Friday Invs., LLC v. Bally Total Fitness of the Mid-Atlantic, Inc. , 370 N.C. 235 ( 2017 )

IN THE SUPREME COURT OF NORTH CAROLINA
No. 248PA16
Filed 3 November 2017
FRIDAY INVESTMENTS, LLC
v.
BALLY TOTAL FITNESS OF THE MID-ATLANTIC, INC. f/k/a Bally Total Fitness
of the Southeast, Inc. f/k/a Holiday Health Clubs of the Southeast, Inc. as successor-
in-interest to Bally Total Fitness Corporation; and BALLY TOTAL FITNESS
HOLDING CORPORATION
On discretionary review pursuant to N.C.G.S. § 7A-31 of a unanimous decision
of the Court of Appeals, ___ N.C. App. ___, 788 S.E.2d 170 (2016), affirming an order
entered on 13 April 2015 by Judge Jesse B. Caldwell III in Superior Court,
Mecklenburg County. Heard in the Supreme Court on 29 August 2017.
Horack, Talley, Pharr & Lowndes, P.A., by Keith B. Nichols, for plaintiff-
appellee.
Knox, Brotherton, Knox & Godfrey, by Lisa G. Godfrey; and Burt & Cordes,
PLLC, by Stacy C. Cordes, for defendant-appellants.
NEWBY, Justice.
In this case we consider whether an attorney–client relationship exists
between defendants and a non-party that contractually agreed to indemnify
defendants. Recognizing its tripartite nature, we conclude that the contractual duty
to defend and indemnify gives rise to an attorney–client relationship. Nonetheless,
because defendants failed to request that the trial court provide written findings of
fact and did not present in a timely manner the documents at issue for appellate
FRIDAY INVS., LLC V. BALLY TOTAL FITNESS OF THE MID-ATL., INC.
Opinion of the Court
review, we must presume the trial court found facts sufficient to support its
conclusion. Given the bare record before us, we cannot conclude that the trial court
erroneously determined that the attorney–client privilege did not extend to the
communications at issue. Accordingly, we modify and affirm the decision of the Court
of Appeals.
In February 2000, the predecessor in interest to defendant Bally Total Fitness
of the Mid-Atlantic, Inc. (Bally Mid-Atlantic) entered into a lease agreement with the
predecessor in interest to Friday Investments, LLC (plaintiff) for a large commercial
space in Charlotte, North Carolina, in which to place a health club.1 Codefendant
Bally Total Fitness Holding Corporation (Bally Holding), the parent company of both
Bally Mid-Atlantic and the original tenant, guaranteed the lease. Bally Mid-Atlantic
later sold some of its health clubs, including the Charlotte club, to Blast Fitness
Group, LLC (Blast). The Asset Purchase Agreement between Bally Mid-Atlantic and
Blast transferred any obligations arising under the real property leases of the clubs
sold. The Agreement also included an indemnification clause, wherein Blast agreed
to “defend, indemnify, and hold [defendants] . . . harmless of, from and against any
1 Around 14 February 2000, Tower Place Joint Venture (Original Lessor), as landlord,
and Bally Total Fitness Corporation (Original Lessee), as tenant, entered into a lease
agreement for the property at issue. Friday Investments, LLC (plaintiff) is the current owner
of the property at issue and successor in interest to Tisano Realty Inc., the successor in
interest to the Original Lessor. Defendant Bally Mid-Atlantic is the successor in interest to
the Original Lessee.
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Opinion of the Court
Losses incurred . . . on account of or relating to . . . any Assumed Liabilities, including
those arising from or under the Real Property Leases after the Closing.”
On 9 May 2014, plaintiff sued defendants for payment of back rent and other
charges due under the lease stemming from Blast’s failure to pay rent on the space
defendants had assigned to Blast. Defendants notified Blast of the lawsuit, and Blast
promptly agreed to indemnify and defend defendants in accord with their Agreement.
During discovery, counsel for plaintiff requested copies of “post-suit correspondence
and documents exchanged between [defendants] and Blast.” After defendants
refused to comply, plaintiff moved to compel production of the requested documents.
Defendants objected and moved for a protective order, asserting the attorney–client
privilege. The trial court orally ordered defendants to produce the documents and a
privilege log for in camera review.
