconsideration (the "Motion"). Plaintiff, Daniel J. Stermer, as Creditor Trustee, filed a Memorandum in Opposition to the Motion.
Doc. No. 128.
Doc. No. 129.
Defendants Old Republic National Title Holding Company ("OR Holding") and Old Republic National Title Insurance Company ("OR Title") (together, the "OR Defendants") ask the Court to reconsider the Order on Motion to Compel Filed by Plaintiff, Creditor Trustee (the "Order"). In the Order, the Court directed the OR Defendants to produce to Plaintiff "any and all documents provided by Carlton Fields and listed on the privilege logs, which they have withheld as privileged." The Motion is denied in part and granted in part as set forth herein.
Doc. No. 117.
A. Background
In this adversary proceeding, Plaintiff alleges that OR Title and OR Holding entered into a Master Agreement with Debtor, pursuant to which Debtor transferred cash and investments, intellectual property, title claims, real estate, and other assets to OR Title. Plaintiff's Second Amended Complaint includes two counts to recover actually fraudulent transfers from OR Title, and six counts to recover constructively fraudulent transfers from OR Title.
Doc. No. 51.
On February 15, 2019, Plaintiff served a Subpoena to Produce Documents on Carlton Fields Jorden Burt, P.A. ("Carlton Fields"). Carlton Fields objected to the Subpoena, and the OR Defendants joined in the Objection to assert the attorney-client privilege for communications with Carlton Fields. In response to the OR Defendants' joinder, Plaintiff filed a Motion to Compel Production of Documents from Carlton Fields, asserting, inter alia, that the crime-fraud exception to the attorney-client privilege applies to the requested documents.
Doc. No. 33, Exhibit 1.
Doc. Nos. 33, 39.
Doc. No. 43.
On October 7, 2019, after extensive briefing by the parties and several hearings, the Court announced its oral ruling on Plaintiff's Motion to Compel. Generally, the Court relied on the two-part test used by the Eleventh Circuit Court of Appeals in United States v. Cleckler to evaluate whether the crime-fraud exception applies in a particular case:
Doc. Nos. 116, 119.
First, there must be a prima facie showing that the client was engaged in criminal or fraudulent conduct when he sought the advice of counsel, that he was planning such conduct when he sought the advice of counsel, or that he committed a crime or
fraud subsequent to receiving the benefit of counsel's advice. Second, there must be a showing that the attorney's assistance was obtained in furtherance of the criminal or fraudulent activity or was closely related to it.
United States v. Cleckler, 265 F. App'x 850, 853 (11th Cir. 2008).
In its evaluation, the Court considered Plaintiff's evidence regarding four "badges of fraud," and determined that Plaintiff had shown a prima facie case of the OR Defendants' fraudulent conduct in connection with the fraudulent transfers. The Court also considered Plaintiff's evidence regarding Carlton Field's representation of the OR Defendants in the transactions, and determined that Plaintiff had made a showing that Carlton Field's assistance was in furtherance of the fraudulent transfers or closely related to them. Accordingly, the Court found that Plaintiff satisfied the two-part test for the application of the crime-fraud exception to the attorney-client privilege, and directed the OR Defendants to produce all documents provided by Carlton Fields that were listed on the privilege logs and withheld as privileged.
Doc. No. 117.
In their Motion for Reconsideration of the Order, the OR Defendants primarily contend that "the Court erred by not considering the OR Defendants' reasonable explanation and rebuttal evidence," and that "the Court erred by not performing an in camera review."
B. The Court properly considered the evidence under the standard established by the Eleventh Circuit.
First, the OR Defendants assert that the crime-fraud exception analysis involves a shifting burden, and that the Court did not consider evidence that they presented to rebut Plaintiff's prima facie showing of fraud. According to the OR Defendants, once the party seeking to establish the crime-fraud exception has made a prima facie showing that the client was engaged in fraudulent conduct, the burden shifts to the party invoking the attorney-client privilege to rebut the prima facie showing by providing a reasonable explanation of the conduct. Here, the OR Defendants contend that they provided a reasonable explanation for the transfers, and that they also provided evidence to rebut the "badges of fraud" found by the Court.
To support their position that the burden shifts after presentation of a prima facie case, the OR Defendants cite Barba v. Shire US, Inc., No. 13-21158-CIV, 2015 WL 7015324 (S.D. Fla. Nov. 12, 2015); JTR Enterprises, LLC v. An Unknown Quantity of Columbian Emeralds, Amethysts and Quartz Crystals, 297 F.R.D. 522 (S.D. Fla. 2013); and In re Holdsworth, 495 B.R. 544 (Bankr. M.D. Fla. 2013). The statement regarding shifting burdens in each of these cases stems from the decision of the Third Circuit Court of Appeals in Haines v. Liggett Group Inc., 975 F.2d 81 (3d Cir. 1992), and not from a decision of the Eleventh Circuit Court of Appeals.
