Carlyle Investment Management, L.L.C. ( 2015 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
CARLYLE INVESTMENT )
MANAGEMENT L.L.C., TC GROUP, )
L.L.C., TCG HOLDINGS, L.L.C., DAVID )
M. RUBENSTEIN, DANIEL A. )
D‟ANIELLO, WILLIAM E. CONWAY, )
JR., JAMES H. HANCE, JOHN C. )
STOMBER, and MICHAEL J. ZUPON, ) C.A. No. 7841-VCP
)
Plaintiffs, )
)
v. )
)
MOONMOUTH COMPANY S.A., PLAZA )
MANAGEMENT OVERSEAS S.A., )
PARBOLD OVERSEAS LTD., LOUIS )
J.K.J. REIJTENBAGH, and STICHTING )
RECOVERY CCC, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: November 19, 2014
Date Decided: February 24, 2015
R. Judson Scaggs, Jr., Esq., Shannon E. German, Esq. MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, Delaware; Robert A. Van Kirk, Esq., R. Hackney
Wiegmann, Esq., Sarah F. Teich, Esq., Brian C. Rabbitt, Esq., WILLIAMS &
CONNOLLY LLP, Washington, D.C.; Attorneys for Plaintiffs.
Michael F. Bonkowski, Esq., COLE, SCHOTZ, MEISEL, FORMAN & LEONARD,
P.A., Wilmington, Delaware; Alan Kolod, Esq., Mark N. Parry, Esq., MOSES &
SINGER LLP, New York, New York; Attorneys for Plaza Management Overseas S.A.
and Louis J.K.J. Reijtenbagh.
David L. Finger, Esq., FINGER & SLANINA, LLC, Wilmington, Delaware; Attorneys
for Liquidators of Carlyle Capital Corporation Limited (in Liquidation).
PARSONS, Vice Chancellor.
Although this case is stayed on the merits, I allowed discovery solely on the issue
of personal jurisdiction over the defendants. What resulted is an international discovery
dispute. Before the Court is a motion by the Liquidators of Carlyle Capital Corporation
Limited (in Liquidation) (“CCC”) to intervene in this action for the limited purpose of
seeking a protective order concerning the authorized discovery.1 For the reasons that
follow, the motion to intervene is granted, and the motion for a protective order is granted
without prejudice to the plaintiffs‟ ability to renew their motion to compel in accordance
with Section II.E of this Memorandum Opinion.
I. BRIEF BACKGROUND
CCC is a Guernsey limited company, incorporated and registered in the Bailiwick
of Guernsey, a British Crown dependency. CCC lost over a billion dollars during the
financial crisis and was placed into liquidation in March 2008. The Liquidators are
officers of the Royal Court of Guernsey and are charged with winding up the affairs of
CCC and attempting to extract any remaining value for its stakeholders. After
investigation, the Liquidators determined that CCC‟s only remaining potentially valuable
assets were claims against those persons and entities involved with CCC‟s management
and operations. The plaintiffs in this case, Carlyle Investment Management, L.L.C. and
various related entities and persons (together, “Plaintiffs” or “Carlyle”),2 are the
1
Liquidators‟ Mot. to Intervene (“MTI”) 1.
2
The other plaintiffs are: TC Group, L.L.C., TCG Holdings, L.L.C., David M.
Rubenstein, Daniel A. D‟Aniello, William E. Conway, Jr., James H. Hance, John
C. Stomber, and Michael J. Zupon.
1
defendants in contentious litigation that ensued—and remains ongoing—in Guernsey
(generally, the “Guernsey Litigation”). Louis J.K.J. Reijtenbagh and entities related to
him (together, “Defendants”)3 previously held a significant stake in CCC. Plaintiffs
allege that Reijtenbagh violated certain releases between him and Carlyle by pursuing,
assisting with, or financing litigation against Carlyle.
To pursue the Guernsey Litigation in light of CCC‟s financial situation, the
Liquidators required outside litigation funding, which they eventually received from
various unknown parties. Defendants allegedly provided at least some of that funding, in
violation of the releases.
Defendants previously attempted to remove this case to federal court. That effort
failed and the case was remanded back to this Court. Defendants appealed the remand
order. On May 6, 2014, I stayed this case pending the Third Circuit‟s decision on
Defendants‟ appeal (the “May 2014 Decision”). The Third Circuit heard argument on
that appeal on June 4, 2014, and took the case under advisement. Although I decided to
stay all merits-related litigation in this case, I allowed the parties to conduct limited
discovery relating to personal jurisdiction in Delaware, because “that discovery likely
would be useful no matter what the outcome of the appeal is.” 4 When I allowed that
3
The other defendants are: Moonmouth Company S.A., Plaza Management
Overseas S.A., Parbold Overseas Ltd., and Stichting Recovery CCC.
4
Mot. to Stay Arg. Tr. 52.
2
limited discovery to proceed, it was anticipated that the parties could coordinate on this
narrow issue without oversight by this Court.5 That hope was misplaced.
On May 14, 2014, Defendants moved for reconsideration of the May 2014
Decision and for a protective order. Plaintiffs opposed that motion, and I denied it in a
letter opinion dated August 21. On July 21, Plaintiffs moved to compel production of
certain documents relating to Defendants‟ alleged funding of the CCC Liquidators and
the various lawsuits filed by the Liquidators, one of which initially was pending in
Delaware. After briefing, I heard argument on the motion to compel on August 28, 2014,
at which time I granted Plaintiffs‟ motion in part (the “Production Order”).