On 2 April 2015, after completing its in camera review, the trial court notified
counsel via e-mail that it had denied defendants’ motion for a protective order and
granted plaintiff’s motion to compel. On 13 April 2015, the trial court entered its
written order summarily denying defendants’ motion for a protective order and
granting plaintiff’s motion to compel. At no point did either party request that the
trial court make written findings of fact and conclusions of law. Defendants appealed
the trial court’s interlocutory order, successfully contending that the subject of the
appeal affects a “substantial right.” After settling the record on appeal, and after the
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Opinion of the Court
briefing deadline had passed, defendants moved to submit the documents at issue
under seal for in camera review by the Court of Appeals.
The Court of Appeals affirmed the trial court’s grant of plaintiff’s motion to
compel. Friday Invs., LLC v. Bally Total Fitness of the Mid-Atl., Inc., ___ N.C. App.
___, 788 S.E.2d 170 (2016). Before discussing the merits of the appeal, the Court of
Appeals denied defendants’ request to present the records for appellate review as
untimely because the request was made after plaintiff had submitted its brief to the
Court of Appeals. Id. at ___, 788 S.E.2d at 175; see N.C. R. App. P. 9(b)(5)(a). On the
merits, the Court of Appeals held that a tripartite attorney–client relationship did
not exist between defendants and Blast because “an indemnification provision in an
asset purchase agreement, standing alone, is insufficient to create a common legal
interest between a civil litigant indemnitee and a third-party indemnitor.” Friday
Invs., LLC, ___ N.C. App. at ___, 788 S.E.2d at 172. The Court of Appeals reasoned
that defendants and Blast shared merely a common business interest and that this
distinction rendered inapplicable our previous decision in Raymond v. North Carolina
Police Benevolent Ass’n, 365 N.C. 94, 98, 721 S.E.2d 923, 926 (2011) (recognizing the
tripartite attorney–client relationship). As a result, the attorney–client privilege did
not extend to the communications between defendants and Blast. This Court allowed
discretionary review. Friday Invs., LLC v. Bally Total Fitness of the Mid-Atl., Inc.,
369 N.C. 185, 793 S.E.2d 685 (2016).
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Opinion of the Court
“The primary purpose of the discovery rules is to facilitate the disclosure prior
to trial of any unprivileged information that is relevant and material to the lawsuit
so as to permit the narrowing and sharpening of the basic issues and facts that will
require trial.” Bumgarner v. Reneau, 332 N.C. 624, 628, 422 S.E.2d 686, 688-89
(1992) (emphasis added) (citation omitted). Rule 26 provides for a broad scope of
discovery, allowing “[p]arties [to] obtain discovery regarding any matter, not
privileged, which is relevant to the subject matter involved in the pending action.”
N.C.G.S. § 1A-1, Rule 26(b)(1) (2015) (emphasis added).
“The attorney-client privilege is the oldest of the privileges for confidential
communications known to the common law.” Upjohn Co. v. United States, 449 U.S.
383, 389, 101 S. Ct. 677, 682, 66 L. Ed. 2d 584, 591 (1981) (citation omitted). For the
privilege to apply and thus exclude relevant evidence, “the relation of attorney and
client [must have] existed at the time the [particular] communication was made.” In
re Investigation of Miller, 357 N.C. 316, 335, 584 S.E.2d 772, 786 (2003) (quoting State
v. McIntosh, 336 N.C. 517, 523, 444 S.E.2d 438, 442 (1994)).
Historically, an attorney–client relationship arises between an attorney and a
single client the attorney represents. See id. at 335, 584 S.E.2d at 786. This Court,
however, has also recognized a multiparty attorney–client relationship in which an
attorney represents two or more clients. See Dobias v. White, 240 N.C. 680, 685, 83
S.E.2d 785, 788 (1954) (indicating that an attorney–client relationship can exist when
“two or more persons employ the same attorney to act for them in some business
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transaction”). “The rationale for recognizing this tripartite attorney-client
relationship is that individuals with a common interest in the litigation should be
able to freely communicate with their attorney, and with each other, to more
effectively defend or prosecute their claims.” Raymond, 365 N.C. at 99, 721 S.E.2d at
926 (citation omitted).
