Voorhees Cattle Co. v. Dakota Feeding Co.

#27124-a-GAS
2015 S.D. 68
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
****
VOORHEES CATTLE COMPANY,
LLP, d/b/a Onida Feeding Company,
a South Dakota limited liability
partnership, Plaintiff,
v.
DAKOTA FEEDING COMPANY, LLC,
a South Dakota limited liability company;
ONIDA FEEDING COMPANY, LLC,
a South Dakota limited liability company;
SCOTT MATHISON, individually; and
RICK JENSEN, individually, Defendants,
and
DAKOTA FEEDING COMPANY, LLC,
a South Dakota limited liability company, Defendant, Third Party
Plaintiff and Appellant,
v.
PATRICK VOORHEES, individually;
MERLIN VOORHEES, individually, Third Party Defendants,
and
B AND B EQUIPMENT, INC.,
a South Dakota Corporation, Third Party Defendant and
Appellee.
****
APPEAL FROM THE CIRCUIT COURT OF
THE SIXTH JUDICIAL CIRCUIT
SULLY COUNTY, SOUTH DAKOTA
****
THE HONORABLE JOHN L. BROWN
Judge
****
ARGUED ON MARCH 25, 2015
OPINION FILED 07/29/15
MARK A. MORENO of
Moreno, Lee & Bachand, P.C.
Rapid City, South Dakota
WILLIAM M. VAN CAMP of
Olinger, Lovald, McCahren
& Reimers, P.C.
Pierre, South Dakota Attorneys for defendant, third
party plaintiff and appellant.
ROBERT B. ANDERSON of
May, Adam, Gerdes & Thompson
Pierre, South Dakota Attorneys for third party
defendant and appellee.
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SEVERSON, Justice
[¶1.] This case arose out of a foreclosure action brought by Voorhees Cattle
Co. (Voorhees) against Dakota Feeding Co. (DFC). In its answer to the complaint,
DFC filed a third party complaint against B and B Equipment, Inc. (B & B) for
breach of contract; B & B counterclaimed alleging impossibility of performance and
breach of contract by DFC. A jury returned a verdict for Voorhees on the
foreclosure claim and for B & B on its breach of contract and impossibility of
performance counterclaims against DFC. The jury determined that B & B suffered
damages in the amount of $103,000, and that DFC owed Voorhees $1,101,573.26,
the amount necessary to pay off the contract for deed. DFC satisfied the judgment
granted to Voorhees, and therefore, the only parties to this appeal are DFC and B &
B. DFC appeals, alleging evidence admitted at trial violated the attorney-client
privilege and its admission requires a new trial. We affirm.
Background
[¶2.] In 2006, DFC approached Voorhees to ask whether Voorhees was
interested in selling its feedlot. Pursuant to a contract for deed, Voorhees sold DFC
its feedlot “AS IS” for 1.7 million dollars. Various aspects of the feedlot needed to be
brought into compliance with the South Dakota Department of Environment and
Natural Resources’ (DENR) requirements. Pertinent to this lawsuit is the feedlot’s
noncompliant lagoon. Prior to the sale, Voorhees submitted plans from an
engineering firm that were intended to bring the lot into compliance. DENR
conditionally approved the plans. The contract for deed required DFC “to complete
the lagoon design per the DENR’s approved specifications to complete the
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permitting process.” 1 DFC hired B & B to do the excavation necessary on the
lagoon. B & B started some of the work, such as removing manure from the lagoon
area, in 2006. B & B performed additional work on the feedlot over the years.
Eventually problems arose with regard to satisfactorily finishing the lagoon.
[¶3.] In April of 2012, the Attorney General notified DFC that the
previously submitted plans did not adequately account for wastewater overflow.
