Drennen v. Certain Underwriters At Lloyd's of London (In re Residential Capital, LLC)

• Decision Date: 14 July 2017
• Docket Number: Adv. No. 15–01025 (SHL),Case No. 12–12020 (MG)
• Citation: 575 B.R. 29
• Parties: IN RE: RESIDENTIAL CAPITAL, LLC, Debtors. Rowena Drennen, individually and as Representative of the Kessler Settlement Class, et al., Plaintiffs, v. Certain Underwriters at Lloyd's of London, et al., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

575 B.R. 29

IN RE: RESIDENTIAL CAPITAL, LLC, Debtors.Rowena Drennen, individually and as Representative of the Kessler Settlement Class, et al., Plaintiffs,

v.Certain Underwriters at Lloyd's of London, et al., Defendants.

Case No. 12–12020 (MG)

Adv. No. 15–01025 (SHL)

United States Bankruptcy Court, S.D. New York.

Signed July 14, 2017

PERKINS COIE, LLP, Counsel for ResCap Liquidating Trust, 700 13th St. NW, Suite 600, Washington, DC 20005, By: Vivek Chopra, Esq., Selena J. Linde, Esq., Alexis Danneman, Esq.

WALTERS, BENDER STROHBEHN & VAUGHAN, P.C., Co–Lead Counsel for the Kessler Class and Counsel for the Mitchell Class, 2500 City Center Square, 1100 Main, Kansas City, Missouri 64105, By: R. Frederick Walters, Esq., Karen W. Renwick, Esq., David M. Skeens, Esq., Garrett M. Hodes, Esq., Michael B. Sichter, Esq.

SEDGWICK LLP, Counsel for Underwriters at Lloyd's of London, 225 Liberty Street 28th Floor, New York, New York 10281, By: J. Gregory Lahr, Esq., Timothy D. Kevane, Esq., Lawrence Klein, Esq.

MEMORANDUM OF DECISION

Sean H. Lane, UNITED STATES BANKRUPTCY JUDGE

Before the Court is Plaintiffs' motion to compel discovery from Defendant Certain Underwriters at Lloyd's of London ("Underwriters"). In this lawsuit about insurance coverage, Plaintiffs allege that Underwriters have improperly withheld claims handling documents on the basis of the attorney-client and work product privileges. See Motion to Compel Discovery ("Motion") at 1 [ECF No. 298]. Specifically, Plaintiffs allege that Underwriters used attorneys from a law firm—Sedgwick, Detert, Moran & Arnold, LLP ("Sedgwick")—as claims handlers and, therefore, cannot shield from discovery documents that reflect the claims handling activities performed by these Sedgwick attorneys. See id. at 1–2. Underwriters maintain, however, that these documents are privileged because Underwriters retained Sedgwick to provide legal advice on coverage issues under the applicable insurance policies. See Underwriters' Opp. to Motion ("Underwriters' Opp.") at 1 [ECF No. 299–16]. The parties also dispute the date when litigation became likely for purposes of when any attorney work product privilege would apply.

Since the filing of the Motion, the parties' positions have evolved as Underwriters have produced some of the previously withheld information. Notwithstanding the narrowing of their disagreements, however, the parties have been unable to resolve all their discovery disputes, thus requiring the Court's decision today.¹

BACKGROUND

We start with a brief history. In May 2012, Residential Funding Company, LLC ("RFC"), along with its parent companies and other affiliated entities, filed for relief under chapter 11 of the Bankruptcy Code. See Second Amended Complaint (the "Complaint") ¶ 1 [ECF No. 206]. Prior to the petition date, the Defendant insurers in this adversary proceeding sold comprehensive insurance policies to RFC's parent company, General Motors ("GM"). Id. ¶ 4. Underwriters provided GM with a Combined Directors and Officers Liability and Company Liability, Errors and Omissions Liability, Pension Trust Liability, and Mortgagees Errors and Omissions policy (the "Policy"). See id. ¶ 38; see also Policy, attached as Exh. 1 to Decl. of Vivek Chopra ("Chopra Decl.") [ECF No. 298–3]; Decl. of Bernard Levy ("Levy Decl.") ¶ 9 [ECF No. 299–15].² The Policy designated Eugene Elsbree of Sedgwick as the recipient of all claims notices. See Policy, Item G. The lead underwriter on the Policy was Novae Group ("Novae"), formerly known as SVB Syndicates Limited, with ACE Global Markets ("ACE") as the co-lead. See Decl. of Eugene Elsbree ("Elsbree Decl.") ¶ 11 [ECF No. 299–14].

Beginning in 2001, several class actions were filed against RFC and other parties on behalf of borrowers who had obtained second mortgage loans that were acquired by RFC on the secondary market. See Compl. ¶ 3. From 2001 to 2013, Sedgwick sent reports to Underwriters about these actions, which the parties here have referred to as the Kessler class action, the Mitchell class action, and the Related Missouri Actions (collectively, the "Underlying Actions"). See Motion at 6–7. These reports include so-called "Bordereaux Reports" and "Direct Reports," which provided information on the second mortgage claims, including the Underlying Actions and other claims. See id. at 7; see also Transcript of Hearing Held on December 21, 2016 ("Hr'g Tr.") 121:24–25 [ECF No. 304]. Plaintiffs contend that these reports provided Underwriters with an update on Sedgwick's investigation of the Underlying Actions, and demonstrate that Underwriters had delegated claims handling functions to Sedgwick for the Underlying Actions. See Motion at 7–8. Underwriters disagree, maintaining that Sedgwick was providing legal advice and counseling with respect to the second mortgage claims, specifically whether these claims implicated coverage under the Policy. See Underwriters' Opp. at 5; Elsbree Decl. ¶¶ 13–16; Levy Decl. ¶¶ 13–14,17.

