Trust Beneficiaries of SNTL Corp. v. JP Morgan Chase (In re Superior Nat'l Ins. GR.)

• Decision Date: 11 September 2014
• Docket Number: Bankruptcy No. 1:00–bk–14099–GM.,Adversary No. 1:13–ap–01099–GM.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Central District of California
• Parties: In re SUPERIOR NATIONAL INSURANCE GR., Debtor(s). The Litigation Trust for the Trust Beneficiaries of SNTL Corporation and Certain Affiliates, Plaintiff(s), v. JP Morgan Chase, JP Morgan Chase Bank N.A., Defendant(s).

518 B.R. 562

In re SUPERIOR NATIONAL INSURANCE GR., Debtor(s).The Litigation Trust for the Trust Beneficiaries of SNTL Corporation and Certain Affiliates, Plaintiff(s)

v.JP Morgan Chase, JP Morgan Chase Bank N.A., Defendant(s).

Bankruptcy No. 1:00–bk–14099–GM.

Adversary No. 1:13–ap–01099–GM.

United States Bankruptcy Court, C.D. California, San Fernando Valley Division.

Heard Aug. 8, 2014.

Filed Sept. 11, 2014.

Eric D. Winston, Quinn Emanuel Urquhart & Sullivan LLP, Los Angeles, CA, for Plaintiff(s).

Craig H. Averch, Richard F. DeLossa, Los Angeles, CA, for Defendant(s).

MEMORANDUM OF OPINION DENYING DEFENDANTS' MOTION TO COMPEL PRODUCTION OF DOCUMENTS (Docket # 160)

GERALDINE MUND, Bankruptcy Judge.

Defendants JP Morgan Chase Bank, N.A. and JP Morgan Chase & Co. (“Chase”) move to compel the production of documents withheld by the Plaintiff, the Litigation Trust for the Trust Beneficiaries of SNTL Corporation and Certain Affiliates (the “Trust”).

Factual Background

SNTL Holdings Corp. (“SNTL”) and its non-insurance subsidiaries (collectively with SNTL, the “Debtors”) filed for chapter 11 relief on April 26, 2000 (# 00–bk–14099–GM). Also in 2000, SNTL's five insurance subsidiaries were seized and placed into conservatorships by state agencies in California and New York.

The Debtors' primary assets were over $1 billion of net operating loss carryforwards (“NOLs”). Chase held about $19 million of the Debtors' senior debt. On June 21, 2002, the Debtors' Second Amended Chapter 11 Joint Plan of Reorganization as amended (the “Plan”) was confirmed (BC Dkt. 709–1). The Plan was structured to realize value from the NOLs, and thus was shaped by the requirements of tax law. In essence, Chase acquired all equity in SNTL so that Chase could use the NOLs to offset its tax liability and then pay most of the value of those tax savings to the Trust, which was created for the benefit of the Debtors' stakeholders pursuant to the Plan and a Litigation Trust Agreement.

On May 12, 2013, the Trust filed a complaint (the “Complaint”), which commenced this adversary proceeding (13–ap–1099), alleging that Chase has had the benefit of over $2.2 billion in NOL's from the Debtors, which has resulted in tax savings to Chase of over $775 million, yet Chase has not paid anything to the Trust. Chase brought motions to dismiss both the Complaint and a First Amended Complaint later filed by the Trust. As a result of the Court's rulings on these motions to dismiss, the Trust filed a Second Amended Complaint (the “SAC”) on April 30, 2014 (AP Dkt. 106), which is the operative complaint in this adversary proceeding. The SAC seeks recovery on Breach of Contract, Breach of Implied Covenant of Good Faith and Fair Dealing, Anticipatory Breach of Contract, Restitution and Reformation of the Plan. Chase filed an answer to the SAC on May 15, 2014 (AP Dkt. 117).

In the meantime, the Trust and Chase have been conducting discovery, have stipulated to various scheduling orders and have brought certain discovery disputes to this Court for resolution. Most recently, on July 16, 2014, the Court entered a scheduling order (pursuant to the parties' stipulation), which, among other things, set October 10, 2014 as the deadline to complete depositions of fact witnesses and respond to written discovery and April 20, 2015 as the “Trial–Ready Date” (AP Dkt. 157).

In response to Chase's document production requests to the Trust, the Trust has withheld or redacted all documents listed on the Privilege Log and Redaction Log (which are Exhibits 1 and 2 to the Declaration of Glenn Kurtz filed in support of this motion), asserting that these documents are protected from discovery by attorney-client privilege, the work product doctrine and/or the common interest doctrine. Chase maintains that many of these documents are not subject to privilege and should be produced and/or unredacted. As Chase and the Trust were unable to resolve the issue, they entered into a stipulation pursuant to Local Bankruptcy Rule 7026–1 (the “Stipulation”) and Chase filed this motion to compel.

This matter was heard on August 8, 2014 at 10:00 a.m. Prior to the hearing, the Court had posted a lengthy tentative ruling analyzing the legal issues raised in this motion and directing the parties to confer prior to the hearing to attempt to resolve these issues in light of the legal conclusions reached by the Court. The parties were unable to consensually resolve the issues. After hearing argument of counsel at the hearing, the Court directed each party to file its own proposal to resolve these issues, which the Court would use to prepare its ruling in this matter. The hearing was continued to September 16, 2014 at 10:00 a.m. as a holding date.