In Raymond a former police officer and member of the Southern States Police
Benevolent Association (SSPBA) contacted the SSPBA and spoke with an SSPBA
attorney in confidence, seeking legal advice regarding his recent demotion. Id. at 95-
96, 721 S.E.2d at 924-25. The SSPBA then referred the officer to outside legal counsel
paid for by the SSPBA. As a dues-paying member, the former officer’s SSPBA
membership entitled him to various SSPBA services, including legal representation
in grievance and disciplinary matters. Recognizing the tripartite nature of the
arrangement, this Court held that an attorney–client relationship existed between
the former police officer, the SSPBA and its attorney, and the outside legal counsel
selected by the association to represent the former officer. Id. at 99, 721 S.E.2d at
927. As such, any communications between them that also satisfied the five-factor
test articulated in State v. Murvin, 304 N.C. 523, 531, 284 S.E.2d 289, 294 (1981),
were privileged. Raymond, 365 N.C. at 100-01, 721 S.E.2d at 927-28.
Our decision in Raymond analogized the relationship between the officer, the
SSPBA and an attorney for the association, and outside defense counsel to those
relationships common in the insurance context. See id. at 98, 721 S.E.2d at 926 (“In
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Opinion of the Court
the insurance context, courts find that the attorney defending the insured and
receiving payment from the insurance company represents both the insured and the
insurer . . . .” (citing Nationwide Mut. Fire Ins. Co. v. Bourlon, 172 N.C. App. 595,
602-03, 617 S.E.2d 40, 46 (2005), aff’d per curiam, 360 N.C. 356, 625 S.E.2d 779 (2006)
(mem.))). As in the insurance context, a tripartite attorney–client relationship arose
from the officer and the SSPBA’s common interest in the litigation, stemming from
the officer’s contractual relationship with the SSPBA as a dues-paying member. See
Raymond, 365 N.C. at 98, 721 S.E.2d at 926 (“[N]otwithstanding that usually only
the insured has been sued, a tripartite attorney-client relationship exists because the
interests of both the insured and the insurer in prevailing against the plaintiff’s claim
are closely aligned.”).
“[A] contractual duty to defend and indemnify creates a common interest and
tripartite relationship between the insurer, the insured, and the defense attorney.”
Id. at 98-99, 721 S.E.2d at 926 (citing Bourlon, 172 N.C. App. at 603-05, 617 S.E.2d
at 46-47). Like the common interest found between the insurer and the insured, an
indemnification agreement creates a common interest between the indemnitor and
the indemnitee in that the indemnitor contractually shares in the indemnitee’s legal
well-being because the agreement subjects the indemnitor to the “damages assessed
and loss resulting from an adverse judgment.” Queen City Coach Co. v. Lumberton
Coach Co., 229 N.C. 534, 536, 50 S.E.2d 288, 289 (1948) (citation omitted); see also
Dixie Container Corp. of N.C. v. Dale, 273 N.C. 624, 627, 160 S.E.2d 708, 711 (1968)
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(noting that an indemnity contract “will be construed to cover all losses, damages,
and liabilities which reasonably appear to have been within the contemplation of the
parties”). The fact that indemnification relates to a business purpose does not sever
but strengthens that common interest. See Dobias, 240 N.C. at 685, 83 S.E.2d at 788(recognizing an attorney–client relationship between more than two individuals
when “two or more persons employ the same attorney to act for them in some business
transaction”). As a result, a tripartite attorney–client relationship arises because the
interests of both the indemnitor and indemnitee in prevailing against the plaintiff’s
claim are contractually aligned, notwithstanding that usually only the indemnitee
has been sued. See Raymond, 365 N.C. at 98, 721 S.E.2d at 926.
In all significant ways, the question of the formation of an attorney–client
relationship here is indistinguishable from that resolved by our decision in Raymond.
Blast contractually agreed to indemnify and defend defendants against any losses
incurred relating to their real property lease. After this litigation commenced,
defendants notified Blast of the litigation, and Blast engaged counsel to defend the
case under the indemnification agreement. Like the common interest found in the
insurance context, Blast’s interest in defendants’ legal well-being as indemnitees
creates the common interest in this litigation: The indemnification provision subjects
Blast to any damages that result from an adverse judgment against defendants.
Accordingly, a tripartite attorney–client relationship exists between defendants,
Blast, and their defense counsel.