But in United States v. Cleckler, the Eleventh Circuit stated that it employs a two-part test to examine the applicability of the crime-fraud exception - a prima facie showing of the client's fraud and the attorney's assistance in the fraud. Cleckler does not hold that the burden shifts to the party asserting the privilege once the prima facie showing is made. And more recently, in Drummond Company, Inc. v. Conrad & Scherer, LLP, the Eleventh Circuit again held that the crime-fraud exception applies when the two-part test is satisfied, without discussing any additional steps in the analysis after the initial showing is made. In fact, both Cleckler and Drummond Company cite the Eleventh Circuit's opinion in In re Grand Jury Investigation (Schroeder) for its statement of the two-part test, and Schroeder explains that the rationale underlying the prima facie standard means that the proceedings should not be turned into mini-trials for resolving conflicting evidence.
United States v. Cleckler, 265 F. App'x at 853.
Drummond Company, Inc. v. Conrad & Scherer, LLP, 885 F.3d 1324, 1335 (11th Cir. 2018).
In re Grand Jury Investigation (Schroeder), 842 F.2d 1223, 1226 (11th Cir. 1987).
Further, in reaching its decision on the crime-fraud exception, the Court did consider "everything that's in the record on this issue." For example, in the oral ruling on Plaintiff's Motion to Compel, the Court recited all of the submissions by the parties, including the OR Defendants' Supplemental Response to Plaintiff's Statement of Facts and Motion to Compel, and the OR Defendants' Limited Supplemental Response to Plaintiff's Motion to Compel. The Court also heard extensive argument by all parties, including the OR Defendants, in at least five hearings in this proceeding on March 25, 2019, May 8, 2019, June 10, 2019, July 22, 2019, and September 16, 2019.
Doc. No. 119, Transcript of October 7, 2019 hearing, p. 9.
Doc. Nos. 98 and 104.
Docs. 47, 69, 79, 90, and 105.
For these reasons, the Court denies the OR Defendants' Motion to the extent that it asserts that "the Court erred by not considering the OR Defendants' reasonable explanation and rebuttal evidence." The Court properly considered the evidence presented by all parties under the standard established by the Eleventh Circuit Court of Appeals in Cleckler and Drummond Company.
C. The Court will perform an in camera review of the documents.
The OR Defendants also assert in their Motion that the Court erred by not performing "an in camera review to determine which, if any, of the Privileged Materials fall within the crime-fraud exception." Plaintiff contends that the OR Defendants waived their right to request an in camera review.
Doc. No. 128, p. 12.
Waiver is "an intentional relinquishment or abandonment of a known right or privilege." Here, the record reflects that the suggestion for an in camera inspection was only mentioned twice during the course of the litigation over the crime-fraud exception, and those brief references were by the Court and not by the parties. Although the OR Defendants did not react positively to the Court's suggestion, the Court finds that the OR Defendants did not intentionally relinquish their right to seek an in camera review of the documents listed on the privilege log.
In re RDM Sports Group, Inc., 260 B.R. 915, 924 (Bankr. N.D. Ga. 2001)(quoting Johnson v. Zerbst, 304 U.S. 458, 464 (1938)).
Doc. No. 79, Transcript of June 19, 2019 hearing, pp. 26, 29; and Doc. No. 90, Transcript of July 22, 2019 hearing, pp. 48-49, 55.
In addition, the United States Supreme Court has established the standard for determining whether an in camera inspection is appropriate in evaluating the application of the crime-fraud exception. The Court stated:
Before engaging in in camera review to determine the applicability of the crime-fraud exception, "the judge should require a showing of a factual basis adequate to support a good faith belief by a reasonable person," . . . that in camera review of the materials may reveal evidence to establish the claim that the crime-fraud exception applies.
United States v. Zolin, 491 U.S. 554, 572, 109 S. Ct. 2619, 105 L. Ed. 2d 469 (1989)(citation omitted).
Citing Zolin, the bankruptcy court in In re Settlers' Housing Service, Inc., held that "[b]ecause judicial review entails less of an intrusion into the attorney-client relationship, a 'lesser evidentiary showing is needed to trigger in camera review than is required ultimately to overcome the privilege.'"
In re Settlers' Housing Service, Inc., 558 B.R. 285, 292 (Bankr. N.D. Ill. 2016)(quoting United States v. Zolin, 491 U.S. at 572).
Here, the OR Defendants request an in camera inspection in an effort to show that the crime-fraud exception does not apply. The Court previously determined that (1) Plaintiff has shown a prima facie case of the OR Defendants' fraudulent conduct in connection with the allegedly fraudulent transfers, and that (2) Plaintiff also made a showing that Carlton Field's assistance was in furtherance of the fraudulent transfers or was closely related to them.
Doc. No. 119, pp. 13-14. --------
Under these circumstances, where the party asserting the attorney-client privilege is seeking the Court's review of the documents, and where a prima facie case for the application of the crime-fraud exception has already been determined, the Court finds that the Zolin standard for in camera review is satisfied.
Accordingly, it is
ORDERED:
1. The Motion for Reconsideration is denied to the extent that the OR Defendants assert that the Court erred by not considering their rebuttal evidence.
2. The Motion for Reconsideration is granted to the extent that the OR Defendants ask the Court for an in camera inspection of the documents provided by Carlton Fields and listed on the privilege logs, which the OR Defendants have withheld as privileged. The OR Defendants/Carlton Fields are directed to submit the documents to the Court on or before November 8, 2019.
DATED: November 1, 2019. /s/ Caryl E. Delano
Caryl E. Delano
Chief United States Bankruptcy Judge