On September 8, the Liquidators moved to intervene in this action for the purpose
of seeking a protective order as to the documents I ordered produced, which dealt with
the nature of the relationship between Defendants and the Liquidators (the “Discovery
Documents”). The Liquidators asserted that the Discovery Documents are protected by
confidentiality orders of the Royal Court of Guernsey and are subject to litigation
privilege under Guernsey law and work product immunity under Delaware law. Briefing
on the Liquidators‟ motion concluded on October 16.6 I heard argument on October 20,
2014 (the “Argument”). At the Argument, it was disclosed that, despite the Production
5
Id. at 52-53.
6
Briefing on the motion to intervene and for a protective order consisted of: (1) the
MTI; (2) Plaintiffs‟ Opp‟n Br. (“POB”); (3) the Liquidators‟ Reply Br. (“LRB”);
(4) Defendants‟ “Reply” Br. in Supp. of Intervention (“DRB”); (5) Plaintiffs‟ Sur-
Reply in Opp‟n (“PSRB”); and (6) the Liquidators‟ Opp‟n to the Sur-Reply
(“LOSR”).
3
Order, Defendants had not produced any of the Discovery Documents. 7 I again ordered
the Discovery Documents produced (the “Second Production Order”),8 but limited access
to them to Defendants‟ lawyers not involved in the Guernsey Litigation.9 I also required
Defendants to file a compliance statement.10
Defendants submitted the required compliance statement on November 10 (the
“Compliance Statement”). According to the Compliance Statement, Defendants
produced: (1) a redacted copy of the Funding Agreement with a redaction log; and (2) a
privilege log of individual documents in their possession consisting of the
communications potentially concerning the relationship between Defendants or their
affiliates and the Liquidators. Those communications, referred to herein as the Discovery
Documents, are 92 documents comprising roughly 700 pages that concern the
negotiations between an affiliate of Defendants and the Liquidators pertaining to the
funding agreement. The Liquidators have asserted claims of privilege and confidentiality
as to all 92 documents.
7
MTI Arg. Tr. 25-27.
8
Id. at 27 (“You are going to list every single one of the documents that I ordered
produced that now—that are in your possession that have not been produced. And
if you‟ve got some basis as to why they‟re not produced, then you state what it
is.”).
9
Id. at 87-89. In terms of the attorneys of record for Defendants in this action, this
meant that Plaintiffs‟ attorneys at Morris, Nichols, Arsht & Tunnell (“Morris
Nichols”) were to receive the documents, but that Plaintiffs‟ counsel at Williams
& Connolly were not to have access to them.
10
Id. at 37-38.
4
Finally, pursuant to a discussion of certain other issues at the Argument, the
parties were given an opportunity to file supplemental briefing focused on when the
Liquidators first became aware of this case. That supplemental briefing concluded on
November 19, 2014.11
II. ANALYSIS
Several issues require resolution. First, can the Liquidators intervene in this case
under the rules of this Court? Second, did the Liquidators unreasonably delay in moving
to intervene such that I should hold their claims of privilege and confidentiality waived?
Third, are the Discovery Documents protected by work product privilege or litigation
privilege, which is the Guernsey equivalent of work product? Fourth, how should this
case proceed from this point?
A. Can the Liquidators Intervene?
1. Standard for intervention
In certain situations a nonparty may intervene in a case pending before this Court,
either as of right or by permission of the Court in its discretion. Court of Chancery Rule
24(a) governs intervention as of right and states that
[u]pon timely application anyone shall be permitted to
intervene in an action: (1) [w]hen a statute confers an
unconditional right to intervene; or (2) when the applicant
claims an interest relating to the property or transaction which
is the subject of the action and the applicant is so situated that
the disposition of the action may as a practical matter impair
11
The supplemental briefing consisted of: (7) the Liquidators‟ Supplemental Br. in
Supp. of the MTI (“Ls.‟ Suppl. Br.”); and (8) Plaintiffs‟ Supplemental Br. in
Opp‟n to the MTI (“Pls.‟ Suppl. Br.”).
5
or impede the applicant‟s ability to protect that interest,
unless the applicant‟s interest is adequately represented by
existing parties.12
A potential intervenor “need only claim, rather than prove, an interest in the subject of
the litigation; the validity of that claimed interest is assessed by reference to the
allegations accompanying the motion to intervene, and such allegations are accepted as
true.”13
Even if a person does not have a right to intervene, he still may be permitted to
intervene under the less exacting standard of Rule 24(b), which allows intervention
“(1) [w]hen a statute confers a conditional right to intervene; or (2) when an applicant‟s
claim or defense and the main action have a question of law or fact in common.”14 If a
person desires to intervene, he must serve a motion so indicating upon all of the parties,
stating the grounds therefore, as well as a pleading setting forth the claim or defense for
which intervention is sought.15 “Necessarily, however, under either variety of
intervention the applicant must, as a threshold matter, present a potentially valid claim.”16
12
Ct. Ch. R. 24(a).
13
Harris v. RHH P’rs, LP, 2009 WL 891810, at *3 (Del. Ch. Apr. 3, 2009).
14
See Ct. Ch. R. 24(b); United Rentals, Inc. v. RAM Hldgs., Inc., 2007 WL 4327770,
at *1 (Del. Ch. Nov. 29, 2007).
15
Ct. Ch. R. 24(c).
16
United Rentals, Inc., 2007 WL 4327770, at *1.
6
2. The Liquidators satisfy the standard for mandatory intervention
The Liquidators seek to intervene under Rule 24(a) “for the limited purpose of
seeking a protective order concerning discovery ordered by this Court.”17 For the Court
to grant that request, the Liquidators must have: (a) timely moved to intervene, (b) in
order to protect a property interest at issue in this case, (c) that would be impaired by the
disposition of this action, (d) under circumstances where their interests are not adequately
represented by Defendants. The Liquidators satisfy these requirements, with the possible
exception of timeliness, which I address in the next Section.