DFC had still not completed the lagoon six years after purchase. Because of the
noncompliance, the Attorney General notified DFC that it was required to
depopulate the feedlot, which meant the lot could only have less than 1,000 head of
animals. Prior to depopulating, the number of cattle in the feedlot fluctuated
between roughly 5,000 to 10,000 animals. DFC defaulted on its payments to
Voorhees, and Voorhees brought a foreclosure action against DFC and its
principals, Scott Mathison and Rick Jensen, individually. DFC answered the
complaint, alleging fraud against Voorhees—particularly that Voorhees “was aware
or should have been aware” that plans which Voorhees submitted to DENR prior to
the sale were not adequate to bring the property into compliance because those
plans failed to “account for adequate collection of all waste water.” Further, the
answer alleged Voorhees misrepresented the work and cost required to bring the
1. The clause provided in full:
SELLERS will seek transfer of DENR lagoon design approval
and NRCS equip funds to PURCHASERS and cooperate in the
transfer of permits upon the execution of this agreement.
PURCHASERS agree to sign all paperwork necessary to have
NRCS equip funds transferred in to PURCHASERS name only
and to complete the lagoon design per the DENR’s approved
specifications to complete the permitting process.
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feedlot into compliance with DENR standards. The answer also contained third-
party claims against B & B, alleging that B & B had “breached its duty under
contract to build and construct the lagoon as it has failed to do so to date.”
[¶4.] As a result of the fraud allegations, counsel for Voorhees, Thomas M.
Maher, sought to depose DFC’s counsel William Van Camp and subpoenaed his
records concerning his representation of DFC. 2 Van Camp moved to quash the
subpoena and enter a protective order. A hearing on the motion was held on August
9, 2013. At the hearing, Maher stated that it was the amended complaint
containing the fraudulent allegations that caused the request to depose Van Camp
and view his files. Maher explained that Van Camp had done due diligence on the
2006 transaction, such as conversing with DENR regarding compliance issues and
reviewing whether the lagoon could be built based on the engineering plans
Voorhees had previously submitted to DENR. He alleged that Van Camp’s role in
this transaction was “not just drafting” and therefore Van Camp’s knowledge was
relevant to the lawsuit. He stated:
We do think he’s [(referring to Van Camp)] clearly a witness for
the Voorhees, yes. And we think his testimony is absolutely
inconsistent with Defendants’ position that the Voorhees are
guilty of fraud. And we think he’s one of the best witnesses for
the Voorhees in that he as an attorney went up there trying to
make sure that these plans would be permitted and approve or
2. The subpoena duces tecum sought “all dates and billing records, records of
meetings, contacts and/or communications/correspondence with DENR and/or
South Dakota Attorney General’s Office representative of DENR or Chief
Deputy Attorney General Charles McGuigan, and/or Defendants’
representatives or engineers, about the permitting process, lagoon design and
requirements, water quantity, and all other requirements necessary for final
permitting herein from before closing on the purchase of the feedlot through
the present.”
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don’t approve a closing, and he approved the closing. . . . And I
believe it’s going to be shown in there that he communicated to
his clients what he found. And I believe he communicated to his
clients that, it’s all right; you can go ahead and buy this; you’re
going to be able to build these plans, be it e-mail, conversation or
billing records.
When asked for B & B’s position on the matter, their counsel, Robert Anderson,
stated that B & B was caught in the middle but the “build-ability of these plans and
the improvement of the feedlot does relate to the B & B involvement.” The court
denied the motion, stating: “However, this does appear to be a case with a fraud
claim having been filed and Mr. Van Camp having been a pertinent part of the
investigation, the due diligence in the transaction of this, that I am going to deny
the motion to quash.”
