Dialysis Clinic, Inc. v. Medley, M2017-01352-SC-R11-CV

• Decision Date: 25 January 2019
• Docket Number: No. M2017-01352-SC-R11-CV,M2017-01352-SC-R11-CV
• Citation: 567 S.W.3d 314
• Parties: DIALYSIS CLINIC, INC. v. Kevin MEDLEY et al.
• Court: Tennessee Supreme Court

567 S.W.3d 314

DIALYSIS CLINIC, INC.

v.Kevin MEDLEY et al.

No. M2017-01352-SC-R11-CV

Supreme Court of Tennessee, at Nashville.

October 3, 2018 Session

FILED January 25, 2019

L. Vincent Williams, Nashville, Tennessee, and J. Ryan Poole, Hermitage, Tennessee, for the appellants, Kevin Medley, individually; Kevin Medley, LLC; Canvas Lounge, LLC; and 3 Entertainment Group, LLC.

Peter C. Sales and Frankie N. Spero, Nashville, Tennessee, for the appellee, Dialysis Clinic, Inc.

Sharon G. Lee, J., delivered the opinion of the Court, in which Jeffrey S. Bivins, C.J., and Cornelia A. Clark, Holly Kirby, and Roger A. Page, JJ., joined.

Sharon G. Lee, J.

In this interlocutory appeal, we address whether the attorney-client privilege protects communications between a corporation’s legal counsel and a third-party nonemployee of the corporation. After acquiring four commercial properties, a corporation filed unlawful detainer actions against the properties' tenants. The tenants subpoenaed documents from a property management company hired by the corporation to manage its properties. The corporation and the property management company objected to producing documents containing communications between the corporation’s legal counsel and the property management company, arguing that the attorney-client privilege protected the documents. The trial court held that the documents were protected because the attorney-client privilege extended to the property management company as an agent of the corporation. We hold that the attorney-client privilege applies to communications between an entity’s legal counsel and a third-party nonemployee of the entity if the nonemployee is the functional equivalent of the entity’s employee and when the communications relate to the subject matter of legal counsel’s representation of the entity and the communications were made with the intention that they would be kept confidential. Applying this framework, we hold that the property management company was the functional equivalent of an employee of the corporation, that the communications related to the subject matter of counsel’s representation of the corporation, and that the communications were made with the intention that they would be kept confidential. We affirm the ruling of the trial court and remand to the trial court for further proceedings.

I.

Dialysis Clinic, Inc. (Dialysis Clinic) owned and operated dialysis centers. In addition, Dialysis Clinic owned and leased various commercial properties to third parties. Dialysis Clinic did not have in-house knowledge about or experience in the management of commercial rental properties. For that reason, Dialysis Clinic had a property management agreement with XMi Commercial Real Estate (XMi) to manage several of Dialysis Clinic’s commercial properties. Under the property management agreement, XMi acted as Dialysis Clinic’s agent on an exclusive basis to manage and operate properties. XMi’s scope of work under the agreement included negotiating lease renewals and amendments; collecting rents and dues; canceling or terminating leases upon Dialysis Clinic’s direction; and instituting, prosecuting, and defending actions involving the leases and properties.

XMi handled all day-to-day operations and tenant relations and regularly communicated with Dialysis Clinic about those matters. XMi also communicated with Dialysis Clinic’s in-house and outside counsel about the properties because, in XMi’s role as property manager, it had information about the properties that Dialysis Clinic did not have.

In July 2012, Dialysis Clinic acquired four commercial properties on Church Street in Nashville. The properties were occupied by Canvas Lounge, LLC; 3 Entertainment Group, LLC d/b/a WKND; and OutCentral, Inc. under a series of leases and sub-leases, the complicated history of which is immaterial.

In October 2014, Dialysis Clinic filed unlawful detainer actions in the Davidson County General Sessions Court against Kevin Medley, individually; Kevin Medley, LLC; Canvas Lounge, LLC; 3 Entertainment Group, LLC; and OutCentral, Inc.¹ On motion of Kevin Medley, individually; Kevin Medley, LLC; Canvas Lounge, LLC; and 3 Entertainment Group, LLC (the Defendants), the General Sessions Court consolidated the cases and removed them to Davidson County Circuit Court (the trial court).

After the cases were removed to the trial court, the Defendants served a subpoena on XMi, a nonparty to the detainer action, for production of documents related to the Church Street properties. XMi withheld a number of documents from production based on the attorney-client privilege. Those documents included emails between XMi and Dialysis Clinic’s in-house and outside counsel. Dialysis Clinic contends that these emails are protected by the attorney-client privilege based on the agency relationship between Dialysis Clinic and XMi.

After an evidentiary hearing and in-camera review of the disputed documents, the trial court ruled that the attorney-client privilege applied to XMi’s communications with Dialysis Clinic’s attorneys and that XMi had properly withheld emails containing those communications from its document production. The trial court granted the Defendants' motion for an interlocutory appeal under Tennessee Rule of Appellate Procedure 9. The Court of Appeals denied the Defendants' application. The Defendants then filed an application under Tennessee Rule of Appellate Procedure 11 for review by this Court, which we granted.