Generally, the Liquidators wish to assert privilege over a series of documents
relating to Defendants‟ funding of the Liquidators‟ lawsuits against Carlyle. The
Liquidators assert that discovery into their funding agreement and related documents, i.e.,
the Discovery Documents, will reveal their mental impressions and evaluations as to the
strengths and weaknesses of the ongoing litigation in Guernsey. This Court twice has
ordered production of those documents. Consequently, the disposition of this action
would impair the Liquidators‟ interest in protecting the Discovery Documents. I am
satisfied that the Liquidators‟ interest in attempting to protect the confidentiality of their
funding documents and negotiations is a sufficiently significant interest as to satisfy the
Rule 24(a)(2) standard. Absent intervention, that interest would be impaired because the
17
MTI 1.
7
disputed documents would have to be produced.18 Thus, elements (b) and (c) of the
applicable standard are satisfied.
Although Plaintiffs argue otherwise, the Liquidators‟ interests are not adequately
represented by Defendants. In this action, Plaintiffs accuse Defendants of having
breached a release between them. The Liquidators have no interest in that dispute
beyond their efforts to keep confidential the Discovery Documents. Instead, the
Liquidators represent CCC, and it is on behalf of CCC that the Liquidators assert their
privilege claims under Guernsey and Delaware law. Defendants have no standing to
assert such privilege claims—particularly those asserted under Guernsey law. For that
reason, I find that the Liquidators‟ interests are not adequately represented by
Defendants.19 Accordingly, element (d) of the standard under Rule 24(a) also is satisfied.
B. Should the Court Conclude that the Liquidators Are Estopped from
Asserting Privilege Claims Because of Their Tactical Delay?
Having determined that the Liquidators meet the other requirements for
intervention under Rule 24(a), I turn to the dispute over the timeliness of their motion.
18
See, e.g., Stornawaye Capital LLC v. Smithers, 2010 WL 673291, at *2 (Del. Ch.
Feb. 12, 2010) (concluding that alleged interest in a property subject to foreclosure
satisfied the Rule 24(a)(2) requirement); Noe v. Kropf, 2008 WL 4603577, at *4
(Del. Ch. Oct. 15, 2008) (finding that being a stockholder satisfied the Rule
24(a)(2) requirement in a Section 225 action); Flynn v. Bachow, 1998 WL 671273,
at *2 (Del. Ch. Sept. 18, 1998) (granting a motion to intervene on the basis that
intervenor brought a colorable claim that the defendant violated the limited
partnership agreement by not seeking approval from an advisory committee before
making an investment).
19
See Noe, 2008 WL 4603577, at *4 (determining that failure to allow intervention
likely would result in default judgment against the defendants).
8
This Court issued the Production Order on August 28, 2014. The Liquidators moved to
intervene on September 8. Normally, seeking to intervene slightly more than a week
after it became clear that one‟s interests could be affected adversely would not be deemed
untimely. Plaintiffs, however, argue that the Liquidators knew about this action and the
relevant discovery dispute significantly earlier and tactically delayed becoming involved
in the hope that I would not compel production of the Discovery Documents. On that
basis, Plaintiffs aver that the Liquidators could have intervened at least a month sooner,
which would have conserved resources, because the Court would not have been forced to
rule piecemeal on two consecutive motions that concern essentially the same subject
matter.
Tardiness in moving to intervene can be a valid reason to deny a motion for
intervention.20 Here, the parties vigorously dispute when the Liquidators had notice that
Plaintiffs were seeking the funding agreement and related documents. The Liquidators
assert that they did not know about the discovery dispute until September 2, 2014.21
Even assuming that assertion is true, there remains the issue of whether the Liquidators‟
20
See, e.g., In re Crimson Exploration S’holder Litig., at *28 (Del. Ch. Oct. 24,
2014) (noting “serious concern” with the fact that the proposed intervenor waited
for five months after his related action was stayed and after briefing on the
defendants‟ motion to dismiss concluded before attempting to intervene); Great
Am. Leasing Corp. v. Republic Bank, 2003 WL 22389464, at *1 (Del. Ch. 2003)
(finding intervention untimely when proposed intervenors had actual knowledge
of the action for nearly nine months); Peak Prop. & Cas. Ins. Co. v. Speed, 2010
WL 530072, at *4 (Del. Super. Feb. 12, 2010) (holding that delay of one year was
unreasonable and rendered application to intervene untimely).
21
MTI, Affidavit of Christopher Morris (“Morris Aff.”) ¶ 55.
9
lawyers knew that Plaintiffs were seeking the Discovery Documents, because such
knowledge arguably would be imputed to the Liquidators.22 Plaintiffs aver that they
subpoenaed several of the Liquidators‟ United States lawyers on July 15 and 16, 2014,
and that the Liquidators accordingly knew about these proceedings roughly two-and-a-
half months before they moved to intervene.23 The parties dispute, however, whether
those discovery requests were within the subject matter of the domestic lawyers‟
employment. Although it is plausible that the requests were within the scope of those
lawyers‟ employment, the answer is not clear cut.24
What is clear, however, is that the Liquidators‟ apparent lead lawyer, Jason Karas
of the Australian law firm Lipman Karas, did have notice that Plaintiffs were seeking the
Discovery Documents before the August 28 hearing on the motion to compel. According
to his affidavit, Karas was informed in general terms about this case sometime in late
2012.25 On July 16, 2014, the United States attorneys informed Karas that they had been
subpoenaed by Plaintiffs regarding “information about any funding agreements between
22
Ocean Drilling & Exploration Co. v. Pauley Pan Am. Petrol. Co., 1965 WL
90028, at *2 (Del. Super. Dec. 10, 1965) (“Generally, knowledge of facts relating
to the subject matter of an attorney‟s employment, acquired by him during his
employment, and relevant to that employment, are imputed to his client.”).
