In re Llc

Citation458 B.R. 560,55 Bankr.Ct.Dec. 131
Decision Date14 September 2011
Docket NumberBK–S–09–31132–BAM.,Nos. BK–S–09–31131–BAM,s. BK–S–09–31131–BAM
PartiesIn re HOTELS NEVADA, LLC; Inns Nevada, LLC, Debtors.
CourtUnited States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Nevada

458 B.R. 560
55 Bankr.Ct.Dec.
131

In re HOTELS NEVADA, LLC; Inns Nevada, LLC, Debtors.

Nos. BK–S–09–31131–BAM

BK–S–09–31132–BAM.

United States Bankruptcy Court, D. Nevada.

Sept. 14, 2011.


[458 B.R. 563]

Brian Sirower, Catherine M. Guastello, Quarles & Brady LLP, Phoenix, AZ, Marjorie A. Guymon, Goldsmith & Guymon, P.C., Las Vegas, NV, for Debtors.
Opinion on Trustee's Turnover Motion
BRUCE A. MARKELL, Bankruptcy Judge.
+-----------------+
                ¦Table of Contents¦
                +-----------------+
                
I. Facts 564
                II. Analysis 566
                
 A. Section 542(e) and Privilege 566
                 B. Governing Law 567
                 C. Does a Joint–Client Privilege Exist? 570
                 D. Analysis if the Joint–Client Privilege Applies 573
                
 Did SDW Satisfy Its Burden to Show the Joint–Client Privilege Applies to the Items?
                 1. 574
                 2. If SDW Has Established Applicability of the Joint–Client Privilege, Did It Sustain Its Burden With Respect to Each Item on the Privilege Log? 576
                
 a. Billing Statements Sent Care of APH 576
                 Seven Pages of Handwritten Notes by a SDW Associate
                 b. Attorney 577
                 Five page typewritten memorandum, dated April 13, 2005
                 c. by SDW associate attorney to Driggs 577
                 d. Post–May 2005 E-mails and Attachments Sent by Driggs to 577
                 Habash, APH, And/Or Their Litigation Counsel
                
III. Conclusion 579
                

[458 B.R. 564]

In this jointly-administered case, debtors and their nondebtor affiliates received prepetition legal representation from one law firm. The chapter 7 trustee for each debtor now seeks turnover of information from that firm about its representation of the debtors. The firm, however, resists. On behalf of the affiliates, it asserts that the debtors and their affiliates were joint-clients, and that the information sought is subject to the attorney-client privilege. The court finds that the joint-client principles do not apply to protect the information from disclosure. Even if such principles apply, however, the firm's conduct and its manner of identifying and disclosing the alleged privileged material has waived any privilege that might have existed. The court thus orders the law firm to turn over all information claimed to be privileged.

I. Facts

The debtors filed chapter 11 bankruptcy on November 5, 2009, after they and their former principal and alleged alter-ego, Louis Habash (“Habash”), lost an arbitration in California. But “lost” is not an adequate word; the arbitration award assessed over $144 million in damages against the debtors and Habash.

At the request of L.A. Pacific Center, Inc. (“LAPC”), the prevailing party in the California arbitration, and thus a creditor of the debtors, the court converted the chapter 11 cases to ones under chapter 7 on February 25, 2010. At the conversion hearing, the court found that the debtors' bankruptcy filings had not been made in good faith. The conversion orders have not been appealed. David Rosenberg was appointed as the chapter 7 trustee in each case (“Trustee”).

This matter involves the Trustee's request for turnover of documents and other items held by debtors' former law firm, Santoro, Driggs, Walch, Kearney, Holley & Thompson (“SDW”). In particular, the Trustee has scheduled an examination under Rule 2004, and has issued a subpoena for all documents held by SDW in several broad categories, but all of which relate to work done by SDW for debtors. With respect to an unspecified number of items, SDW claimed the attorney-client privilege on behalf of Habash and his wholly-owned management company, A.P.H., Inc. (“APH”). Understanding this claim requires a brief review of some facts.

Debtors, acting through their principal Habash, sold two pieces of Nevada real property to LAPC in 2004. SDW represented debtors in the transaction. The agreement required LAPC to make a later payment of $5 million. A disagreement arose after closing as to whether the later payment was due within 12 or 60 months. On May 5, 2005, less than twelve months after the closing, the debtors (and not Habash or APH), represented by someone other than SDW, filed a complaint for

[458 B.R. 565]

rescission, among other claims, against LAPC in California state court.1

LAPC filed counterclaims, claiming breach of contract. Its damages included a claim for lost profits because the litigation with debtors caused it to lose a sale of the property to a third party. The matter was sent to arbitration, in which LAPC prevailed on its counterclaims. The arbitration panel issued a final award on October 29, 2009, awarding LAPC a total of $144,130,369 in damages, fees, and costs. The debtors filed bankruptcy soon thereafter.

