Hof v. Laporte
| Decision Date | 17 September 2020 |
| Docket Number | CIVIL ACTION NO. 19-10696 SECTION: "D"(1) |
| Parties | RONALD J. HOF IN HIS CAPACITY AS CHAPTER 7 TRUSTEE OF THE BANKRUPTCY ESTATE OF FOODSERVICEWAREHOUSE.COM v. LAPORTE, A PROFESSIONAL ACCOUNTING CORPORATION, ET AL. |
| Court | U.S. District Court — Eastern District of Louisiana |
Before the Court is LaPorte, APAC's Motion to Compel witnesses Kevin Bouma and Madhu Natarajan to answer certain questions regarding communications that plaintiff contends are protected by the attorney-client privilege. (Rec. Doc. 58).1 For the following reasons, the Motion is DENIED.
In this lawsuit, plaintiff Ronald J. Hof (the "Trustee"), in his capacity as trustee of the Chapter 7 Bankruptcy Estate of FoodServiceWarehouse.Com, LLC ("FSW") alleges that LaPorte, APAC ("Laporte") is liable for professional negligence arising out of LaPorte's performance of audit services for FSW for the 2013 and 2014 fiscal years. The Trustee contends that the board of FSW relied on the 2013 audit in recommending and obtaining the approval of FSW's membership to explore the possibility of a public or private offering. To achieve that goal, FSW began expanding and taking on debt. It sought $75,000,000 in financing from JP Morgan Chase Bank,N.A. ("Chase") in June 2015. Chase began its field examination around the time that LaPorte was completing its field work in connection with its 2014 audit of FSW. According to the Trustee, Chase identified "numerous accounting deficiencies and misstatements that LaPorte was required, but failed, to identify and disclose in its audit opinions." (Rec. Doc. 1-2, at 5). FSW was unable to remedy the issues identified and Chase declined to advance funds to FSW in January 2016. FSW alleges that it brought in an experienced CPA/auditor and a restructuring advisor in February and March of 2016, but it was determined that restructuring would not be possible.
On May 20, 2016, FSW filed a bankruptcy petition. Since that time, the Trustee has liquidated all of the assets of FSW, except this claim.
The Trustee filed this adversary proceeding against LaPorte in bankruptcy court on May 13, 2019. On May 28, 2019, the Trustee filed a motion in this court to withdraw the bankruptcy reference. Trial is presently set to begin on January 11, 2021. The deadline to complete discovery is September 25, 2020.
LaPorte seeks an order compelling Kevin Bouma and Madhu Natarajan, a former FSW board member and employee respectively, to answer certain questions that they did not answer at their depositions on the basis of the attorney client privilege. Bouma's deposition was closed. Natarajan's deposition was left open and will continue on September 21, 2020.
Bouma was involved with FSW as a board member from its inception until his resignation in 2016. Natarajan was employed by FSW as general manager and CEO. In November 2016, the Trustee made damages claims against Bouma and Natarajan (among other past and present officers, directors, managers, and employees of FSW). Bouma and Natarajan were represented by independent counsel at that time, and they settled with the Trustee.
In advance of their depositions in the present case, Bouma and Natarajan each spoke with counsel for the Trustee. The Trustee submits that their testimony is relevant here to both FSW's reliance on the LaPorte audits and to FSW's damages. The Trustee submits that Bouma and Natarajan were part of the management of FSW during the time period relevant to this lawsuit and were among the most important individuals associated with FSW's expansion and spending at the time. During their depositions, counsel for the Trustee objected to either individual testifying about the contents of their discussions with counsel or about the identity of the documents they were shown during those discussions.
LaPorte argues that the attorney-client privilege is not applicable to the communications at issue because the former employees' conversations with counsel for the Trustee were not intended to provide any legal advice to FSW. Instead, LaPorte argues that the conversations were intended to help the Trustee's counsel pursue claims on behalf of FSW's creditors because FSW is essentially a dissolved entity. Further, LaPorte points out that the Trustee earlier made claims against Bouma and Natarajan. It argues that they cannot be considered "clients" of the Trustee.