23
POB 13-14.
24
PSRB, Exs. A-C (listing these lawyers as counsel of record in cases where the
Liquidators were seeking discovery from United States companies in aid of the
Guernsey Litigation).
25
Ls.‟ Suppl. Br., Affidavit of Jason Karas (“Karas Aff.”) ¶ 49.
10
the CCC Liquidators and Defendants or their affiliates.”26 On August 3, an affiliate of
Defendants informed Karas that Plaintiffs were seeking to depose Defendants and that
questions concerning the funding agreements could be asked.27 Finally, sometime
between August 22 and 24, an affiliate of Defendants told Karas that a hearing would
occur in late August—the motion to compel hearing at which this Court issued the
Production Order—and that Plaintiffs were seeking discovery of documents relating to
the Liquidators‟ funding.28 From this record, I find that Karas knew the Discovery
Documents were at risk of being compelled by, at the latest, early August, several weeks
before the Production Order.
Plaintiffs take the position that this delay is inexcusable in light of its tactical
justification: the Liquidators refused to intervene sooner, according to Plaintiffs, because
doing so would reveal that Defendants in fact were funding the Liquidators. There is,
however, no bright-line rule on when an application is “timely.” The cases finding
untimeliness or expressing serious concern about unwarranted delay involved delays of
between five and twelve months.29 Even assuming the mid-July imputed knowledge
date, I do not consider such a delay so long as to be “inexcusable.”30 Furthermore, and
26
Id. ¶ 52.
27
Id. ¶¶ 59-60.
28
Id. ¶ 63.
29
See supra note 20.
30
Great Am. Leasing Corp., 2003 WL 22389464, at *2 (“If the delay is inexcusable,
disruption to the schedule is reason enough to deny intervention.”).
11
notwithstanding the fact that the jurisdictional discovery in this case evidently overlaps
significantly with the merits discovery, this case remains in the early procedural stages
and is stayed pending resolution of the appeal to the Third Circuit. Accordingly, I cannot
conclude that the Liquidators‟ one- or two-month delay was inexcusable.31 Finally, given
the procedural posture of this action, the prejudice in terms of further delay to Plaintiffs,
if any, does not justify precluding the Liquidators from attempting to assert their privilege
arguments. Such a holding would not be a proportionate or equitable outcome.32
C. Are the Discovery Documents Protected by Delaware’s Work Product
Privilege or its Guernsey Analog?
The Liquidators argue that the Discovery Documents are protected by litigation
privilege under Guernsey law, which appears to be a similar concept to work product
privilege. Alternatively, if Delaware law applies, the Liquidators argue that work product
privilege covers the Discovery Documents. The Liquidators specifically denied any
assertion that the Discovery Documents are protected by the attorney-client privilege or
31
Cf. CAPM Corp. Advisors AB v. Protegrity, Inc., 2001 WL 1360122, at *11 (Del.
Ch. Oct. 30, 2001) (finding a four-month delay unreasonable when the motion to
intervene came the same day as oral argument for summary judgment).
32
Plaintiffs further argue that the Liquidators have not been candid with the Court.
Our Supreme Court, citing Delaware Rule of Professional Conduct 3.3, recently
noted that, “Just like attorneys have duties of candor to the tribunal, so too do
parties themselves.” Taylor v. Taylor, 102 A.3d 151, 154 (Del. 2014). Based on
the record before me, I am not persuaded that the Liquidators have not been
candid with the Court. The statements of the Liquidators and their counsel in the
Guernsey litigation regarding their knowledge of these proceedings, however,
border on misleading and have unnecessarily imposed upon the resources of this
Court. I expect more forthright communication in the future.
12
any Guernsey analog.33 Accordingly, I do not address the attorney-client privilege. For
the reasons that follow, I conclude that Delaware law governs and that the documents are
protected by work product privilege.
1. Conflict of Laws
“„Under general conflict of laws principles, the forum court will apply its own
conflict of laws rules to determine the governing law in a case.‟”34 “In cases where
foreign law may be applicable, „the party seeking the application of foreign law has the
burden of not only raising the issue that foreign law applies, but also the burden of
adequately proving the substance of the foreign law.‟”35 The Liquidators contend that
Guernsey law governs. As such, they bear the burden of adequately proving what
Guernsey law provides on the subject of applying the litigation privilege to litigation
funding agreements.
Plaintiffs argue that Delaware law controls because either Guernsey law is
unknown or consistent with Delaware law, meaning that there is no conflict of laws. To
the extent that neither jurisdiction has ruled on the subject using its own laws, this Court
will not attempt to divine foreign law, then determine Delaware law, and then proceed
33
LRB 9.
34
Vichi v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 765-66 (Del. Ch. 2014)
(quoting Tyson Foods, Inc. v. Allstate Ins. Co., 2011 WL 3926195, at *5 (Del.
Super. Aug. 31, 2011)).
35
Id. at 765 (quoting Republic of Pan. v. Am. Tobacco Co., 2006 WL 1933740, at *4
(Del. Super. June 23, 2006), aff’d sub nom. State of Sao Paolo of Federative
Republic of Braz. v. Am. Tobacco Co., 919 A.2d 1116 (Del. 2007)).
13
with a conflict of laws analysis. Instead, “[w]here neither jurisdiction has decided the
particular issue, „the Court will not read a conflict where none exists, and will apply the
law of the forum state, Delaware.‟”36
a. Litigation privilege under Guernsey law
This Court is not expert in Guernsey law and, as noted, the Liquidators bear the
burden of showing both that Guernsey law governs and exactly what Guernsey law on the
matter is. Based on the Liquidators‟ submissions, it would appear that, under Guernsey
law, the funding agreement either would not be protected by litigation privilege or the
exact issue presented in this case has yet to be decided.
