The Harrisburg Auth. v. Cit Capital USA.. Inc. .

• Decision Date: 14 June 2010
• Docket Number: Civil No. 4:08-cv-0180.
• Citation: 716 F.Supp.2d 380
• Parties: The HARRISBURG AUTHORITY, et al., Plaintiffs, v. CIT CAPITAL USA, INC., et al., Defendants.
• Court: U.S. District Court — Middle District of Pennsylvania

716 F.Supp.2d 380

The HARRISBURG AUTHORITY, et al., Plaintiffs,

v.CIT CAPITAL USA, INC., et al., Defendants.

Civil No. 4:08-cv-0180.

United States District Court,M.D. Pennsylvania.

June 14, 2010.

Ronald M. Katzman, Royce L. Morris, Steven E. Grubb, Goldberg, Katzman & Shipman, Charles B. Zwally, Mette, Evans & Woodside, Harrisburg, PA, Daniel Lawrence Sullivan, Saidis, Flower & Lindsay, Camp Hill, PA, for Plaintiffs.

Norman E. Greenspan, Stephanie C. Chomentowski, Blank Rome LLP, Philadelphia, PA, for Defendants.

ORDER

JOHN E. JONES III, District Judge.

THE BACKGROUND OF THIS ORDER IS AS FOLLOWS:

Pending before the Court is Plaintiff The Harrisburg Authority's (“THA”) appeal from the July 14, 2009 discovery order issued by Magistrate Judge J. Andrew Smyser, (Doc. 78), which resolved THA's Motion to Compel, (Doc. 59). For the reasons that follow, we shall deny the appeal and affirm the Magistrate Judge's July 14, 2009 order.

I. FACTUAL BACKGROUND ¹

The case sub judice involves THA's project to upgrade and modernize the Harrisburg Materials, Energy, Recycling and Recovery Facility, a trash-to-steam waste treatment facility (“the incinerator”). (Amend. Compl., ¶¶ 1, 10). To finance the incinerator project, THA issued a series of bonds. ( Id. at ¶ 11). Dauphin County (“Dauphin”), in recognition of the countywide benefits of the project and its responsibilities for municipal waste planning, entered into agreements with THA to guarantee some of the bonds. ( Id. at ¶ 12).

THA contracted with Barlow Projects, Inc. (“Barlow”) to design the incinerator, retrofit the facility, and provide state-of-the-art “Combustion Technology.” ( Id. at ¶¶ 14, 16.) The agreement between THA and Barlow was memorialized in three separate contracts in May 2004. In the “Equipment Contract,” THA agreed to pay almost $52 million for the proprietary and other specialized equipment necessary to retrofit the incinerator. ( See id. at ¶ 18(I)). In the “Services Contract,” THA agreed to pay almost $13 million to Barlow for engineering, construction, and start-up of the incinerator. ( See id. at ¶ 18(II)). Finally, in the “Sublicensing Agreement,” THA purchased a nonexclusive license to the use Barlow's proprietary Combustion Technology which was to be installed in the incinerator. ( See id. at ¶ 18(III)).

The retrofit of the incinerator was originally scheduled to be completed in twenty-four months, and the facility was designed to be restarted in late 2005. ( See id. at ¶ 21). This was not to be. Plaintiffs THA and Dauphin allege that Barlow was negligent in its work and breached its contract with THA, and that the Barlow's design flaws, unsuitable equipment, construction delays, poor project management, and lack of financial resources prevented the incinerator project from being completed. ² ( Id. at ¶ 17). In late fall of 2005, Barlow was increasingly behind schedule and out of money, despite having received substantially all of the contract price from THA. ( Id. at ¶¶ 22-23). Barlow eventually obtained additional capital in the amount of $25 million from defendant CIT Capital USA, Inc. (“CIT”). ( Id. at ¶ 24). ³

To secure CIT's funding, a “Restated Sublicensing Agreement” replaced the original Sublicensing Agreement. ( See id. at ¶ 26.) Via the Restated Sublicensing Agreement, Barlow Projects Harrisburg, LLC (“Barlow HBG”), the Barlow entity which had licensed the rights to the Combustion Technology from Barlow for purposes of the incinerator project, licensed that technology to THA in exchange for $25 million in fees. ( See Defs.' Amend. Countercl. ¶¶ 19, 24-25). Barlow HBG then assigned its rights to payment from THA to a newly created Barlow entity, Aireal Technologies of Harrisburg, LLC (“Aireal”). ( Id. at ¶ 24(b)). THA consented to this assignment. ( Id. at ¶ 24(c)). Finally, CIT purchased Barlow HBG's interest in Aireal for $25 million. ( Id. at ¶ 24(e)). The $25 million from CIT was used by Barlow to continue work on the incinerator project. ( Id. at ¶ 28). As a result of these transactions, THA allegedly became obligated to pay the restated $25 million license fee to Aireal, which is now owned by CIT.

