In re Fundamental Long Term Care, Inc.

• Citation: 489 B.R. 451
• Decision Date: 19 March 2013
• Docket Number: No. 8:11–bk–22258–MGW.,8:11–bk–22258–MGW.
• Parties: In re FUNDAMENTAL LONG TERM CARE, INC., Debtor.
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Middle District of Florida

489 B.R. 451

In re FUNDAMENTAL LONG TERM CARE, INC., Debtor.

No. 8:11–bk–22258–MGW.

United States Bankruptcy Court,

M.D. Florida,

Tampa Division.

March 19, 2013.

Steven M. Berman, Esq., Shumaker Loop & Kendrick, LLP, for Trustee.

Patricia A. Redmond, Esq., Stearns Weaver Miller Weissler, Alhadeff & Sitterson, P.A., for Receiver.

Gregory M. McCoskey, Esq., Akerman Senterfitt, for Fundamental Administrative Services, LLC.

Marsha G. Rydberg, Esq., The Rydberg Law Firm, P.A., Rick L. Brunner, Esq., Brunner Quinn, for Christine Zack.

Steven N. Leitess, Esq., Leitess Friedberg PC, for Kristi Anderson.

Harley E. Riedel, Esq., Stichter Riedel Blain & Prosser, P.A., for the Estate of Juanita Jackson.

MEMORANDUM OPINION ON ATTORNEY–CLIENT PRIVILEGE AND WORK PRODUCT ISSUES

MICHAEL G. WILLIAMSON, Bankruptcy Judge.

Where a lawyer represents two clients in the same case, communications between the lawyer and one client ordinarily are not confidential as to the other client. Here, Trans Health Management, Inc. (“THMI”) and Trans Health, Inc. (“THI”) have been represented by the same lawyers in a series of wrongful death cases. THMI is the wholly owned subsidiary of the Debtor in this case, and THI is THMI's former parent. THI (and later its court-appointed receiver) retained counsel to defend THMI, which has been defunct since it was sold to the Debtor in 2006, in the wrongful death cases.

The Court recently ruled that the Chapter 7 Trustee has the right to control THMI's defense in those cases (including its rights with respect to the attorney-client privilege and attorney work product). Since that ruling, the Trustee has retained new counsel to defend THMI. And now she wants the litigation files (including all attorney-client communications and work product) from the lawyers representing THI and THMI so her new lawyers can prepare THMI's defense. She also wants the files to investigate potential breach of fiduciary duty and malpractice claims she believes she has against THI's Receiver and THMI's former counsel for letting more than $1 billion in judgments get entered against THMI in three of the wrongful death cases. But the law firms representing THI and THMI have refused to turn over their litigation files based on the attorney-client privilege, common interest doctrine, and work product doctrine.

This Court concludes that the Trustee (standing in THMI's shoes) is entitled to invoke the co-client exception to the attorney-client privilege to obtain communications relating to the defense of the wrongful death cases. THI (and the Receiver) owed THMI a fiduciary duty in retaining counsel for THMI and directing its defense under an indemnification agreement.¹ And under that indemnification agreement, THMI had the right to access the litigation files for the wrongful death cases. So the Trustee is entitled to any communications between THI (or the Receiver) and the law firms representing THI and THMI—as well as communications between those law firms and Fundamental Administrative Services—relating to the defense of the wrongful death cases.

The Trustee is also entitled to communications among the parties to a January 5, 2012 settlement agreement (as well as their lawyers) relating to the defense of those claims. It is true that THI (and the Receiver) share an interest in avoiding liability for wrongful death (and collection of any wrongful death judgment) with parties to the settlement agreement. But THMI shares the same interest in avoiding liability (although not collection on any liability). So while the common interest exception applies to protect communications between parties to the settlement agreement relating to the defense of the wrongful death cases from disclosure to third parties, it cannot be used to protect those communications from disclosure to THMI. The Court cannot conceive of any basis for THMI's attorneys to refuse to share communications they received from other parties with identical interests in the wrongful death cases.

Nor can THMI's former counsel use the work product doctrine to deny the Trustee access to the litigation files (including attorney work product). THMI, as a former client, is presumptively entitled to its files. And courts uniformly agree that an attorney cannot invoke the work product doctrine to deny its client access to its files. There is no policy reason to deviate from that well-accepted rule.

There are, however, two significant limitations on the Court's ruling. First, the Trustee is only entitled to communications or litigation files relating to the defense of the wrongful death cases. The Trustee is not entitled to any communications regarding this bankruptcy case or any matters unrelated to the defense of the wrongful death cases. Second, the Trustee and her attorneys cannot disclose to any third parties (specifically the plaintiffs in the wrongful death cases) any communications they receive under the co-client exception—other than agents assisting the Trustee and THMI's new counsel.