[¶5.] In response to the court’s denial, Van Camp filed a motion to
reconsider. The court held a hearing on the motion on October 2, 2013. Van Camp
argued that there was no applicable fraud exception to the attorney-client privilege
and that he was acting as “an ordinary attorney” by performing due diligence on the
transaction. Further, he stated that there is no statute or case law in South Dakota
that allows an attorney to be deposed in ongoing litigation because of a fraud
complaint such as this. Van Camp explained he was resisting the motion, in part
because “they can conduct the discovery they want from my client, the discovery
they want from DENR to see what information is there.” Maher compared Van
Camp’s action to that of an attorney investigating for an insurance company as in
Dakota, Minn. & E. R.R. Corp., v. Acuity (DM&E), 2009 S.D. 69, 771 N.W.2d 623.
The court again denied Van Camp’s motion.
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[¶6.] As a result of the court’s ruling, the parties deposed Van Camp. Van
Camp also answered requests for admissions, admitting to the contents of
communications between himself and his client. Van Camp admitted that he told
his client’s principals, Mathison and Jensen, that: they must comply with the
requirements or they would face enforcement proceedings; the costs of completing
the process would be substantial; they needed to immediately begin conversations
with DENR about how to come into compliance with the requirements to operate
the feedlot; DENR was dismissive of stretching the work out over five years; they
were not to deviate from the engineer-approved plans; they must do the work as
required by the conditional permit; they would “need an engineer because an
engineer will need to sign off that the very detailed descriptions with requirements
are completed in proper fashion;” and Van Camp was not aware of anyone in the
deal that “has the authority or the ability to sign off on some of the leakage tests
and pipe specifications as detailed in these requirements.” These admissions were
admitted into evidence at trial. Also admitted at the jury trial were letters from
Van Camp to his client where he told Mathison and Jensen that he did not see
anything in the agreement about the permitting requirements needed to operate the
feedlot or the “hundreds of thousands of dollars” in cost to bring the feedlot into
compliance.
[¶7.] DFC now appeals the introduction of those materials at trial,
submitting that they are privileged materials and introduction of such was
prejudicial error requiring a new trial where the privileged information cannot be
used.
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Standard of Review
[¶8.] “This Court normally reviews a circuit court’s discovery orders under
an abuse of discretion standard.” DM&E, 2009 S.D. 69, ¶ 47, 771 N.W.2d at 636.
“‘When we are asked to determine whether the circuit court’s order violated a
statutory privilege, however, it raises a question of statutory interpretation
requiring de novo review.’” Id. (quoting Maynard v. Heeran, 1997 S.D. 60, ¶ 5, 563
N.W.2d 830, 833).
Analysis
Attorney-client privilege
[¶9.] The judgment was satisfied in the foreclosure action between Voorhees
and DFC, which was the initial claim in this action. B & B’s claim was simply to
obtain payment for excavation work it completed. The attorney-client privileged
evidence that was admitted at trial was introduced by Voorhees, who is not a party
to this appeal. However, we must still analyze whether the evidence was privileged
and whether it was prejudicial because both the foreclosure action and the third-
party claim and counterclaim were included in one trial. We do not address the
related discovery issue of an attorney’s work-product because it was not an issue
raised or argued by the parties.
[¶10.] South Dakota’s attorney-client privilege is set forth in SDCL 19-19-
502(b)3, which provides:
3. The Code Commission, with approval of the Supreme Court, renumbered the
sections in SDCL chapters 19-9 to 19-13, inclusive, and 19-14 to 19-18.
Therefore, “subdivision 19-19-502(b)” is substituted for “§ 19-13-3” to reflect
the transfer of § 19-13-3 to subdivision 19-19-502(b).
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A client has a privilege to refuse to disclose and to prevent any
other person from disclosing confidential communications made
for the purpose of facilitating the rendition of professional legal
services to the client:
(1) Between himself or his representative and his
lawyer or his lawyer’s representative;
(2) Between his lawyer and the lawyer’s representative;
(3) By him or his representative or his lawyer or a
representative of the lawyer to a lawyer or a
representative of a lawyer representing another party
in a pending action and concerning a matter of
common interest therein;
(4) Between representatives of the client or between
the client and a representative of the client; or
(5) Among lawyers and their representatives representing
the same client.