In the absence of a Guernsey decision on an issue, the courts of Guernsey look
first to England and, in the absence of English authority, then to other Commonwealth
jurisdictions, such as Australia.37 Guernsey follows English law for guidance on issues
of privilege.38 The Liquidators point to no Guernsey cases addressing “claims to legal
professional privilege in respect of a litigation funding agreement.”39 Thus, to the extent
English courts have decided the issue, those decisions would control. Although the
36
Homeland Ins. Co. v. CorVel Corp., 2013 WL 3937022, at *9 (Del. Super. June
13, 2013) (quoting Tyson Foods, 2011 WL 3926195, at *6).
37
MTI 11-12; see also GORDON DAWES, LAWS OF GUERNSEY 11-12, 452-53 (2003).
38
See DAWES, supra note 37, at 452-53 (“English principles are again followed as
regards the nature and extent of legal professional privilege in addition to
discovery generally.”).
39
MTI 12.
14
Liquidators supplied no English cases on this question, and instead cited favorable
Australian authorities, Plaintiffs referred the Court to an English case entirely on point.
In Excalibur Ventures LLC v. Texas Keystone Inc.,40 a decision from the Queen‟s
Bench Division of the High Court of Justice (the “English Court”), the court addressed
the issue of the applicability of litigation privilege to a funding agreement and related
documents. Ultimately, the English Court concluded that the privilege did not apply.
According to the English Court, litigation privilege—much like the narrow version of
American work product doctrine discussed infra—asks whether the document or
communication was “brought into existence for the dominant purpose of being used in
the litigation.”41 The court further stated: “It is clear . . . that it is the use of the document
or its contents in the conduct of the litigation which is what attracts the privilege.”42
Accordingly, the English Court found that litigation privilege did not apply to the funding
documents before it because they were not created for the dominant purpose of being
used in the litigation.43 Finally, the court noted that, in certain circumstances, a funding
agreement may be covered by legal advice privilege, the English analog to attorney-client
40
[2012] EWHC (QB) 2176.
41
Id. at [18] (citing Winterthur Swiss Ins. Co. & Ors v. AG (Manchester) Ltd. & Ors,
[2006] EWCH (Comm) 839, [67]-[71]).
42
Id. at [17].
43
As discussed in the next Section, the court‟s “dominant purpose” test resembles
the “primary purpose” test applied by some United States courts; those tests are
narrower than the “because of” test adopted by the Delaware courts.
15
privilege.44 Ultimately, however, those concerns were not broached, because the parties
agreed to redact: (1) the amount of the premium charged to reflect the funder‟s
assessment of the merits; (2) circumstances in which the arrangement could be
terminated; and (3) conditions whereby the funders must be consulted.
In response to the Excalibur case, the Liquidators point to two other English cases:
Arroyo v. BP Exploration Co. (Columbia) Ltd.45 and Barr v. Biffa Waste Services Ltd. &
Another.46 Those cases, however, involve After the Event (“ATE”) insurance. ATE
insurance has grown out of English law that requires the loser of litigation to pay the
winner‟s costs, including attorneys‟ fees. To help defray the potential costs, some
litigants purchase insurance. To the extent the ATE policies would involve an analysis of
the merits of the litigation, the Liquidators argue that an analogy could be drawn to
litigation funding agreements. But, the cited cases directly conflict: Arroyo found the
litigation privilege applicable to ATE policies, while Barr concluded that the privilege
did not apply. In any event, the English Court in Excalibur explicitly distinguished
Arroyo and Barr as applying only to ATE contracts, not litigation funding agreements.47
44
“If and insofar as the disclosure of the funding arrangements would or might give
the other side an indication of the advice which was being sought or the advice
which was being given, it would be covered by legal advice privilege.” Id. at [23].
45
[2010] EWHC (QB) 1653.
46
[2009] EWHC (TCC) 1033.
47
The court also strongly implied that Arroyo, which found the privilege applicable,
was incorrectly decided: “[Arroyo] is a decision which can be supported, if at all,
16
To the extent that Guernsey law on the subject can be determined on the basis of a
single English case, it would appear that those courts would not find litigation privilege
applicable to funding agreements. The English Court‟s comments regarding legal advice
privilege, as well as the agreed-upon redactions, leave the breadth of Excalibur‟s holding
unclear. Guernsey law on the question of work product privilege over funding
documents, therefore, either finds the privilege inapplicable or is uncertain. In either
event, the Liquidators have failed to establish that Guernsey law would find the litigation
privilege broadly applicable to litigation funding agreements.
b. Work product privilege under Delaware law
Delaware has not ruled on the applicability of work product privilege to funding
agreements. In fact, only a handful of American courts have addressed privilege claims
in the context of litigation funding agreements.48 Of these, few contain in-depth analyses,
only on the particular facts of that case.” Excalibur Ventures LLC, [2012] EWHC
(QB) 2176, [19].
48
Doe v. Soc’y of Missionaries of Sacred Heart, 2014 WL 1715376, at *3-4 (N.D.
