Opinion
BUSINESS & COUNSUMER DOCKET NO. BCD-CV-17-39
12-06-2018
DENNIS BARRIAULT, Plaintiff, v. DENRON, INC., et al., Defendants.
STATE OF MAINE
CUMBERLAND, ss. COMBINED ORDER ON PENDING MOTIONS
Pending before the Court is Defendant Denron, Inc.'s motion to dismiss the amended complaint (the "Complaint") and Plaintiff Dennis Barriault's motion to compel discovery. The Court heard oral argument on the motion on November 5, 2018. Timothy Bryant, Esq. appeared for Denron and Kurt Olafsen, Esq. appeared for Party-in-Interest Ronald Barriault. Dennis was represented by Toby Dilworth, Esq.
Ronald Barriault and Dennis Barriault are brothers who share the same last name. The Court therefore refers to them by their first names in the Order.
BACKGROUND
Dennis and Ronald are brothers and former business partners who are the only directors, officers, and shareholders of Denron, each owning fifty-percent of Denron's shares. Ronald is Denron's president and Dennis is its treasurer. Dennis's Complaint principally seeks judicial dissolution of Denron based on allegations that Ronald hired a lawyer (Mr. Bryant) for the corporation without Dennis's knowledge or approval and directed Mr. Bryant to agree to a consent judgment between Ronald and Denron in a lawsuit that Ronald had filed against Denron to wrongfully procure direct personal control of up to $400,000 of corporate money. At the oral argument, the parties confirmed that $300,000 was disbursed in equal parts to Denron's two shareholders (Ronald and Dennis) and that $100,000 was deposited into a Denron bank account, although apparently only Ronald has the ability to draw on that account.
Denron now moves to dismiss the Complaint, principally on the grounds that it does not allege fraud by Denron with sufficient particularity. Dennis has brought a motion to compel discovery responsive to a prior request for communications between Ronald and Mr. Bryant (Denron's counsel); Denron objected to the request on the grounds that such correspondence is protected by attorney-client privilege.
DISCUSSION
I. Motion to Dismiss
In reviewing a motion to dismiss under Rule 12(b)(6), the complaint is viewed "in the light most favorable to the plaintiff to determine whether it sets forth elements of a cause of action or alleges facts that would entitle the plaintiff to relief pursuant to some legal theory." Id. (quoting Saunders v. Tisher, 2006 ME 94, ¶ 8, 902 A.2d 830). "Dismissal is warranted when it appears beyond a doubt that the plaintiff is not entitled to relief under any set of facts that he might prove in support of his claim." Id. While general allegations are usually sufficient to satisfy this liberal pleading standard, our rules of civil procedure apply a heightened standard for pleading special matters, such as fraud. See M.R. Civ. P. 9. "In all averments of fraud . . . , the circumstances constituting fraud . . . shall be stated with particularity." M.R. Civ. P. 9(b).
Dennis's two-count Complaint alleges, inter alia, that Ronald as president of Denron "is acting, or will act in a manner that is illegal, oppressive or fraudulent" as grounds for his request for judicial dissolution of Denron. (Pl's Compl. ¶ 5.b.) Denron has moved to dismiss the Complaint on the grounds that this allegation lacks the specificity demanded by M.R. Civ. P. 9(b). In his written opposition, Dennis argues that because the Complaint does not plead fraud as a cause of action that Rule 9(b)'s heightened pleading requirement has no bearing on whether the Complaint should be dismissed for failure to state a claim pursuant to M.R. Civ. P. 12(b)(6). At the oral argument, Dennis further argued that the purpose behind Rule 9(b) is "to allow the defendant to be fairly apprised of the elements of the claim" and because Denron has actual knowledge of the fraudulent acts alluded to in the Complaint the Rule should not apply here. See Stevens v. Bouchard, 532 A.2d 1028, 1030 (Me. 1987) (citing 1 Field, McKusick & Wroth, Maine Civil Practice, § 9.2 at 221 (2d ed. 1970)). Denron responded that it has only a general understanding of Dennis's complaint of fraudulent behavior and that Rule 9(b) entitles it to more specificity. Denron said it would not oppose a motion to amend the Complaint so that Dennis could state his allegations of fraud with specificity in order to allow Denron to adequately defend itself.
In particular, at the oral argument, Mr. Bryant expressed confusion as to whether the Complaint alleges fraud on the part of Denron, Ronald, or both.