The Trustee insists that the attorney-client privilege applies to the pre-deposition communications because Natarajan and Bouma were employed by and/or directing the actions of FSW during the relevant time period, they were among the most important individuals associated with FSW's expansion and spending, and they spoke with the Trustee's counsel to enable counsel to pursue this auditing malpractice case, a pre-bankruptcy petition asset of FSW.
1. Privilege over Communications with Former Employee
Louisiana state law governs privilege in this case asserting state law claims. Fed. R. Evid. 501. It appears that there is no reasoned Louisiana court decision addressing whether thecommunications of a corporation's counsel with the corporation's former employees are privileged. Hanover Ins. Co. v. Plaquemines Par. Gov't, 304 F.R.D. 494, 496 (E.D. La. 2015). In Hanover, the Eastern District of Louisiana considered the two federal cases cited by the Louisiana Supreme Court in entering a protective order preventing discovery of communications between corporate counsel and former employees relating to the subject matter of the litigation.2 Id. at 497. One was Justice Burger's concurrence in the United States Supreme Court's seminal decision in Upjohn Co. v. United States, in which Justice Burger expressed his view that when a former employee speaks "at the direction of the management with an attorney regarding conduct or proposed conduct within the scope of employment," the communications should be privileged. 449 U.S. 383, 403 (1981) (Burger, C.J., concurring). The other case cited by the Louisiana Supreme Court was In re Allen, where the United States Fourth Circuit Court of Appeals held that the attorney-client privilege extends to communications with former employees. 106 F.3d 582, 606 (4th Cir. 1997). At issue in Allen were counsel's notes and summary of her interview of a former employee. Id. In finding the communications privileged, the Fourth Circuit considered that the former employee had been employed during the time period at issue in the litigation, that the attorney interviewed the former employee at the direction of the former employer in order to provide legal advice to the former employer, and that the attorney needed the information in order to develop her legal analysis for the client. Id.
After considering these cases, the Hanover court concluded that:
the Louisiana Supreme Court would recognize the existence of a privilege between counsel for a corporation and a former employee of the corporation, at a minimum, where (1) the former employee was employed by the corporation during the timerelevant to the attorney's current representation of the corporation, (2) the former employee possesses knowledge relevant to the attorney's current representation of the corporation, and (3) the purpose of the communication is to assist the attorney in "(a) evaluating whether the employee's conduct has bound or would bind the corporation; (b) assessing the legal consequences, if any, of that conduct; or (c) formulating appropriate legal responses to actions that have been or may be taken by others with regard to that conduct."
304 F.R.D. at 499-500 (quoting Upjohn, 449 U.S. at 403 (Burger, C.J., concurring). The court found that communications between former employees and counsel for the former employers in preparation for their depositions as well as the identity of the documents shown to the former employees were protected by the attorney-client privilege. Id. at 500. The court observed that the former employees had been employed with their respective employers at the time of the construction project at issue in the litigation, they both had knowledge of the project and were the most important individuals associated with the project, and they spoke with the corporate attorneys in order to defend against the litigation. Id.
When a corporation files for bankruptcy and the trustee "prosecutes a right of action derived from the debtor, the trustee stands in the shoes of the debtor." In re Segerstrom, 247 F.3d 218, 224 (5th Cir. 2001). Thus, the trustee is vested with the authority to exercise the corporation's attorney-client privilege. Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 354 (1985). For example, post-termination communications between a former employee and the bankruptcy trustee of the former employee have been found protected by the attorney-client privilege. In In re Worldwide Wholesale Lumber, Inc., the Bankruptcy Court for the District of South Carolina applied the Fourth Circuit's analysis in Allen to hold that communications between the trustee's counsel and a former officer of the debtor were protected by the attorney client privilege to the extent the communications concerned matters within the scope of his corporate duties and were made for the purpose of investigation and rendering legal advice to the trustee.392 B.R. 197, 202-03 (Bankr. D.S.C. 2008). Two conversations were at issue: one took place a few weeks prior to the former officer's deposition and the other took place just prior to the deposition. Id. at 200. Both were protected. Id. at 203.
Applying the factors announced in Hanover, the court finds that the attorney client privilege protects the communications between the Trustee's counsel with Natarajan and Bouma in preparation for their depositions. First, Natarajan and Bouma were directors or employees of FSW during the time relevant to the current legal matter. Second, as a result of their roles...
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