Ill. May 1, 2014) (finding work product privilege protected the plaintiffs‟
communications with litigation financing company and related documents); Miller
UK Ltd. v. Caterpillar, Inc., 17 F. Supp. 3d 711, 731-38 (N.D. Ill. 2014)
(Magistrate Judge) (concluding, after a thorough analysis, that common interest
exception to attorney-client privilege did not apply to communications with third-
party litigation funder, but that documents plaintiffs shared with funder were
protected work product); Devon IT, Inc. v. IBM Corp., 2012 WL 4748160, at *1
(E.D. Pa. Sept. 27, 2012) (conclusorily determining that communications with
funders and funding agreement drafts were protected as work product and
protected by the attorney-client privilege under the common interest exception);
Mondis Tech., Ltd. v. LG Elecs., Inc., 2011 WL 1714304, at *2-3 (E.D. Tex. May
4, 2011) (concluding that documents shared with potential funders were
privileged); Leader Techs., Inc. v. Facebook, Inc., 719 F. Supp. 2d 373, 376-77
17
and the cases disagree on the appropriate outcome. As to work product, four cases found
the privilege applicable to funding agreements and one case found it inapplicable. In
general, with the exception of Miller UK Ltd. v. Caterpillar, Inc., the cases do not
analyze the work product issue thoroughly. In contrast, a relatively robust discussion has
developed in the scholarly literature.49 Excluding those articles debating the wisdom of
whether claim funding should be allowed at all, many authors favor extending work
product privilege to discussions and negotiations with claim funders as well as related
documents.50
The modern formulation of the work product doctrine often is traced to the United
States Supreme Court‟s opinion in Hickman v. Taylor.51 Court of Chancery Rule
26(b)(3) codifies the work product rule. It reads, in relevant part:
[A] party may obtain discovery of documents, electronically
stored information, and tangible things otherwise
discoverable under paragraph (b)(1) of this rule and prepared
(D. Del. 2010) (holding, after brief analysis, that patentee and litigation funding
companies did not have a common interest, which rendered the attorney-client
privilege and, apparently, work product protection unavailable).
49
Miller UK, 17 F. Supp. 3d at 718 n.1 (collecting literature).
50
See, e.g., Michele DeStefano, Claim Funders and Commercial Claim Holders: A
Common Interest or a Common Problem?, 63 DEPAUL L. REV. 305 (2014)
(favoring common interest attorney-client privilege and work product protection
for collaborative work and communications between funders and claim holders);
Grace M. Giesel, Alternative Litigation Finance and the Work-Product Doctrine,
47 WAKE FOREST L. REV. 1083 (2012) (concluding that the involvement of
alternative litigation financing entities in litigation should not affect work product
privilege and that materials evaluating litigation should enjoy protection).
51
329 U.S. 495 (1947).
18
in anticipation of litigation or for trial by or for another party
or by or for that other party‟s representative (including the
other party‟s attorney, consultant, surety, indemnitor, insurer,
or agent) only upon a showing that the party seeking
discovery has substantial need of the materials in the
preparation of the party‟s case and that the party is unable
without undue hardship to obtain the substantial equivalent of
the materials by other means.52
Whether a document receives work product protection depends upon why it was
created. Courts generally apply either the broader “because of litigation” test or the
narrower “primary purpose” test. In the context of litigation funding, the choice of test
may be outcome-determinative.53 Delaware applies the “because of” test. Accordingly, a
document created because of litigation likely is entitled to work product protection. “If
the document was created for some other reason, such as a business purpose, then it is
likely not protected. . . . Delaware courts have expressly rejected the primary purpose
test, which asks whether the primary purpose of the document was for litigation, in favor
of the „because of litigation‟ test.”54 Thus, work product protection extends relatively
broadly in Delaware.
52
Ct. Ch. R. 26(b)(3).
53
See DeStefano, supra note 50, at 355-61 (analyzing, in the claim funding context,
the work product doctrine under the Federal Rules of Civil Procedure and
concluding that applying the “primary purpose” test makes it unlikely that the
work product doctrine will apply, but that protection should be found under the
“because of” test, even though some courts seemingly infuse a “primary purpose”
analysis into the “because of” test).
54
JPMorgan Chase & Co. v. Am. Century Cos., 2013 WL 1668393, at *3 (Del. Ch.
Apr. 18, 2013).
19
The main question, then, is why were the Discovery Documents created? In
Delaware, “„work product protection is not precluded merely because the [document]
may also serve a business function.‟”55 Although dual purpose documents may receive
work product protection, a document still must have been created “because of” the
litigation.56 In the litigation funding context, this analysis becomes blurry because the
litigation itself arguably is part of the business. Potentially every document a third-party
litigation-funding company creates is created “because of litigation” in that the company
is in the business of funding litigation.
Third-party funding literally may allow a lawsuit to proceed, but it is unclear
whether any of the documents or communications exchanged between the claim holder
and the funder in fact would be intended for use, or even be useful, in the actual
litigation—at least where the funder takes a passive role and does not actively assist with
or manage the litigation.57 In this respect, communications between the claim holder and
the third-party appear more like business transactions separate from the litigation itself.
Yet, in all probability, to get the litigation funder to supply the financing, the claim holder
55
Id. (quoting Rohm & Haas Co. v. Dow Chem. Co., 2009 WL 537195, at *2 (Del.
Ch. Feb. 26, 2009)).
56
See AM Gen. Hldgs. LLC v. Renco Gp., Inc., 2013 WL 1668627, at *1 (Del. Ch.
Apr. 18, 2013) (“The key question is why was each document created? If created
because of a contract requirement, it is likely not privileged. If created in
anticipation of litigation, it is likely privileged. The difficulty arises when both
considerations played a role in the preparation of the document.”).
57
See DeStefano, supra note 50, at 319-27 (describing and distinguishing among
types of claim funders).
20
would need to convince her of the merits of the case. The negotiations between those
two parties almost certainly would involve the “lawyers‟ mental impressions, theories
and strategies about” the case, which “were only prepared „because of‟ the litigation.”58
Similarly, the terms of the final agreement—such as the financing premium or acceptable
settlement conditions—could reflect an analysis of the merits of the case.59 Somewhat
analogously, this Court previously has found litigation reserve numbers, as well as the
process of setting them, to involve protected opinion work product because they “„reveal
the mental impressions, thoughts, and conclusions of an attorney in evaluating a legal
claim.‟”60 This Court also previously has emphasized that work product protection is
warranted with respect to settlement considerations.61
According to the Compliance Statement submitted by Defendants‟ counsel, the
Discovery Documents over which the Liquidators assert privilege “are or concern the
58
Miller UK, 17 F. Supp. 3d at 735.