This Court’s review on interlocutory appeal is limited to the issue certified to it by the trial court. Wallis v. Brainerd Baptist Church , 509 S.W.3d 886, 896 (Tenn. 2016). Here, the certified issue is whether the trial court extended the attorney-client privilege beyond what Tennessee law allows by finding that XMi properly withheld certain documents from production based on attorney-client privilege because of its agency relationship with Dialysis Clinic.

We review a trial court’s rulings on the application of the attorney-client privilege under an abuse of discretion standard. Boyd v. Comdata Network, Inc. , 88 S.W.3d 203, 211 (Tenn. Ct. App. 2002) (citing In re Grand Jury Proceedings , 219 F.3d 175, 182 (2d Cir. 2000) ; Frontier Refining, Inc. v. Gorman-Rupp Co. , 136 F.3d 695, 699 (10th Cir. 1998) ); see also Lee Med., Inc. v. Beecher , 312 S.W.3d 515, 524 (Tenn. 2010) (citing Doe 1 ex rel. Doe 1 v. Roman Catholic Diocese of Nashville , 154 S.W.3d 22, 42 (Tenn. 2005) ; Benton v. Snyder , 825 S.W.2d 409, 416 (Tenn. 1992) ; Loveall v. Am. Honda Motor Co. , 694 S.W.2d 937, 939 (Tenn. 1985) ). "A court abuses its discretion when it causes an injustice to the party challenging the decision by (1) applying an incorrect legal standard, (2) reaching an illogical or unreasonable decision, or (3) basing its decision on a clearly erroneous assessment of the evidence." Lee Med., Inc. , 312 S.W.3d at 524 (citing State v. Ostein , 293 S.W.3d 519, 526 (Tenn. 2009) ; Konvalinka v. Chattanooga-Hamilton Cnty. Hosp. Auth. , 249 S.W.3d 346, 358 (Tenn. 2008) ; Roman Catholic Diocese of Nashville , 154 S.W.3d at 42 ). We review the trial court’s factual findings underlying a discretionary decision under a preponderance of the evidence standard. Boyd , 88 S.W.3d at 212. We review the trial court’s legal determinations de novo without a presumption of correctness. Id. (citing Brown v. Birman Managed Care, Inc. , 42 S.W.3d 62, 66 (Tenn. 2001) ; Burlew v. Burlew , 40 S.W.3d 465, 470 (Tenn. 2001) ; Grand Jury Proceedings v. United States , 156 F.3d 1038, 1042 n.1 (10th Cir. 1998) ).

II.

The attorney-client privilege "encourages full and frank communication between attorney and client by sheltering these communications from disclosure." State ex rel. Flowers v. Tenn. Trucking Ass'n Self Ins. Group Trust, Inc. , 209 S.W.3d 602, 615–16 (Tenn. Ct. App. 2006) (citing Tenn. Code Ann. § 23-3-105 ); Federal Ins. Co. v. Arthur Anderson & Co. , 816 S.W.2d 328, 330 (Tenn. 1991) ). The privilege is codified at Tennessee Code Annotated section 23-3-105,² but whether it applies to a communication is "necessarily question, topic and case specific." Bryan v. State , 848 S.W.2d 72, 80 (Tenn. Crim. App. 1992) (citing Johnson v. Patterson , 81 Tenn. 626, 649 (1884) ). For the privilege to apply, "[t]he communication must involve the subject matter of the representation and must be made with the intention that the communication will be kept confidential." Flowers , 209 S.W.3d at 616 (citing Bryan , 848 S.W.2d at 80 ). The privilege protects both the client’s communications to the attorney and the attorney’s communications to the client when the communications are based on the client’s communications or when disclosure of the attorney’s communications would reveal the substance of the client’s communications. Boyd , 88 S.W.3d at 213 (citing Burke v. Tenn. Walking Horse Breeders' & Exhibitors' Ass'n , No. 01A01-9611-CH-00511, 1997 WL 277999, at *11 (Tenn. Ct. App. May 28, 1997) ; Bryan , 848 S.W.2d at 80 ) ).

The attorney-client privilege, however, does not protect communications between attorneys and clients that take place in the presence of a third party or are divulged to a third party. Id. (citing Hazlett v. Bryant , 192 Tenn. 251, 241 S.W.2d 121, 123 (1951) ; Taylor v. State , 814 S.W.2d 374, 377 (Tenn. Crim. App. 1991) ). That said, when the third party is an agent of the client, the attorney-client privilege applies. Smith Cnty. Educ. Ass'n v. Anderson , 676 S.W.2d 328, 333 (Tenn. 1984) (citing McCormick § 91 (2d. ed. 1972); D. Paine, Tennessee Law of Evidence , § 92, at 112 (1974) ). In Smith County , a third party who served as a negotiator between the school board and the teachers' union attended a meeting between the school board and its attorneys about the pending litigation. Id. at 330–31. We held that under these facts the attorney-client privilege applied because the third-party negotiator was acting as an agent of the school board. Id. at 333. We, however,...