Background

The Parties

Before March 2006, THI owned a number of subsidiaries that operated nursing homes throughout the United States. THMI, which was a THI subsidiary at the time, provided “back office” administrative support for the nursing homes operated by the other THI subsidiaries. In March 2006, THI sold its stock in THMI to the Debtor under a stock purchase agreement.² After it was sold to the Debtor, THMI stopped providing support to the other THI subsidiaries and eventually was administratively dissolved. THMI is currently a defunct entity. In 2009, THI (and its remaining subsidiaries) filed for receivership in Maryland, and the Maryland state court appointed a receiver to manage THI's assets.³

The Wrongful Death Cases

Two years before the stock purchase agreement, the first of six wrongful death claims— Estate of Jackson—was filed.⁴ Two more cases— Estate of Nunziata and Estate of Jones—were filed before the stock purchase agreement.⁵ Another two cases— Estate of Webb and Estate of Sasser—were filed just months after the stock purchase agreement.⁶ And the last case— Estate of Townsend—was filed in 2009.⁷ THI and THMI were co-defendants in all but the Nunziata case (just THMI was a defendant in that case).

Retention of Counsel

Before filing for receivership, THI retained the following firms to represent it and THMI in the wrongful death cases: Mancuso & Dias, P.A.; Quintairos Prieto Wood & Boyer, P.A.; Fudge & McArthur, P.A.; and Schutt Schmidt Noey. From the record, it appears that Mancuso & Dias initially represented THI and THMI in the Jackson, Nunziata, and Sasser wrongful death cases. That firm later withdrew, and Quintairos Prieto substituted in as counsel in those cases in 2007. Fudge & McArthur represented THI and THMI in the Jones case, and Schutt Schmidt represented both parties in the Webb case.⁸ Once THI filed for receivership in 2009, the Receiver took over the defense of THI and THMI in the wrongful death cases.

Defense of the Wrongful Death Cases

What happened next is—like most of this case—subject to much disagreement. The Receiver says that the Maryland state court set two claims bar dates and that none of the wrongful death plaintiffs filed a claim in THI's receivership proceeding. The Receiver also says that counsel for the wrongful death plaintiffs (Wilkes & McHugh) represented to him on three separate occasions that none of his clients would be filing a claim in the receivership proceeding. Based on that, the Receiver says he stopped his defense of the six wrongful death claims—on behalf of both THI and THMI—around April 2010. Not surprisingly, the wrongful death plaintiffs tell a completely different version of the story. The Court need not resolve that dispute now. What is clear is that in April or May 2010, Quintairos Prieto withdrew as counsel in the Jackson, Nunziata, and Sasser cases.⁹

About three months later, the first of three judgments was entered in the wrongful death cases: on July 22, 2010, a $110 million judgment was entered against THI and THMI in the Jackson case after an “empty chair” trial. The plaintiff in Jackson then initiated proceedings supplementary against a number of entities (including the Debtor) in an attempt to collect on the judgment.¹⁰ And on September 13, 2011, a $110 million judgment was entered against the Debtor and others in the proceedings supplementary. Then, in November 2011, the Jackson plaintiff and the plaintiffs in the remaining wrongful death cases sought an order from a state court in Miami–Dade County declaring that they had timely filed claims in the Maryland receivership proceedings.¹¹

All of this led the Receiver to enter into an agreement with the other parties to the Jackson proceedings supplementary regarding the defense of the wrongful death cases. Under that agreement, entered into on January 5, 2012, Fundamental Administrative Services agreed to defend the Receiver against any claims arising out of the wrongful death cases. Fundamental Administrative Services also agreed to defendand oppose the wrongful death cases outside of the receivership proceeding. To fund that defense, Fundamental Administrative Services agreed to deposit $800,000 into escrow. General Electric Capital Corporation also agreed to deposit another $200,000. That settlement agreement was later approved by the Maryland receivership court.

Immediately after entering into the settlement agreement, the Receiver retained the Rydberg Law Firm to represent THMI in the Nunziata case. A default as to liability had already been entered in that case, and the jury trial on damages was set for January 9, 2012. So the Rydberg firm filed a notice of appearance in that case and moved to vacate the default. But the Nunziata plaintiff objected. The Nunziata court struck the Rydberg firm's notice of appearance, and the case ultimately proceeded to a jury trial on damages, where the jury—after an “empty chair” trial—entered a $200 million judgment...