Cahaly v. Benistar Prop. Exch. Trust Co.

• Decision Date: 06 June 2014
• Docket Number: No. 12–P–956.,12–P–956.
• Citation: 85 Mass.App.Ct. 418,10 N.E.3d 659
• Court: Appeals Court of Massachusetts
• Parties: Gail A. CAHALY & others v. BENISTAR PROPERTY EXCHANGE TRUST COMPANY, INC., & others.

85 Mass.App.Ct. 418

10 N.E.3d 659

Gail A. CAHALY & others ¹

v.BENISTAR PROPERTY EXCHANGE TRUST COMPANY, INC., & others.²

No. 12–P–956.

Appeals Court of Massachusetts, Suffolk.

Argued Dec. 2, 2013.

Decided June 6, 2014.

Anthony R. Zelle, Boston, for Gail A. Cahaly & others.

Michael B. Keating, Boston, for the intervener.

Brooks L. Glahn, Boston, for Benistar Property Exchange Trust Company, Inc., & others.

Present: KANTROWITZ, GRAHAM, & MEADE, JJ.

MEADE, J.

The plaintiffs appeal from the denial of their motion for sanctions against Bingham McCutchen LLP (Bingham), intervener, the law firm that defended Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill), in the 2002 jury trial of this action. The plaintiffs claim that in that litigation Bingham wrongfully withheld documents relevant to the issue whether Merrill, in handling the accounts of Benistar Property Exchange Trust Company, Inc. (Benistar), knew that Benistar was trading with money belonging to third parties. We hold that Bingham lacked an adequate legal basis, under the guise of the work product doctrine, for its decisions to withhold informationthat Merrill employees had viewed certain Benistar Web pages describing its business as an intermediary for third-party funds and then to present a defense claiming that no Merrill employees had viewed the very same Web pages. ³ As a result, we vacate that portion of the final judgment entering judgment in favor of Bingham on the plaintiffs' motion for sanctions.⁴ As explained below, there remain certain issues that require resolution by a fact finder, and thus, we remand for further proceedings consistent with this opinion.⁵

Background. For background regarding the 2002 trial and the underlying dispute, we refer to Cahaly v. Benistar Property Exch. Trust Co., 451 Mass. 343, 885 N.E.2d 800 (2008) ( Cahaly ),⁶ in which the Supreme Judicial Court affirmed the order of the Superior Court judge granting the plaintiffs a new trial. The documents at issue here came to light during the preparation of the second trial in 2009, when Merrill, then represented by different counsel, produced the documents as responsive to document requests served by the plaintiffs in 2001. As a result, after the second trial, the plaintiffs moved for sanctions against Merrill and Bingham, intervener on the issue of sanctions, and the judge conducted an eight-day evidentiary hearing on the motion. He adopted most of the 334 stipulated facts submitted by the parties and made comprehensive additional findings of fact, set out in his January 11, 2011, memorandum and order. We summarize those facts here, adding additional materials from the record where noted.

Merrill retained Bingham in June, 2001, to represent it in connection with the complaints filed by the plaintiffs, who were former clients of Benistar and who claimed losses of $8 million as a result of Benistar's wrongdoing in investing the plaintiffs' funds. John R. Snyder, a Bingham partner and experienced trial attorney, became Merrill's lead trial counsel, and proceeded to gather information in response to discovery requests. In speaking with Merrill employees involved with the Benistar accounts, Snyder was informed that none of them knew that the money in those accounts belonged to third parties, and that on September 20, 2000, Benistar's trading was restricted because of losses rather than because of concerns that the accounts contained third-party funds. Snyder also determined that none of Merrill's employees had visited the § 1031 pages of the Benistar Web site,⁷ which explained that Benistar's business was to serve as an intermediary for third-party funds.

On July 15, 2002, Snyder received a file from Joseph Pash, a Merrill in-house lawyer,which Pash had obtained from Martin Malia, an options specialist in Merrill's compliance department. The file contained documents indicating that on the morning of September 20, 2000, the day Merrill ordered Benistar's trading restricted, Malia had visited the § 1031 pages of the Benistar Web site. Those pages contained information about § 1031 property exchanges and revealed that Benistar's business was as an intermediary to hold funds for clients engaged in § 1031 property exchanges. The pages contained a question and answer section, including the following:

“Can I trust Benistar Property Exchange with My Money? ... [W]e protect your assets: We have accounts with major banking and investment firms—accounts under our sole control, as required for these exchanges.... Our accounts are restricted to paying out funds only for a subsequent closing, or to return funds to the original property owner. We distribute funds only at your written request.”