While arbitration was pending, debtors settled an inverse condemnation action they had brought against Clark County, the jurisdiction in which the property was located, for a taking of air space. SDW provided an opinion letter to Clark County about debtors and LAPC's relative rights under their purchase agreement. Clark County then settled with debtors and, on October 6, 2008, paid debtors $50 million, of which debtors netted $40 million after attorney fees. LAPC attempted, without success, to enjoin debtors from transferring or using the settlement funds. The Trustee believes that the settlement funds were transferred to entities under Habash's control.

Against this background, the Trustee began to collect documents to build a financial picture of the debtors, in part to assess whether there were any avoidance actions available to augment the estates. In August 2010, the Trustee requested that SDW deliver all its files with respect to the debtors. This request was made under Section 542 of the Bankruptcy Code, based on the allegation that such files were property of the debtors' bankruptcy estates under Section 541(a).

SDW did not promptly respond. In February 2011, the Trustee sought and obtained an order from this Court for an examination of SDW under Rule 2004. In connection with that order, the Trustee also caused the issuance of a subpoena for certain classes of documents related to the debtors. In particular, the Trustee requested:

• Engagement letters for Debtors, including any documentation regarding the scope or limitation of the representation; 2

• Billing statements for work done on behalf of Debtors related to the sale of the property, subsequent litigation and arbitration, and the settlement with Clark County;

• All documents, correspondence, memoranda, and other documentation related to the sale, litigation and arbitration, and settlement with Clark County, including but not limited to communications between the Santoro Firm and any of Debtors' other counsel in the litigation/arbitration; and

• Any and all documents related to the transfer of any assets belonging to Debtors.

Procedural skirmishes ensued, none of which are particularly relevant to the resolution of this motion. While some documents were produced, not all were. On August 5, 2011, SDW, through independent counsel, refused to produce various documents, and instead produced a privilege

[458 B.R. 566]

log.3 Believing that log insufficient and the claim of attorney-client privilege to be unsustainable, the Trustee, on shortened time and with the prior consent of SDW, brought this motion requiring SDW to turnover the documents listed on the privilege log.4

SDW responded that Section 542(e) permits it to decline to turnover items which are subject to an applicable privilege. It has rested on its privilege log and the declaration of J. Douglas Driggs (“Driggs Declaration”). Driggs was SDW's primary contact with Habash and his related entities. Among other things, the Driggs Declaration confirms that SDW represented the debtors and that its representation of Habash and his related entities terminated in February 2010.

The context for this dispute is unlike most privilege disputes. Here, no third party seeks access to a confidential communication between a lawyer and her client. Rather, a successor to a client—here, the Trustee—is attempting to gain access to its property, or information related to its property, from its former attorney, all as authorized by Section 542. The analog would be if two corporations hired the same attorney for a common task, and then one of the corporations had a change in management, and new management wanted all its old files to give to a new attorney only to be told “no” by the old attorney.

II. AnalysisA. Section 542(e) and Privilege

The Trustee seeks turnover of estate property, and information related to estate property. Section 542(e) gives him that right. Section 542(e) states:

Subject to any applicable privilege, after notice and a hearing, the court may order an attorney, accountant, or other person that holds recorded information, including books, documents, records, and papers, relating to the debtor's

[458 B.R. 567]

property or financial affairs, to turn over or disclose such recorded information to the trustee.There is no doubt that SDW represented the debtors and that it holds recorded information about them. There is also no doubt that under Nevada law, which governs the property rights here, that clients such as the debtors have a property right in their attorneys' files. Nevada law provides that the file amassed by an attorney in representing a client belongs to the client. See Nev.Rev.Stat. § 7.055.5 Moreover, under the broad scope of § 541, even attorney notes and research memoranda that were prepared in representing the debtors are property of the estate. See Rushton v. Woodbury & Kesler, P.C. (In re C.W. Mining Co.), 442 B.R. 44, 47 (Bankr.D.Utah 2010) (“As a matter of law, documents prepared while representing a debtor-corporation are property of the estate, as are documents, records, or papers relating to property of the estate.”).

Section 542(e), however, does qualify the Trustee's powers. The ability to compel turnover is “[s]ubject to any applicable privilege.” Here, SDW is asserting the privilege of a nondebtor in the files and items. This is not, however, the situation Congress had in mind when qualifying...

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