Iafrate v. Warner Norcross & Judd, LLP

DOMINIC IAFRATE; ANGELO IAFRATE, SR.;ANGELO IAFRATE, SR. as trustee of theJOHN IAFRATE IRREVOCABLE TRUST, Plaintiffs, v. WARNER NORCROSS & JUDD, LLP, Defendant.

Case No.: 18-12028

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION

June 15, 2020

Arthur J. Tarnow United States District Judge

R. Steven Whalen United States Magistrate Judge

OPINION AND ORDER

Before the Court is plaintiffs' March 10, 2020 Motion to Compel Production of Documents Withheld as Privileged. (ECF No. 37). For the reasons set froth below, plaintiffs' motion to compel is GRANTED IN PART, DENIED IN PART.

I. BACKGROUND FACTS¹

A. The Parties and Relationships

Angelo Iafrate, Sr., a plaintiff in this case, started construction company Angelo Iafrate Construction Company (AICC). Angelo Iafrate Sr., and his sonsplaintiff Dominic Iafrate, the John Iafrate irrevocable trust,² and Angelo Iafrate, Jr. (not a plaintiff) collectively became the sole shareholders of AICC over time. Prior to 2013, Angelo Sr. and Dominic moved to Florida and started a similar construction company down there.

In early 2013, the family decided to create an Employee Stock Ownership Plan (ESOP) structure for the company that would allow the family members to phase out of the business and "monetize their equity interest in AICC" by selling their shares to the ESOP entity, instead of selling to a third party. (ECF No. 37, PageID.441). The following steps were taken in the formation of the ESOP: plaintiffs contributed all their stock in AICC to "Newco." Newco formed the ESOP, which then purchased all the plaintiffs' shares in Newco for an established purchase price. One hundred percent of the purchase price was provided by seller financing in the form of a loan from the Iafrate family shareholders to the ESOP. As part of the closing, that loan was assigned from the ESOP to, and assumed by, Angelo Iafrate, Inc., (AII), formerly Newco. AII then immediately refinanced the ESOP loan with plaintiffs and furnished to each plaintiff a Senior Promissory Note and a Junior Note for the purchase of plaintiffs' shares over 10 years, and issued Common Stock Warrants. (ECF No. 3, PageID.35-36, ¶¶ 18-20 - AmendedComplaint). The Common Stock Warrants entitled each plaintiff to purchase shares at $225 per share or to redeem shares for cash payment, with limitations listed in the contract, after full payment of the Notes. The transaction closed December 6, 2013.

After the transaction was complete, Dominic Iafrate remained on the Board of Directors of AICC and the ESOP entity, AII, until February 20, 2017. Angelo Iafrate, Jr. remained on the Board until January 26, 2016. (ECF No. 37, PageID.438). Robert Adcock became President of AII and Trustee of the ESOP. (ECF No. 46, PageID.1001-02).

B. Warner Norcross & Judd and the Common Stock Warrants

In February 2013, Warner Norcross & Judd (WNJ) entered into a representation agreement with AICC for the purpose of implementing an Employee Stock Ownership Plan. (ECF No. 46-5). WNJ attorney Justin Stemple became responsible for drafting the majority of the ESOP documents. At that time, plaintiffs and Angelo Jr. were the sole shareholders in AICC. It is plaintiffs' contention that WNJ also represented their individual interests in addition to representing AICC, but WNJ disagrees. (ECF No. 3; ECF No. 37, PageID.441-46).

Stemple drafted, among other things, the Common Stock Warrants. The initial draft provided for a Warrant term that terminated warrants of all the holderson December 31, 2024, or effectively in ten years of closing. (ECF No. 37-3, PageID.658). Two weeks prior to the closing date, Stemple sent plaintiffs and their family attorney a second iteration containing many changes. One such change was in the Warrant Term clause. In this version, the warrants for each holder terminate, and could no longer be exercised, 60 days after the ESOP paid in full the Senior and Junior Promissory Notes to the holder. (ECF No. 37-3, PageID.666). This is the version the plaintiffs signed into effect on December 6, 2013.

This case is largely about the Common Stock Warrants term clause. Plaintiffs' believe that WNJ attorneys were duty-bound to expressly point out and inform them of the 60-day time limit on exercising the warrant, especially once AII started paying the Notes in full.

Though the plaintiffs originally planned to have the payments on the Senior and Junior Promissory Notes paid pro rata to each family member, they decided that Angelo Sr.'s Notes should be paid first. Angelo Sr. was paid in full on December 20, 2016. He did not exercise his Warrants within 60 days of full payment. On February 17, 2017, Dominic and the John Iafrate Trust's Notes were paid in full, but they did not exercise their redemption rights under the Warrants within 60 days either. On February 2, 2018, Angelo Jr.'s notes were paid. All four attempted to exercise their rights under the Warrant for payment of cash instead ofshares of stock. AII only paid Angelo Jr., as his request came within 60 days of full payment on his Notes. This is when, purportedly, plaintiffs learned of the 60-day warrant termination clause. At Angelo Jr.'s request, Stemple drafted an assignment of the warrant payments of 25% to each of the three other shareholders/plaintiffs. (ECF No. 37, PageID.460).