“Four minimum elements exist to invoke the privilege: (1) a client; (2) a confidential
communication; (3) the communication was made for the purpose of facilitating the
rendition of professional legal services to the client; and (4) the communication was
made in one of the five relationships enumerated in SDCL § 19-[19-502(b)].” State
v. Rickabaugh, 361 N.W.2d 623, 624-25 (S.D. 1985). “It is the client, not the
attorney, with whom the lawyer-client privilege reposes.” State v. Catch the Bear,
352 N.W.2d 640, 645 (S.D. 1984).
[¶11.] There is no dispute that DFC is Van Camp’s client. SDCL 19-19-
502(a)(1). A confidential communication is one “not intended to be disclosed to third
persons other than those to whom disclosure is made in furtherance of the rendition
of professional legal services to the client or those reasonably necessary for the
transmission of the communication.” SDCL 19-19-502(a)(5). No one is disputing
that the letters from Van Camp and communications admitted to in the requests
were not intended to be disclosed to third parties. DFC asserts, and B & B does not
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counter, that Van Camp was hired to protect the interests of DFC in a multi-faceted
commercial undertaking. Accordingly, he rendered advice regarding legal
implications of the transaction. Lastly, the letters were between Van Camp and his
client, constituting a relationship under SDCL 19-19-502(b). Similarly the
communications admitted to in the requests for admissions satisfy the elements of
the test as those communications regarded compliance issues with the feedlot.
[¶12.] B & B asserts that “[e]ven though B & B is not arguing that the
communications and admissions at issue should or should not have been admitted,
the evidence in the record supports Voorhees’s claim that DFC was attempting to
use the attorney-client privilege to hide knowledge of certain information.” B & B
contends that “[b]ecause DFC put its own knowledge at issue (by claiming
fraud/concealment of facts by Voorhees) the trial court could have allowed the
communications and admissions to be admitted in order to prevent DFC from
unfairly using the privilege as a sword, rather than a shield.” However, B & B cites
no case law to support such an assertion.
[¶13.] Putting a party’s knowledge at issue in ongoing litigation does not
necessarily exclude attorney-client communications from the scope of the privilege.
Such a contention appears to misconstrue our precedent where we have held that a
party may waive privilege by placing advice of counsel at issue. Bertelson v. Allstate
Ins. Co., 2011 S.D. 13, ¶ 53, 796 N.W.2d 685, 703 (“[A] client only waives the
privilege by expressly or impliedly injecting his attorney’s advice into the case. . . .
[A] client only waives the privilege to the extent necessary to reveal the advice of
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counsel he placed at issue.” (citations omitted)). Such is not the scenario in this
case. As one court stated:
Advice is not in issue merely because it is relevant, and does not
necessarily become in issue merely because the attorney’s advice
might affect the client’s state of mind in a relevant manner. The
advice of counsel is placed in issue where the client asserts a
claim or defense, and attempts to prove that claim or defense by
disclosing or describing an attorney client communication.
Rhone-Poulenc Rorer Inc. v. Home Indem. Co., 32 F.3d 851, 863 (3d Cir. 1994), see
also Andrews v. Ridco, Inc., 2015 S.D. 24, ¶¶ 17-26, 863 N.W.2d 540, 546-50. At no
point in its pleadings did DFC place Van Camp’s advice into issue by attempting to
prove the claim by “disclosing or describing” Van Camp’s communications. Because
there is no indication in this case that DFC “expressly or impliedly inject[ed ][its]
attorney’s advice into the case[,]” waiver is not an issue. See Bertelson, 2011 S.D.
13, ¶ 53, 796 N.W.2d at 703.
[¶14.] The circuit court stated that Van Camp acted in a role similar to a
claims adjuster as in the case of DM&E. 2009 S.D. 69, ¶ 56, 771 N.W.2d at 638.