Dennis's argument misapprehends the scope of Rule 9(b) and Rule 12(b). First, Rule 9(b) applies to "all averments of fraud[,]" not only when fraud is pleaded as a stand-alone cause of action. M.R. Civ. P. 9(b). Second, a party's failure to meet the requirements of M.R. Civ. P. 9(b) is grounds for dismissal pursuant to M.R. Civ. P. 12(b). See Barnes v. McGough, 623 A.2d 144, 146 (Me. 1993) ("[B]ecause the plaintiffs have alleged that the defendants' conduct involved fraud, the provisions of M.R. Civ. P. 9(b) must also be considered in addressing the motion to dismiss."); see also 2 Harvey & Merritt, Maine Civil Practice § 9:2 at 384 (3d, 2011 ed.) ("[f]ailure to comply with the requirements of Rule 9(b) may ordinarily lead to a dismissal under 12(b) for failure to state a claim").
However, when a motion to dismiss is granted for failure to comply with Rule 9(b), "it would presumably be with leave to amend." Id.; see M.R. Civ. P. 15(a). At the oral argument, Denron said it would not oppose a motion to amend brought by Dennis pursuant to such a dismissal without prejudice. The Court therefore grants Denron's motion to dismiss without prejudice.
II. Motion to Compel
On October 19, 2017, Dennis served requests for production of documents upon Denron and Ronald, including Request No. 2, which sought "[a]ll communications . . . between Ronald . . . and [Mr. Bryant] . . . [between] January 1, 2016 [to the present] relating in whole or in part to [Barriault v. Denron, No. BCD-CV-18-28] or any of the allegations contained in [Ronald's complaint] in that matter . . . ." (Pl's Mot. Compel Exs. A, B.) Denron and Ronald responded to other requests, but both refused to produce any documents in response to Request No. 2 on the grounds that the information requested was protected by the attorney-client privilege. This case was then stayed by court order until June 1, 2018. Following the dissolution of the stay the parties made good faith efforts to resolve the discovery dispute but were unable to reach a resolution.
"Parties may obtain discovery by . . . production of documents . . . ." M.R. Civ. P. 26(a). "Parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action . . . if the information sought appears reasonably calculated to lead to the discovery of admissible evidence." M.R. Civ. P. 26(b)(1) (emphasis added). Maine Rule of Evidence 502, "Lawyer-Client Privilege," provides that "A client has a privilege to refuse to disclose, and to prevent any other person from disclosing, the contents of any confidential communication . . . [b]etween the client . . . and the client's lawyer . . . ." M.R. Evid. 502(b)(1). "The privilege may be claimed by . . . [any] agent authorized to act on behalf of a legal entity . . . such as a corporation . . . in legal matters or in obtaining the services of, or communicating with, an attorney for the entity. . . ." M.R. Evid. 502(c)(1)(D). "There is a presumption that the . . . lawyer . . . has authority to claim the privilege on the client's behalf." M.R. Evid. 502(c)(2). "The party asserting the existence of the attorney-client privilege has the initial burden of demonstrating its applicability." Harris Mgmt., Inc. v. Coulombe, 2016 ME 166, ¶ 24, 151 A.3d 7. The burden then shifts to the party seeking to pierce the privilege to prove by a preponderance of the evidence that an exception applies. See id.
Dennis's first argument is that if Ronald is within the privilege, he is too, and can pierce or waive the privilege. Although the lawyer-client privilege protects communications between attorneys and corporations, see M.R. Evid. 502(c)(1)(D), the privilege does not protect the communications of every employee of the corporation with the corporation's attorney. Its scope is limited to members of the so-called "control group" of the corporation, that is, "'those officers, usually top management, who play a substantial role in deciding and directing the corporation's response to the legal advice given,' and other individuals who have 'sufficient authority to make decisions for the client[.]'" Harris Mgmt. v. Coulombe, 2016 ME 166, ¶ 15, 151 A.3d 7 (quoting United States v. Upjohn Co., 600 F.2d 1223, 1226 (6th Cir. 1979), rev'd, 449 U.S. 383); Advisers' Note to former M.R. Evid. 502 (Feb. 2, 1976)).
Ronald and Denron do not necessarily dispute that Dennis, as an officer and director of Denron, is a member of the "control group." However, Ronald and Denron claim that Dennis is adverse to Denron in this lawsuit and therefore cannot waive the lawyer-client privilege on Denron's behalf in order to obtain a strategic advantage against it. See Chambers v. Gold Medal Bakery, Inc., 983 N.E. 2d 683, 693 (Mass. 2013) (citing SBC Interactive Inc. v. Corp. Media Partners, No. 15987, 1997 Del. Ch. LEXIS 170, at *18 (Dec. 8, 1997) ("The principle that directors have a right of equal access to advice of corporate counsel provided to the corporation is based on the assumption that the interests of the directors are not adverse to interests of the corporation on a given issue.")