A hearing on the Motion was initially held in late December 2016. Subsequent to the hearing, the parties continued to work together on discovery issues and further hearings were held with the Court on January 23, 2017, and February 28, 2017. During these hearings, the Court offered some observations and preliminary conclusions about the issues. Given the release of additional information by Underwriters, the parties submitted supplemental briefing after the last hearing. [See ECF Nos. 312, 313, 314, 315].³ There are now three primary issues before the Court: (i) whether Underwriters acted as claims handlers, rather than attorneys; (ii) the date by which Underwriters anticipated litigation; and (iii) whether information about the reserve level established by Underwriters for the Underlying Actions is discoverable.

DISCUSSION

A. The Attorney–Client Privilege

The purpose of the attorney-client privilege is "to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice." Upjohn Co. v. United States , 449 U.S. 383, 389, 101 S.Ct. 677, 66 L.Ed.2d 584 (1981). In determining whether the attorney-client privilege applies, the first inquiry is whether to apply state or federal law. In cases under the Bankruptcy Code, the Federal Rules of Evidence apply. See In re Asia Glob. Crossing, Ltd. , 322 B.R. 247, 254 (Bankr. S.D.N.Y. 2005) (citing Fed. R. Bankr. P. 9017 ; Fed. R. Evid. 1101(b) ). The "federal common law of privileges applies when federal law determines the substantive rights of the parties." Id. "On the other hand, the state privilege law controls if the underlying claim or defense is also governed by state law." Id. (citing Fed. R. Evid. 501 ; Bower v. Weisman , 669 F.Supp. 602, 603 (S.D.N.Y. 1987) ).

The parties agree that the Court should apply New York law to the dispute over attorney-client privilege.⁴ See AIU Ins. Co. v. TIG Ins. Co. , 2008 WL 4067437, at *5 (S.D.N.Y. Aug. 28, 2008). In New York, the attorney-client privilege is codified in C.P.L.R. 4503(a). The privilege "protects confidential communications between client and counsel where such communications are made for the purpose of providing or obtaining legal advice." HSH Nordbank AG N.Y. Branch v. Swerdlow , 259 F.R.D. 64, 70 (S.D.N.Y. 2009). Under New York law, there are essentially three elements of the attorney-client privilege: "[ (1) ] the existence of an attorney-client relationship, [ (2) ] a communication made within the context of that relationship for the purpose of obtaining legal advice, and [ (3) ] the intended and actual confidentiality of that communication." Safeco Ins. Co. of Am. v. M.E.S., Inc. , 289 F.R.D. 41, 46 (E.D.N.Y. 2011) (citation omitted); see also People v. Mitchell , 58 N.Y.2d 368, 373, 461 N.Y.S.2d 267, 448 N.E.2d 121 (1983). To validly claim the privilege, "the information sought to be protected from disclosure [must be] a ‘confidential communication’ made to the attorney for the purpose of obtaining legal advice or services." Id. ; see also Rossi v. Blue Cross & Blue Shield of Greater N.Y. , 73 N.Y.2d 588, 593, 542 N.Y.S.2d 508, 540 N.E.2d 703 (1989). The privilege is "limited to communications—not underlying facts," and the communication "must be primarily or predominantly of a legal character." Spectrum Sys. Int'l Corp. v. Chem. Bank , 78 N.Y.2d 371, 377–78, 575 N.Y.S.2d 809, 581 N.E.2d 1055 (1991). "So long as the communication is primarily or predominantly of a legal character, the privilege is not lost merely by reason of the fact that it also refers to certain nonlegal matters." Rossi , 73 N.Y.2d at 594, 542 N.Y.S.2d 508, 540 N.E.2d 703. Communications protected by the attorney-client privilege are generally "absolutely immune from discovery." N.Y. Times Newspaper Div. of N.Y. Times Co. v. Lehrer McGovern Bovis, Inc. , 300 A.D.2d 169, 752 N.Y.S.2d 642, 644–45 (1st Dep't 2002) (citing N.Y. C.P.L.R. 3101(b) ; Spectrum , 78 N.Y.2d 371, 575 N.Y.S.2d 809, 581 N.E.2d 1055 ).⁵

Under New York law, an insurance company's claim handling activities are generally subject to discovery even if they were performed by an attorney. See Stephenson Equity Co. v. Credit Bancorp., Ltd. , 2002 WL 59418, at *3 (S.D.N.Y. Jan. 16, 2002) ("Courts have held that reports prepared by attorneys investigating insurance claims on behalf of an insurance company are not privileged, because the reports, although prepared by attorneys, are prepared as part of the ‘regular business' of the company.") (internal quotations and citation omitted); see also Melworm v. Encompass Indem. Co. , 112 A.D.3d 794, 977 N.Y.S.2d 321, 323 (2d Dep't 2013) ("Reports prepared by insurance investigators, adjusters, or attorneys before the decision is made to pay or reject a claim are ... not privileged and are discoverable[.]"). Indeed, "[d]ocuments prepared in the ordinary course of an insurance company's investigation to determine whether to accept or reject...