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Opinion of the Court
The mere fact that an attorney–client relationship exists, however, does not
automatically trigger the attorney–client privilege. See Dobias, 240 N.C. at 684, 83
S.E.2d at 788 (Simply because “the evidence relates to communications between
attorney and client alone does not require its exclusion.”). For the attorney–client
privilege to apply, the communication must satisfy the five-factor Murvin test:
(1) the relation of attorney and client existed at the time
the communication was made, (2) the communication was
made in confidence, (3) the communication relates to a
matter about which the attorney is being professionally
consulted, (4) the communication was made in the course
of giving or seeking legal advice for a proper purpose
although litigation need not be contemplated and (5) the
client has not waived the privilege.
Murvin, 304 N.C. at 531, 284 S.E.2d at 294 (citing 1 Henry Brandis, Jr., Stansbury’s
North Carolina Evidence § 62 (1973)). “[I]f any one of these five elements is not
present in any portion of an attorney-client communication, that portion of the
communication is not privileged.” Brown v. Am. Partners Fed. Credit Union, 183 N.C.
App. 529, 534, 645 S.E.2d 117, 121 (2007) (quoting In re Miller, 357 N.C. at 335, 584
S.E.2d at 786). “The trial court is best suited to determine, through a fact-sensitive
inquiry, whether the attorney-client privilege applies to a specific communication.”
Raymond, 365 N.C. at 100, 721 S.E.2d at 927 (emphasis added) (citing In re Miller,
357 N.C. at 336, 584 S.E.2d at 787).
“Findings of fact and conclusions of law are necessary on decisions of any
motion . . . only when requested by a party . . . .” N.C.G.S. § 1A-1, Rule 52(a)(2)
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(2015). The purpose of requiring findings of fact and conclusions of law by the trial
court “is to allow meaningful review by the appellate courts.” O’Neill v. S. Nat’l Bank
of N.C., 40 N.C. App. 227, 231, 252 S.E.2d 231, 234 (1979) (citation omitted). “When
the trial court is not required to find facts and make conclusions of law and does not
do so, it is presumed that the court on proper evidence found facts to support its
judgment.” Estrada v. Burnham, 316 N.C. 318, 324, 341 S.E.2d 538, 542 (1986),
superseded by statute, N.C.G.S. § 1A-1, Rule 11(a) (Cum. Supp. 1988), on other
grounds as stated in Turner v. Duke Univ., 325 N.C. 152, 163-64, 381 S.E.2d 706, 712-
13 (1989) (citations omitted).
A trial court’s discovery ruling is reviewed for abuse of discretion, see Firemen’s
Mut. Ins. Co. v. High Point Sprinkler Co., 266 N.C. 134, 143, 146 S.E.2d 53, 62 (1966),
and will be overturned “only upon a showing that its ruling was manifestly
unsupported by reason and could not have been the result of a reasoned decision,” In
re Foreclosure of Lucks, 369 N.C. 222, 228, 794 S.E.2d 501, 506 (2016) (quoting State
v. Riddick, 315 N.C. 749, 756, 340 S.E.2d 55, 59 (1986)).
Though a tripartite attorney–client relationship exists, we cannot conclude,
given the bare record before us, that the trial court abused its discretion or misapplied
the law in compelling disclosure of the communications at issue. The underlying trial
court order compelling discovery contains neither findings of fact nor conclusions of
law, as neither party requested them. Therefore, we must presume that the trial
court found facts sufficient to support its determination that the communications at
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issue were not privileged. Moreover, defendants did not properly present the
allegedly privileged documents for appellate review. See State v. Alston, 307 N.C.
321, 341, 298 S.E.2d 631, 644 (1983) (“It is the appellant’s duty and responsibility to
see that the record is in proper form and complete.”). As such, the record merely
contains a privilege log that briefly describes each of the allegedly privileged
documents. Nothing in the privilege log or the trial court’s order suggests that the
trial court erroneously concluded that a tripartite attorney–client relationship had
not formed or that the court misapplied the five-factor Murvin test. Given the record
before us, we cannot conclude that the trial court’s decision was so arbitrary that it
could not have been the result of a reasoned decision.
In sum, we hold that Blast’s contractual duty to defend and indemnify
defendants created a tripartite attorney–client relationship. Nonetheless, the record
before us fails to indicate that the trial court abused its discretion in determining that
the post-litigation communications between defendants and Blast were not
privileged. Accordingly, we modify and affirm the decision of the Court of Appeals.
We remand this case to the Court of Appeals for further remand to the trial court for
additional proceedings not inconsistent with this opinion.
MODIFIED AND AFFIRMED; REMANDED.
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