DM&E is distinguishable. The insurer in DM&E “completely delegated its claims
function to outside counsel.” Id. “[C]ounsel exclusively conducted the investigation
and solely made the initial determination to deny the UM claim.” Id. “[T]he
attorney [was] not acting as a lawyer in such instance.” Id. ¶55. Instead, counsel
was fulfilling the ordinary business function of claims investigation. Id. In this
case, Van Camp was not making business decisions, but rather rendering legal
advice on the implications of a transaction. The privilege still protects
communications from an attorney rendering transactional advice even though the
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attorney investigated relevant facts before communicating with a client. 4
Therefore, these communications fall within the protection of the attorney-client
privilege.
[¶15.] Even if the court found that the communications may not have been
privileged or that waiver was an issue, it should have considered whether deposing
opposing counsel was the appropriate means of acquiring the information sought.
The court failed to consider the implications of allowing discovery without bounds
by the extraordinary means of requesting admissions from opposing counsel
regarding client communications, deposing opposing counsel, and issuing a
subpoena for the production of materials from counsel’s case files. “Taking the
deposition of opposing counsel not only disrupts the adversarial system and lowers
the standards of the profession, but it also adds to the already burdensome time and
4. This does not mean that the facts that Van Camp learned from other sources
are protected. It is the communication rather than the information that is
protected.
For example, a client seeking legal advice on the contractual
implications of his previous discussions with a third party might
provide his attorney with facts detailing the meetings held with the
third party and his representatives. In the client’s future contract
action against that third party, the client could be required to answer
interrogatories or deposition questions about those meetings, even
though the substance of the answers might be identical to what was
previously told to the attorney. The client and his attorney would only
be protected from revealing that those same facts had been
communicated by the client to the attorney. Therefore, information not
otherwise privileged will not acquire a privileged status simply by
being communicated to, or filtered through, the attorney. But the fact
that the information was communicated to the client’s attorney
remains privileged.
1 Paul R. Rice, Attorney-Client Privilege in the U.S. § 5:1 (2014) (emphasis
omitted) (footnotes omitted).
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costs of litigation.” Shelton v. Am. Motors Corp., 805 F.2d 1323, 1327 (8th Cir.
1986).
[¶16.] Opposing counsel “is [not] absolutely immune from being deposed.” Id.
However, the circumstances under which opposing counsel may be deposed “should
be limited to where the party seeking to take the deposition has shown that (1) no
other means exist to obtain the information than to depose opposing counsel, (2) the
information sought is relevant and nonprivileged; and (3) the information is crucial
to the preparation of the case.” Id. (citation omitted). In this case, none of these
considerations were taken into account. The court did not analyze the necessity for
the discovery or consider reasonable alternative sources such as DFC’s principals or
other witnesses such as the DENR employees that may have spoken with DFC’s
attorney. See SDCL 15-6-26(b)(3) 5; see also Hickman v. Taylor, 329 U.S. 495, 509-
10, 67 S. Ct. 385, 393, 91 L. Ed. 451 (1947). The attorney for Voorhees was free to
ask DFC’s principals what factual information DFC knew. As the Eighth Circuit
noted, clients cannot refuse, on the basis of privilege, “to disclose facts which their
attorneys conveyed to them and which the attorneys obtained from independent
5. SDCL 15-6-26(b)(3) provides in part:
[A] party may obtain discovery of documents and tangible things
otherwise discoverable under subdivision (1) of this section and
prepared in anticipation of litigation or for trial by or for another
party or by or for that other party’s representative . . . only upon
a showing that the party seeking discovery has substantial need
. . . and that the party is unable without undue hardship to
obtain the substantial equivalent of the materials by other
means. . . . [T]he court shall protect against disclosure of the
mental impressions, conclusions, opinions, or legal theories of an
attorney or other representative of a party concerning the
litigation.