On August 15, 2014, the Trust filed its proposal which mirrored the language that the Trust had suggested to the Court at the August 8 hearing:

1. Neither party will be permitted to prove its claims or defenses by relying on evidence of the party's individualized intent or unilateral mistake (or lack thereof);

2. To the extent either party intends to prove mutual intent and/or mutual mistake (or lack thereof), the party will do exclusively on the basis of non-privileged evidence (e.g., information exchanged between the parties, or information submitted or represented to the Court);

3. Neither party will present attorney testimony regarding communications with its clients to which the other party was not included;

4. Neither party will present attorney testimony regarding the attorney's individual analysis or mental impressions of the Plan or other documents approved by the Court in connection with the Plan;

5. The parties may present attorney testimony regarding non-privileged communications or representations between the parties or to the Court.

Trust's Proposal (AP Dkt. 190).

On August 22, 2014, Chase filed its proposal:

(i) the Trust agrees to withdraw its reformation and restitution claims because such claims are based on the parties' intent, understanding or contemplation of (1) the NOL Utilization Value, (2) the Turnaround Amount, (3) the Later Recognized NOLs, (4) the time value of money (or interest) related to the Turnaround Amount, and (5) Chase's purported obligation to engage in the Trust's alleged tax planning;

(ii) the Trust agrees to narrow its breach of contract, breach of the implied covenant of good faith and fair dealing and anticipatory breach of contract claims to exclude any evidence concerning the parties' intent, understanding, or contemplation of (1) the NOL Utilization Value, (2) the Turnaround Amount, (3) the Later Recognized NOLs, (4) the time value of money (or interest) related to the Turnaround Amount, and (5) Chase's purported obligation to engage in the Trust's alleged tax planning;

(iii) the Trust agrees to not present attorney testimony to support its claims.

Defendants JP Morgan Chase Bank N.A. and JP Morgan Chase & Co.'s Proposal (AP Dkt. 191).

Applicable Law

Although California and federal law governing privilege are substantially similar, certain differences in precedent may affect the determination of these issues. Thus, the appropriate choice of law should be considered. Attorney-client privilege and work product doctrine should each be analyzed separately, as the standards governing the two privileges differ in some respects.

Attorney–Client Privilege

Federal Rule of Evidence 501 states that “state law governs privilege regarding a claim or defense for which state law supplies the rules of decision.” See also Star Editorial v. United States Dist. Court, 7 F.3d 856, 859 (9th Cir.1993) ; Dynamic Fin. Corp. v. Kipperman (In re N. Plaza, LLC),

395 B.R. 113, 121 (S.D.Cal.2008). The claims in the SAC are all state law causes of action and both the Plan (§ 12.14) and the EON (§ 10) provide that they are governed by California law, so the California law of privilege (Cal.Code. Evid. § 950 et seq. ) is applicable to the resolution of attorney-client privilege issues. If any of the claims were governed by federal law, then federal law of privileges would govern the entire proceeding. Wm. T. Thompson Co. v. General Nutrition Corp., 671 F.2d 100, 103 (3d Cir.1982) ; Dynamic Fin. Corp., 395 B.R. at 121.

Cal.Code Evid. § 954 provides that “the client, whether or not a party, has a privilege to refuse to disclose, and to prevent another from disclosing, a confidential communication between client and lawyer....”

[T]he fundamental purpose behind the privilege is to safeguard the confidential relationship between clients and their attorneys so as to promote full and open discussion of the facts and tactics surrounding individual legal matters.

Mitchell v. Superior Court, 37 Cal.3d 591, 599, 208 Cal.Rptr. 886, 691 P.2d 642 (Cal.1984) (citations omitted).

Work Product Doctrine

“Unlike the attorney client privilege, the work product privilege is governed, even in diversity cases, by a uniform federal standard embodied in Federal Rule of Civil Procedure 26(b)(3) ”. United Coal Cos. v. Powell Constr. Co., 839 F.2d 958, 966 (3d Cir.1988) ; Kandel v. Brother Int'l Corp., 683 F.Supp.2d 1076 (C.D.Cal.2009).

Rule 26(b)(3) (applicable through Fed. R. Bankr.P. 7026 ) provides a qualified immunity for tangible work product:

Ordinarily, a party may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party's attorney, consultant, surety, indemnitor, insurer, or agent). But, subject to Rule 26(b)(4), those materials may be discovered if:

(i) they are otherwise discoverable under Rule 26(b)(1) ; and

(ii) the party shows that it has substantial need for the materials to prepare its case and cannot, without undue hardship, obtain their substantial equivalent by other means.

Fed.R.Civ.P. 26(b)(3).

Bankruptcy is considered “litigation” for Rule 26(b) purposes. Osherow v. Vann (In re Hardwood P–G, Inc.), 403 B.R. 445 (Bankr.W.D.Tex.2009) ; Tri–State Outdoor Media Group, Inc. v....