Plaintiffs allege that the Restated Sublicensing Agreement is unenforceable for lack of consideration because THA had already paid Barlow $2.7 million in full satisfaction of the original license fee six months prior to entering into the restated agreement. (Amend. Compl. ¶¶ 40, 50-51). Plaintiffs also allege that THA's entering into the Restated Sublicensing Agreement was an ultra vires act in violation of THA's authority and Pennsylvania's Municipal Authorities Act, 53 Pa.C.S.A. § 5601, et seq. in that THA agreed to pay for a license for which it had already paid in full and, effectively, agreed to guarantee the debts of its private party contractor. ( Id. at ¶¶ 52, 70). Plaintiffs also contend that, pursuant to Amendment No. 9 to the Equipment Contract, Barlow and its associated entities assumed all of THA's payment obligations, and that THA's only obligation was to forward payments from Barlow to CIT. ( Id. ¶ 57, 61).

In March 2007, THA failed to make payments to Aireal as purportedly required by the Restated Sublicensing Agreement. (Amend. Compl. ¶ 101; Amend. Countercl. ¶¶ 31, 32.) In June 2007, THA, Aireal, and CIT entered into a Forbearance Agreement, which acknowledged THA's obligations under the Restated Sublicensing Agreement. (Amend. Compl. ¶ 101.) Plaintiffs allege that the Forbearance Agreement merely repeats the void and unenforceable provisions of the Restated Sublicensing Agreement and therefore is also void and unenforceable. ( Id. at ¶¶ 101, 103.) Upon expiration of the forbearance period in November 2007, CIT and Aireal provided notice to THA of its default under the Restated Sublicensing Agreement, gave THA the required sixty-day period to cure the default, and notified THA of their intent to seek legal remedies if the default was not cured. ( Id. at ¶ 107, Ex. J.)

Before expiration of the sixty-day grace period, Plaintiffs THA and Dauphin filed suit, asserting two claims against CIT and Aireal: one seeking a declaratory judgment that, inter alia, the Restated Sublicensing Agreement is void and unenforceable, ( id. at Counts I, III), and one seeking a permanent injunction enjoining CIT and Aireal from enforcing, inter alia, the Restated Sublicensing Agreement ( id. at Counts II, IV). CIT and Aireal both counterclaimed against THA for, inter alia, breach of the Restated Sublicensing Agreement. (Amend. Countercl., Count I-III).

II. PROCEDURAL HISTORY

On March 30, 2009, THA filed the aforementioned Motion to Compel the Production of Documents. (Doc. 59) (the “Motion”). Through that Motion, THA sought from CIT; CIT's counsel, Moore Van Allen (“MVA”); and Aireal the production of documents listed in privilege logs that were being withheld on the basis of attorney-client privilege. THA contended that many of the descriptions in the privilege logs created by CIT and MVA were insufficiently specific and that numerous documents catalogued in the privilege logs were not subject to the attorney-client privilege. THA sought the production of all of the documents entered in the privilege logs. As an alternative to the outright production of these documents, the Motion requested that the Court conduct an in camera review of the same in order to assess the applicability of the asserted privilege. As a result of both the voluminous nature of the documents sought, the complexity of the dispute itself, and our overburdened caseload at the time, we lacked the judicial resources to properly resolve the dispute. Consequently, we referred it to the able hands of Magistrate Judge J. Andrew Smyser pursuant to 28 U.S.C. § 636(b)(1)(A). ⁴ Magistrate Judge Smyser issued an order resolving the Motion to Compel on July 14, 2009. (Doc. 78). On July 24, 2009, THA appealed from that order pursuant to Federal Rule of Civil Procedure 72(a) ⁵ and Middle District of Pennsylvania Local Rule 72.2 ⁶ and filed a brief in support thereof. (Docs. 79, 80). CIT and Aireal filed an opposing brief on August 7, 2009, (Doc. 85), and THA filed a reply brief on August 18, 2009, (Doc. 86). The parties subsequently filed supplemental briefs, as requested. ( See Docs. 90, 91, 94). Accordingly, the appeal is ripe for disposition. As a first step in resolving the appeal, we shall address the particulars of the appealed order.

III. MAGISTRATE JUDGE SMYSER'S ORDER

As a method of resolving the aforementioned discovery dispute, Magistrate Judge Smyser ordered CIT to produce 50 of the requested documents, selected by THA, from the privilege logs with the understanding that such production would not constitute waiver of the asserted privilege. ⁷ This procedure failed to resolve the disputes relating to whether the descriptions in the privilege logs were accurate and whether the documents in question were in fact privileged. Accordingly, Magistrate Judge Smyser ordered letter briefs addressing these issues.

Before resolving the discovery dispute, Magistrate Judge Smyser was faced with a choice of law decision. ⁸ As the Magistrate Judge noted, a federal court exercising diversity jurisdiction must apply the choice of law rules of the forum state. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 497, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); see also Nafar v. Hollywood Tanning Sys., Inc., 339 Fed.Appx. 216, 220 (3d Cir.2009) (citation omitted). As we explain below in more detail, the first step in Pennsylvania's choice of law methodology is to determine whether an “actual conflict” exists. Hammersmith v. TIG Ins. Co., 480 F.3d 220, 230 (3d Cir.2007). Magistrate Judge Smyser correctly noted that “[i]f two jurisdictions' laws are the same, then there is no conflict at all, and a choice of law analysis is unnecessary.” Id. ⁹ Accordingly, the Magistrate Judge proceeded to identify the contours of the attorney-client privilege law in...