The judge found that the § 1031 pages of the Benistar Web site disclosed that Benistar handled other people's money and caused Malia to suspect that Benistar was trading other people's money through its Merrill accounts. The judge also found that this information concerned Malia because of the losses in Merrill's Benistar accounts, but that the Web site did not inform Malia that Benistar's options trading was a breach of Benistar's duty to its clients to hold their funds in low-risk escrow accounts. Also in the file was a facsimile transmission (fax) from Malia to Thomas Rasmussen, a Merrill administrative manager, sent at 11:04 a.m. on September 20, 2000, attaching the § 1031 Web site pages.⁸

Upon reviewing the Malia file, Snyder thought that some of the documents might be protected under the work product doctrine. When he spoke with Malia, Malia indicated that he performed the Web site search before he made the decision to restrict the accounts and that the information on the question and answer page gave him some suspicion of embezzlement. Malia also told Snyder that in September, 2000, he reported to Dennis Pape, an attorney working as a compliance supervisor at Merrill, and after September 22, 2000, he was working with an in-house lawyer of Merrill's office of general counsel.⁹

Snyder discussed with Merrill's in-house lawyers whether the Malia file was protected from disclosure under the work product doctrine. They considered that Malia operated under the umbrella of the office of general counsel, that he acted on occasion when litigation was anticipated, and that he was generally under the direction of attorneys. Pash determined that the documents were protected work product, and Snyder agreed.¹⁰ We add that Snyder testified at the evidentiary hearing that he did not know whether he conducted legal research in making the work product determination, but he did not think that Bingham's billing records would reflect such research.

On June 19, 2002, the trial judge granted the plaintiffs' emergency motion to compel evidence of visits by Merrill employees to the Benistar Web site. Merrill responded that no nonprivileged documents had been found. In October, 2002, after receiving the Malia file, Bingham drafted supplements to several of Merrill's interrogatory answers concerning Merrill's knowledge of Benistar's business and visits to the Web site. Those responses would have disclosed the fact that Malia had viewed the § 1031 pages. In the end, Snyder decided not to serve the supplemental answers, following his determination that the Malia file was protected work product.

We also add from the record that prior to receiving the Malia file, Bingham had filed a motion for summary judgment, which contained the following representation: “At no time prior to the transfer of the accounts did any employee at Merrill Lynch learn that the funds in the Benistar accounts were being held by Benistar as a third party intermediary for real estate transactions or that those funds were Benistar client escrowed funds.” In addition, the parties stipulated that Merrill's portion of the first revised joint pretrial memorandum, dated September 25, 2002, included the following: “At no time prior to the transfer of the Benistar accounts from Merrill Lynch to Paine Webber did any employee at Merrill Lynch learn that the funds in the accounts were being held by Benistar as a third party intermediary for real estate transactions or that those funds were Benistar client escrow funds.”

At the hearing on the motion for sanctions, the parties stipulated that at the 2002 trial, Snyder, in examining Rasmussen, asked whether Rasmussen knew in 2000 that Benistar acted as a third-party intermediary or escrow agent handling other people's money, and Rasmussen testified that he did not. Rasmussen also testified that he never visited the Benistar Web site before the accounts were transferred to UBS Paine Webber, Inc., and that he had never thought to do so. The record further discloses that Snyder told the jury, in closing, that “the Merrill people” did not know that the funds in the accounts belonged to third parties, and that the witnesses all said they did not know what a § 1031 exchange was and that there was no reason for them to go to the § 1031 “button” on the Web site. According to the record, in Merrill's motion for judgment notwithstanding the verdict, Merrill argued that the plaintiffs “have failed even to present sufficient evidence to support a reasonable inference that Merrill knew that the Benistar accounts contained third party funds.”

Following the sanctions hearing, the judge concluded that Snyder acted in good faith in failing to disclose the Malia file and in presenting a defense at the 2002 trial that included the claim that Merrill employees had not viewed the § 1031 pages of the Benistar Web site.

Discussion. The plaintiffs maintain that Snyder was prohibited from not disclosing the fact, under the work product doctrine, that certain Merrill employees had seen the § 1031 pages of the Benistar Web site, and then asserting, as part of Merrill's defense, that Merrill employees had not seen the § 1031 pages of the Benistar Web site. We agree.

We review the judge's decision regarding sanctions for abuse...