Plaintiffs' theory is that attorney Stemple and Adcock colluded to essentially trick plaintiffs out of their money. They believe that Adcock and Stemple communicated about the 60-day term limit and planned to "lie in wait" for the 60 days to pass after payment of each promissory note in full, then deny the redemption rights based upon the 60-day language in the contract. (ECF No. 37, PageID.452).

II. DISCUSSION

Plaintiffs served on WNJ their First Request for Production of Documents (RFP) containing 28 RFPs on February 22, 2019. (ECF No. 37-2). WNJ responded to some of the requests indicating that no documents existed to satisfy the request, that documents had already been produced, or that documents would be produced, subject to general objections listed in the response. (ECF No. 37-3). However, WNJ objected to producing any documents as to some of the requests claiming they are protected by attorney-client privilege. In general, WNJ relied on this objection for requests for documents post-dating the ESOP transaction whichseek communications between WNJ attorneys and persons/entities other than the plaintiffs. WNJ provided a 56-page privilege log. (ECF No. 37-2, Ex. 3). Plaintiffs believe they are entitled to documents withheld under attorney-client privilege. They raise a number of arguments, addressed in turn below.

A. Adverse Litigation/Joint Client Exception

The main premise behind plaintiffs' first argument is that they, as individuals, were clients of WNJ, as well as AICC pre-transaction. WNJ insists that the plaintiffs were not their clients, and that only AICC and then the entities created by the transaction—AII and AII ESOP—were the clients.

"In a diversity case, the court applies federal law to resolve work product claims and state law to resolve attorney-client claims." In re Powerhouse Licensing, LLC, 441 F.3d 467, 472 (6th Cir. 2006) (citing Fed. R. Evid. 501). The attorney-client "privilege attaches only to confidential communications by the client to his attorney, which are made for the purpose of obtaining legal advice." In re Costs & Attorney Fees, 250 Mich. App. 89, 99 (2002) (quoting McCartney v. Attorney General, 231 Mich. App. 722, 731 (1998)). Although WNJ raised work-product privilege against some requests, and plaintiffs include the term in recitations of legal authority (see ECF No. 37, PageID.461, n. 7), plaintiffs did notset forth any argument that documents withheld as work product should be compelled.³

The Court need not decide whether plaintiffs and WNJ had an attorney-client relationship to resolve plaintiffs' motion to compel. Assuming without deciding that such a relationship existed, plaintiffs' joint client theory of entitlement to communications between WNJ and Adcock, AII, and AII ESOP lacks merit.

As an initial matter, plaintiffs cite the "common interest exception" to attorney-client privilege. Taking plaintiffs' use of terminology literally, the common interest doctrine does not apply here. It applies "where the parties are represented by separate attorneys but share a common legal interest." Ford Motor Co. v. Michigan Consol. Gas Co., 2013 WL 5435184, at *5 (E.D. Mich. Sept. 27, 2013) (quoting State Farm Mut. Auto. Ins. Co. v. Hawkins, 2010 WL 2287454 at *8 (E.D. Mich. June 4, 2010)). Under the doctrine, an attorney-client privileged communication can be exchanged with the third party without waiving the privilege, provided that the parties have "'an identical legal interest with respect to the subject matter of the communication.'" MPT, Inc. v. Marathon Labels, Inc.,2006 WL 314435 at *6 (N.D. Ohio Feb. 9, 2006) (quoting Libbey Glass, Inc. v. Oneida, Ltd., 197 F.R.D. 342, 347 (N.D. Ohio 1999)); see also Estate of Nash v. City of Grand Haven, 321 Mich. App. 587 (2017). Plaintiffs argue here that they were represented by the same attorney as joint clients, not a different attorney than the one representing the business entities and Adcock after the transaction.

Plaintiffs' argument, more broadly, is that as joint clients with AII, ESOP, and Adcock toward a common interest, they are entitled to communications between WNJ and the other parties. (ECF No. 37, PageID.470). The principle behind plaintiffs' argument is that "when two persons employ a lawyer as their common agent, their communications to him as to strangers will be privileged, but as to themselves, they stand on the same footing as to the lawyer and either can compel him to testify against the other as to their negotiations in any litigation between them, when the subject of the conversation is competent." Grand Trunk W. R. Co. v. H.W. Nelson Co., 116 F.2d 823, 835 (6th Cir. 1941) (...