In Chambers, the court did not hold that the directors (who were also shareholders) were adverse merely because they were suing the corporation, but rather concluded more narrowly that in the context of that case "there [was] sufficient evidence, at least narrowly with respect to the . . . present litigations, that the plaintiff's interests [were] adverse to [the corporation]." Id. at 694. In particular, the court noted that the plaintiffs had brought multiple suits directly against the corporation over a short span of time, were represented by their own counsel throughout that period, and their motives were self-interested because their goal in accessing the privileged information was to maximize their share price in a corporate buy-back. Id. Although Dennis's motive for obtaining the privileged communications are different in this case, his adversity to Denron is even more pronounced than that of the plaintiffs in Chambers: Dennis's ultimate goal in this suit is a judicial dissolution of Denron. (See Am. Compl. ¶¶ 5-6.) The Court therefore concludes that regardless of whether Dennis is part of Denron's "control group," Dennis's interests are adverse to Denron in this lawsuit and therefore Dennis is not entitled to pierce the lawyer-client privilege between Ronald and Denron.
Dennis next argues that the "crime-fraud exception" to the lawyer-client privilege vitiates any privilege between Ronald and Denron. "An opposing party seeking to show that the crime-fraud exception to the attorney-client privilege applies . . . has the burden to prove, by a preponderance of the evidence, that (1) the client was engaged in (or was planning) criminal or fraudulent activity when the attorney-client communications took place and (2) the communications were intended by the clients to facilitate or conceal the criminal or fraudulent activity." Harris Mgmt., Inc., 2016 ME 166, ¶ 24, 151 A.3d 7. The Court concludes that Dennis has failed to carry his burden.
In support of his argument, Dennis relies on his "detailed allegations that Ronald perpetrated a fraud upon the Court" and "documentary evidence" that consists of memoranda he previously filed in Barriault v. Denron, No. BCD-CV-18-28: his verified motion for joinder and for relief from judgment and his reply memorandum to Ronald's opposition to that motion. (Pl's Mot. Compel 7.) As noted above, Dennis's allegations in this lawsuit lack the particularity demanded by M.R. Civ. P. 9(b); furthermore, allegations of fraud are not evidence of fraud.
Furthermore, the "documentary evidence" referenced in Dennis's motion does not prove by a preponderance of the evidence either that (1) Ronald was planning any fraudulent or criminal activity when he communicated with Mr. Bryant or (2) that Ronald intended any such communications to facilitate or conceal fraudulent or criminal activity. See Harris Mgmt., Inc., 2016 ME 166, ¶ 24, 151 A.3d 7. The Court acknowledges that Dennis strongly disagrees with Denron's decision to consent to judgment in BCD-CV-18-28 and make the distribution sought by Ronald. However, as "the officer designated as president[,]" Ronald had the statutory authority "to institute or defend legal proceedings" given the deadlock between the two director/shareholders on the issue of the distribution. 13-C M.R.S. § 842(2). Dennis has established, at most, that he was not apprised of that litigation. This is insufficient to prove that the crime-fraud exception applies.
Finally, Dennis argues that he "does not seek communications between Denron and its counsel" but rather "communications between Ronald Barriault and Denron's counsel . . . there can be no privilege between the Plaintiff in that lawsuit [Ronald] and the attorney for the Defendant." (Pl's Mot. Compel 7.) However, the requested communications were between Ronald in his capacity as president of Denron and Mr. Bryant, not between Ronald in his individual capacity and Mr. Bryant. Corporations can only act through human beings, and as president, Ronald was the human being with the statutory authority to act as Denron's representative in the litigation. 13-C M.R.S. § 842(2). It is in this capacity that he has invoked the lawyer-client privilege. M.R. Evid. 502(c)(1)(D). Dennis cites no authority suggesting that Ronald's participation in the litigation as an individual is enough to defeat Denron's assertion of the lawyer-client privilege with respect to communications between Ronald, in his capacity as Denron's president, and Denron's counsel.
At the oral argument, Dennis for the first time raised the argument that because Ronald's interests were adverse to Denron's in No. BCD-CV-18-28 that Ronald's communications were thus not protected by lawyer-client privilege under the rule from Chambers discussed above. 983 N.E. 2d at 693. "[A]bsent extraordinary circumstances, arguments raised for the first time at oral argument are waived[.]" Laqualia v. Laqualia, 2011 ME 114, ¶ 16 n.6, 30 A.3d 838 (citing United States v. Pulido, 566 F.3d 52, 60 n.4 (1st Cir. 2009)); see also Chadwick-BaRoss, Inc. v. Martin Marietta Corp., 483 A.2d 711, 717 (Me. 1984) ("Generally, an issue not addressed by the brief of either party and raised at oral argument is viewed as waived . . . ."). --------
CONCLUSION
Based on the foregoing it is hereby ORDERED:
1. Denron's motion to dismiss is GRANTED without prejudice.
2. Plaintiff Dennis's motion to compel is DENIED. The Clerk is requested to enter this Order on the docket for this case by incorporating it by reference. M.R. Civ. P. 79(a). Dated: 12/6/18
/s/_________
M. Michaela Murphy
Justice, Business and Consumer Court