Opinion
Case No. 95-11946-SSM, Adversary Proceeding No. 96-1110
October 11, 1996
Joseph S. Luchini, Esquire, Hazel Thomas, P.C., Falls Church, VA, Of Counsel for Plaintiff
Raymond A. Ceresa, Esquire, Rees, Broome Diaz, P.C., Vienna, VA, for S. P. Newell, Of Counsel for Defendant
MEMORANDUM OPINION AND ORDER
This matter is before the court for a determination of whether certain documents withheld from production are protected by the attorney-client privilege. Oral argument was heard on October 11, 1996, and the challenged documents were submitted to the court for in camera review.
The object of this adversary proceeding is to set aside a $3,000,000 deed of trust and a confessed judgment in roughly the same amount (based on the same obligation) in favor of S. P. "Chip" Newell against the debtor's real estate. The debtor is a Virginia limited liability company that was formed in April 1994 to develop a shopping center and office complex in Sterling, Virginia, known as Pare City Center. The company originally owned 12 acres of real estate, but a portion of this has been sold, and at the present time there remain 3.766 acres divided into four retail "pad" sites. The original members of the company were Joel T. Broyhill ("Broyhill"), who held a 50% interest, and Marilyn and Robert DeLuca ("the DeLucas"), who together held a 50% interest. The DeLucas were designated in the operating agreement as the managing members. In late July 1994, Northern Virginia Realty, Inc. Profit Sharing Trust ("NVRI") was admitted as a 15% member, and the membership share of Broyhill and the DeLucas was reduced to 42.5% each.
The history of the project and a discussion of the Broyhill-DeLuca management dispute is set forth in a prior opinion of this court. Broyhill v. DeLuca (In re DeLuca), 194 B.R. 65 (Bankr. E.D. Va. 1996).
The DeLucas owned interests in a large portfolio of real estate ventures — organized variously as partnerships, limited partnerships, or limited liability companies — in Virginia and the District of Columbia and negotiated with Newell to purchase those interests. On October 7, 1994, Newell made a $2,000,000 loan to the DeLucas individually secured by a pledge of a 30% limited partnership interest in Countryside Commercial Professional Center, L.P. On or about February 15, 1995, Broyhill brought an action against the DeLucas in the Loudoun County Circuit Court that sought, among other things, an accounting from the DeLucas with respect to their management of the debtor and on that same date recorded a memorandum of lis pendens against the debtor's property. On February 16, 1995, Newell loaned the DeLucas an additional $500,000, secured by a deed of trust against the four pad sites. On February 24, 1995, Newell made a further $100,000 loan to the DeLucas secured by the four pad sites. On March 2, 1995, Newell loaned another $100,000 to the DeLucas secured by the four pad sites. By March 9, 1995, at the latest, Newell's attorney learned of the lis pendens. Shortly thereafter, an amended and restated note and deed of trust were recorded that rolled into a single obligation, secured by the four pad sites, the $2,000,000 loan that previously had been secured only by the pledge of the DeLucas limited partnership interest in a different venture, as well as the $700,000 already secured by the pad sites, and an additional $300,000, making a total of $3,000,000.00. Broyhill and NVRI were not consulted concerning, and had no prior knowledge of, the $3,000,000 deed of trust.
On May 9, 1995, the DeLucas caused D B Countryside to file a voluntary chapter 11 petition in this court. They also — at or around that same time — filed chapter 11 petitions for themselves and for twelve other partnerships, limited partnerships, or limited liability companies, in addition to D B Countryside, that they owned or controlled. Many months later, Broyhill and the DeLucas reached a global settlement of their various outstanding claims. As part of that settlement, which was approved by this court, the DeLucas transferred to Broyhill their entire interest in D B Countryside. The debtor in possession, now controlled by Broyhill, then commenced the present adversary proceeding, trial of which is set to begin on December 9, 1996.
In response to a request for production of documents propounded by Broyhill under F.R.Bankr.P. 7034, Newell supplied a number of documents related to communications concerning the notes and deeds of trust. Thirty-five documents, however, have been withheld on the ground of attorney-client privilege. These consist of letters, records of facsimile transmissions, and notes of meetings either directed to, or authored by, Henry F. Brandenstein of the law firm of Rees, Broome Diaz, P.C., Newell's attorney. Brandenstein drafted the various notes and deeds of trust and provided legal advice to Newell in connection with the original purchase agreement and the various loans. Broyhill disputes that the withheld documents are subject to the attorney-client privilege and asserts that the privilege does not apply either because of the "crime/fraud" exception or because they involved matters that were to be made public, not kept confidential. The documents have been submitted to the court for in camera review to determine whether the privilege applies.
The plaintiff did, however, supply an index describing each document by date, sender, recipient, and general subject matter.