59
See AM Gen. Hldgs., 2013 WL 1668627, at *2 (“[S]ome of these documents will
nevertheless contain potential settlement considerations, predictions as to what the
Court might do, and discussions of how the dispute might evolve. That type of
information . . . deserves protection. It is the expression of the attorneys‟ discrete
thought processes.”).
60
JP Morgan Chase, 2013 WL 1668393, at *3 (quoting Simon v. G.D. Searle & Co.,
816 F.2d 397, 401 (8th Cir. 1987)).
61
Rohm & Haas, 2009 WL 537195, at *2 (finding a litigation support model
protected and noting, “This Court is hard pressed to think of any information that
warrants greater protection under attorney work product doctrine than potential
settlement strategies prepared at the direction of counsel”).
21
negotiations preceding the execution of the funding agreement in October 2009.”62 The
question of whether documents prepared by or for a third-party funder and shared
between the funder and a party‟s counsel constitute work product has not previously been
answered in Delaware. There is not, however, anything so unique about third-party
funding as to require a different inquiry than usual in work product cases. Overall, it
appears that the Discovery Documents were “prepared in anticipation of litigation or for
trial by or for another party or by or for that other party‟s representative.”63 Additionally,
the Discovery Documents more likely than not include discussions of the merits of the
Guernsey Litigation and potential strategies. Thus, under Delaware case law and the
clear language of Rule 26(b)(3), the Discovery Documents are entitled to work product
protection. That “protection is not precluded merely because the [Discovery Documents]
may also serve a business function.”64
Admittedly, in the context of third-party funding, the overlap between business
and litigation reasons for the creation of the disputed documents is more extensive than
usual. The policies underlying the work product doctrine, however, favor a finding of
protection. The “work product doctrine is intended to protect „the privacy of lawyers in
their work and encourag[e] the freedom of lawyers in the task of preparing their clients‟
62
Compliance Statement 3.
63
Ct. Ch. R. 26(b)(3).
64
Rohm & Haas, 2009 WL 537195, at *2.
22
cases for trial.‟”65 Generally, the work product doctrine exists to preserve and promote
the adversarial system of litigation and prevent a party from free-riding on his opponent‟s
efforts.66 In those instances where a claim cannot proceed without third-party financing,
one element of preparing a client‟s case for trial will be securing the requisite funding,
which probably will require discussions of a case‟s merits in an effort to convince the
third party to supply the needed funds. No persuasive reason has been advanced in this
case why litigants should lose work product protection simply because they lack the
financial means to press their claims on their own dime. Allowing work product
protection for documents and communications relating to third-party funding places those
parties that require outside funding on the same footing as those who do not and
maintains a level playing field among adversaries in litigation. Thus, even though claim
funding is the business of financing lawsuits, which means the Discovery Documents
serve a business purpose, those documents simultaneously also are litigation documents
and work product protection is appropriate.
2. The applicable law
In the event of a conflict between the privilege law of this forum and that of
Guernsey, the Restatement (Second) Conflict of Laws directs that:
65
Tackett v. State Farm Fire & Cas. Ins. Co., 653 A.2d 254, 260 (Del. 1995)
(quoting Riggs Nat’l Bank of Wash. D.C. v. Zimmer, 355 A.2d 709, 715 (Del. Ch.
1976)).
66
Id.23
Evidence that is not privileged under the local law of the state
which has the most significant relationship with the
communication will be admitted, even though it would be
privileged under the local law of the forum, unless the
admission of such evidence would be contrary to the strong
public policy of the forum.67
I consider next, therefore, whether a conflict exists between Delaware and Guernsey law.
Under Delaware law, the Discovery Documents are entitled to work product
protection. Guernsey law probably does not find litigation privilege applicable to the
Discovery Documents, but Guernsey law might protect at least parts of those documents
under theories of legal advice privilege. This conclusion about Guernsey law, however,
is based almost entirely on one case from England. The Court is aware of no Guernsey
cases on point. In addition, the Liquidators cited to contrary Australian authorities that
would find litigation privilege applicable to these disputed documents, and there also is
the issue of the conflicting English authorities on ATE policies. In sum, it is unclear
whether the Discovery Documents would be privileged under Guernsey law. Thus, I am
not convinced that there is a conflict between Delaware and Guernsey law. Accordingly,
the first condition of the Restatement is not clearly satisfied and the Restatement‟s
guidance, therefore, is not determinative here.
Before this Memorandum Opinion, neither Delaware nor Guernsey squarely had
addressed whether third-party funding agreements and related documents deserve work
product protection. In these circumstances, the Tyson Foods approach seems preferable:
67
Restatement (Second) Conflict of Laws § 139(1) (West 2014).
24
“Since neither jurisdiction has decided the issue using its own laws, the Court will not
read a conflict where none exists and will apply the law of the forum state, Delaware.”68
I conclude that Delaware law governs this discovery dispute. Under Delaware
law, the Discovery Documents are entitled to work product protection.
D. Has Privilege Been Waived?
Plaintiffs opposed the Liquidators‟ intervention and also argued against any
protective order. Plaintiffs‟ briefing focused primarily on issues of timeliness, what
occurred in the Guernsey Litigation proceedings, whether the Liquidators previously
acted inequitably before this Court, and whether the Discovery Documents are privileged.