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sources.” Sedco Int’l, S.A. v. Cory, 683 F.2d 1201, 1205 (8th Cir. 1982) (citing
Hickman, 329 U.S. at 508, 67 S. Ct. at 392). However, that does not stand for the
proposition that an attorney may be deposed and required to answer requests for
admissions about communications to clients because a party believes opposing
counsel will have relevant knowledge or suspects that attorney-client
communications may provide material with which it can impeach the deposed
attorney’s client, as was done in this case.
Prejudice
[¶17.] The circuit court erred in refusing to quash Maher’s subpoena,
submitted on behalf of Voorhees, to depose Van Camp and require him to submit to
discovery of his file and answer requests for admissions. The circuit court
committed further error in allowing privileged material to be introduced on behalf
of Voorhees during the trial. However, our review of evidentiary rulings is a two-
step process. Supreme Pork, Inc. v. Masterblaster, Inc., 2009 S.D. 20, ¶ 59, 764
N.W.2d 474, 491. A party must demonstrate both error and that it was prejudicial.
Id. Error is prejudicial if it “most likely has had some effect on the verdict and
harmed the substantial rights of the moving party.” Schoon v. Looby, 2003 S.D.
123, ¶ 18, 670 N.W.2d 885, 891. DFC argues that it suffered prejudice because the
communications were allowed in to conclusively prove issues that are part of B &
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B’s claims. 6 B & B points out that independent evidence was admitted to prove
elements of B & B’s claim.
[¶18.] We note that in this multi-party, multi-issue trial the communications
were introduced without limit and were used throughout the trial. However, B & B
claimed breach of contract and impossibility of performance. A partner of B & B,
Darrell Beck, testified that DFC was concerned about the costs of the lagoon project
so it had B & B obtain an operating loan. DFC assigned a grant to B & B so B & B
could obtain the loan. B & B drew the loan amount but never received payment
from the grant, and B & B alleged that nonpayment of the grant was because of
some failure on DFC’s part. Further, Beck testified that DFC was not liable on the
loan as he originally thought and now B & B must repay the loan, which it used in
order to provide construction services for DFC. He further testified that although B
& B excavated a large cell for the lagoon, it was prevented from finishing the project
completely because DFC refused to hire an engineer to do the measuring and
staking that the project required.
[¶19.] Even though the privileged communications should not have been
introduced, nor the deposition of the attorney and further discovery of attorney-
client privileged material allowed, those communications were germane to the claim
by Voorhees, which is not being appealed because DFC satisfied the judgment
against it. The communications did not prove, nor go to the heart of B & B’s claims.
B & B’s claims asserted that the company was not paid for the work that it provided
6. SDCL 15-6-36(b) provides that “[a]ny matter admitted under this rule is
conclusively established unless the court on motion permits withdrawal or
amendment of the admission.”
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and that no engineer was hired to enable it to complete the project. Van Camp’s
communications to his client and the content of those communications were not
relevant to DFC’s conduct during the period of time that was relevant to B & B’s
claims. The communications occurred before DFC purchased the feedlot, whereas
the matters that B & B needed to prove for its claims—breach of contract and
impossibility of performance—occurred after purchase. Mathison acknowledged at
trial that an engineer was needed to ensure compliance with DENR’s specifications.
Further, he testified that he did not expect B & B to be responsible for the redesign
of the plans. It was uncontested that: B & B completed excavation work for DFC;
no engineer was hired; and sufficient staking was not done so as to allow B & B to
complete the project. The only issue between B & B and DFC decided by the jury
was the amount of money owed B & B for the work done on the feedlot. As a result,
the erroneous admission of the privileged communications was not unfairly
prejudicial to DFC as against B & B. DFC’s claim that the error tainted the trial is
not sufficient. We affirm.
[¶20.] GILBERTSON, Chief Justice, and ZINTER and KERN, Justices, and
LINNGREN, Circuit Court Judge, concur.
[¶21.] LINNGREN, Circuit Court Judge, sitting for WILBUR, Justice,
disqualified.
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