At the outset, it is useful to delineate the scope of the privilege. The attorney-client privilege, as recognized in the Federal courts, provides a client with the right "to refuse disclosure and to prevent any other person from disclosing confidential communications with his attorney made for the purpose of facilitating the rendition of professional legal services to the client." Barry Russel, BANKRUPTCY EVIDENCE MANUAL § 501.5, p. 349 (1994). The purpose of the privilege is to encourage "full and frank communication between attorneys and their clients." Upjohn v. United States, 449 U.S. 383, 101 S.Ct. 677, 66 L.Ed.d 584. The privilege, however, "only protects disclosure of communications; it does not protect disclosure of the underlying facts by those who communicated with the attorney." Id., 449 U.S. at 395, 101 S.Ct. at 685. The essential elements of the privilege are as follows:
1. The asserted holder of the privilege is or sought to become a client;
2. The person to whom the communication was made (a) is a member of the bar of a court or his subordinate, and (b) in connection with his communication is acting as a lawyer.
3. The communication relates to a fact of which the attorney was informed (a) by his client, (b) without the presence of strangers, (c) for the purpose of securing permanently, either (1) an opinion of law, (2) legal services, or (3) assistance in some legal proceeding, (d) and not for the purpose of committing a crime or tort; and
4. Privilege has been (a) claimed, and (b) not waived by the client.
In re Blier Cedar Co., Inc., 10 B.R. 993 (Bankr. D.Me. 1981) (denying claimed privilege where debtor consulted attorney to assist in transfer of collateral in an effort to defeat security interest). The privilege encompasses communications from the attorney to the client, since these may lead to inferences as to the communication of the client. Id. at 1002. The privilege, however "does not attach simply by reason of the attorney/client relationship, but depends on the specific contents of the letter." Id. In the present case, we are confronted with a situation in which, over a two-month period of time (and after a memorandum of lis pendens had been recorded), a number of loans or advances made to the DeLucas personally (whose interests Newell had agreed to purchase) were secured by the debtor's real estate without the knowledge or consent of the other members. What is more, a $2,000,000 loan made to the DeLucas months earlier was apparently recharacterized after the lis pendens came to light, and then not only secured by the debtor's real estate, but the debtor was made a co-obligor on the loan. Clearly the principal issue at trial is likely to be whether the DeLucas had apparent authority to pledge the debtor's real estate for a loan to them to prop up their portfolio pending the sale to Newell. What Newell knew, and when, will be central. The debtor's position is that Newell and his attorney both knew or suspected that DeLuca did not have authority to pledge the debtor's real estate for the loan to them individually, and that, at the time the loans were made and the deeds of trust recorded, Newell knew that the funds were not being expended for the benefit of the debtor. Clearly, if Brandenstein's services went beyond the giving of legal advice and extended to the drafting of documents intended to defraud the debtor and its members, the privilege would not apply. United States v. Ballard, 779 F.2d 287, 292 (5th Cir. 1986), cert. den. 475 U.S. 1109, 106 S.Ct. 1518, 89 L.Ed.2d 916 (1986) ("The privilege for communications between client and attorney ceases when the purpose of the privilege is abused, when the lawyer becomes either the accomplice or the unwitting tool in a continuing or planned wrongful act.")
Having carefully reviewed the documents, I determine that the claimed attorney-client privilege either must give way or simply does not apply to the following documents:
#2 Brandenstein letter to Newell of 2/24/95
#3 Brandenstein letter to Newell of 3/2/95
#5 Brandenstein letter to Newell of 3/9/95
#7 Brandenstein letter to Newell of 3/10/95
#9 Brandenstein letter to Newell of 3/31795
#10 Brandenstein letter to Slutsky of 3/31/95
#18 Newell facsimile to Brandenstein of 5/2/95
#19 Brandenstein letter to Slutsky of 5/3/95 (first and last full paragraphs only)
#26 Daly hand-written memo to Brandenstein
#35 Brandenstein notes of 2/8/95
Not included in the foregoing documents that must be produced are a fairly large number of documents that — even though the claim of privilege is tenuous (in that it is doubtful that the information was actually intended to remain confidential) — nevertheless do not appear relevant or likely to lead to the discovery of relevant information. In such circumstances, I have thought it best to err on the side of upholding the claimed privilege.
ORDER
It is, accordingly,
ORDERED:
1. The defendant S.P. Newell shall promptly, but in any event no later than October 18, 1996 produce to the plaintiff for inspection and copying Documents No. 2, 3, 5, 7. 9, 10, 18, 19, 26, and 35 as set forth in the Defendant S. P. Newell's Supplemental Designation of Correspondence and Notes submitted in open court on October 11, 1996.
2. The clerk shall mail a copy of this order to counsel for the plaintiff and counsel for defendant S. P. Newell.