Comparatively little briefing addressed the issue of waiver. In that regard, Plaintiffs‟
chief argument is that the Liquidators unduly delayed in seeking a protective order and
thereby waived any applicable privilege. In Section II.B supra, I rejected Plaintiffs‟
arguments that the Liquidators‟ delay made their motion to intervene untimely and should
prevent them from pursuing their privilege arguments. That same analysis applies here:
the Liquidators were not so dilatory as to warrant the harsh result of waiver on grounds of
timeliness alone, particularly given that this case is stayed.
Plaintiffs also urged the denial of any privilege claims because Defendants and the
Liquidators had not substantiated such claims by providing an appropriate privilege log.
Such a log was not produced until November 2014, after the main briefing and the
Argument. Based on the complexity of the threshold issues regarding the nature of the
68
Tyson Foods, 2011 WL 3926195, at *6.
25
claimed privileges under Delaware and Guernsey law, I find the belated timing of the log
is excusable. Should Plaintiffs wish to challenge the adequacy of specific entries on that
privilege log or the log in general, they are free to do so in the future.
E. Unresolved Issues
In this Memorandum Opinion, I have determined that the Liquidators should be
permitted to intervene, that Delaware law governs this discovery dispute, that the
Discovery Documents are protected by work product privilege, and that there has been no
waiver of work product privilege based on the Liquidators‟ purportedly untimely
assertion of claims of privilege. At the Argument, I also required Defendants to produce
certain limited discovery and indicated that most of that could be disclosed only to
Plaintiffs‟ counsel who are not involved in the Guernsey matter. In their November 10,
2014 Compliance Statement, Defendants summarized their responsive actions as follows:
1) the redacted funding agreement and its associated
redaction log have been produced to Morris Nichols; 2) all
records within Defendants‟ possession, custody or control
have been searched for responsive documents; 3) all
potentially responsive documents have been individually
identified on the privilege log produced to Morris Nichols;
and 4) the categories of documents logged and the bases for
the privilege and confidentiality claims asserted have been
provided to both Morris Nichols and Williams & Connolly.69
This Memorandum Opinion is without prejudice to Plaintiffs‟ ability to pursue
production of the Discovery Documents on grounds not addressed herein. In that regard,
I provide the following comments as to the nature of certain issues that may remain open.
69
Compliance Statement 4.
26
First, I reiterate that this case is stayed. Only discovery going to the issue of
personal jurisdiction currently is permitted. This discovery dispute, however, either has
strayed or is at risk of straying from that narrow area of allowable discovery into
discovery on the merits. According to the Compliance Statement, the currently withheld
documents relate to the negotiation of the funding agreement.70 For purposes of this
Memorandum Opinion, I have not had to address the issue of whether the 92 Discovery
Documents actually relate to personal jurisdiction or otherwise are responsive to the non-
stayed discovery in this case. Those issues have not yet crystallized.
Second, the issue of waiver has been addressed only in terms of the Liquidators‟
timeliness in asserting their privilege claims. Waiver also may occur because of an
inadequate privilege log. Because of the unusual procedural posture of this case,
Plaintiffs have not had a fair opportunity to challenge the adequacy of the privilege log
produced by Defendants. A seriously deficient privilege log—e.g., one containing
descriptions that are substantially misleading, incomplete, or inaccurate—can result in
wholesale waiver of the documents covered by the log. This Memorandum Opinion is
without prejudice to any challenge Plaintiffs may make to the adequacy of the privilege
log.
70
Defendants have represented in their Compliance Statement that the relationship
between the Liquidators and Defendants‟ sponsoring affiliate is governed entirely
by the funding agreement. The parties dispute, therefore, whether the remaining
Discovery Documents could show an agency or control relationship between
Defendants and the Liquidators, which is the theory upon which Plaintiffs claim
that Defendants are subject to this Court‟s jurisdiction.
27
Third, assuming no waiver, work product protection still provides only a qualified
immunity from discovery. To obtain the Discovery Documents, Plaintiffs must
demonstrate “substantial need of the materials in the preparation of [their] case and that
[they are] unable without undue hardship to obtain the substantial equivalent of the
materials by other means.”71 Almost none of the briefing directly addressed this issue.
Accordingly, I express no opinion on it. Plaintiffs are not precluded from arguing in the
future that they have a substantial need for one or more of the Discovery Documents
sufficient to outweigh the work product privilege.
Fourth, I consider it appropriate to modify somewhat the restrictions Defendants
imposed on the access of Plaintiffs‟ attorneys to the few documents Defendants have
produced. Plaintiffs have a right to counsel of their choice, but there also are serious
concerns about granting Williams & Connolly access to the redacted funding agreement
and other items that have been produced to date only to Plaintiffs‟ Morris Nichols
attorneys because of Williams & Connolly‟s involvement in the Guernsey Litigation. To
facilitate the review of the redacted funding agreement and the redaction and privilege
logs that have been produced and the determination of what additional action, if any,
Plaintiffs should take regarding them, I conclude that it is appropriate to authorize up to
two attorneys from Williams & Connolly to have access to those documents. But, all of
the Williams & Connolly attorneys who are of record in this case evidently also are
involved to some degree in the Guernsey Litigation. Assuming that is true, I have
71
Ct. Ch. R. 26(b)(3).
28
determined to allow Plaintiffs to designate up to two other Williams & Connolly
attorneys, who have not had any direct or indirect involvement in the Guernsey
Litigation, to have access to the redacted funding agreement, the redaction log, and the
privilege log, contingent on their complying with the conditions set forth in more detail in
the Order accompanying this Memorandum Opinion.
III. CONCLUSION
For the foregoing reasons, the Liquidators‟ motion to intervene is granted, and the
motion for a protective order is granted to the extent indicated in this Memorandum
Opinion. These rulings are memorialized in the implementing Order being entered on
this same date, and are without prejudice to Plaintiffs‟ ability to renew their motion to
compel and pursue the issues not resolved herein.
29