Impala Platinum Holdings Ltd. v. A-1 Specialized Servs.

IMPALA PLATINUM HOLDINGS LIMITED, et al. v. A-1 SPECIALIZED SERVICES AND SUPPLIES, INC., et al.

CIVIL ACTION NO. 16-1343

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

February 2, 2017

Baylson, J.

MEMORANDUM RE: CRIME-FRAUD EXCEPTION

At issue in this complex commercial litigation is whether to compel production of certain attorney-client privileged documents under the crime-fraud exception. Plaintiffs Impala Platinum Holdings Limited and Impala Refining Services Limited ("Impala") filed a Motion to Require the Shareholder/Director Defendants to Produce Privilege Logs and to Produce Certain Communications Based on the Crime-Fraud Exception on November 11, 2016 (ECF No. 150). After considering the Motion, as well as the responses and reply thereto, this Court scheduled a hearing on January 12, 2017 for argument on whether in camera review of the privileged documents was appropriate. At the hearing, defense counsel argued that Impala had not met its burden of showing a prima facie case of fraud sufficient to justify in camera review of the challenged documents. They further contended that a fraudulent conveyance, such as that alleged by Impala, cannot constitute "fraud" for purposes of the crime-fraud exception. Impala, on the other hand, argued that they had met the Third Circuit's standard for in camera review under the crime-fraud exception, and cited a recent Supreme Court case to bolster their argument that a fraudulent conveyance can be a "fraud" under the exception.

Following the hearing, the Court ordered the Defendants to prepare a log of all attorney-client communications from the client to counsel in the six months prior to each of the allegedly fraudulent transactions (ECF No. 205). The Court found that because the evidence showed that Defendant A-1 Specialized Services and Supplies, Inc. ("A-1") had engaged in significant financial transactions at a time when it may have been insolvent and when Defendants may have known Impala to have a superior right of recovery, in camera review was justified. Defendants submitted their privilege logs and all communications described therein on January 24, 2017, with the exception of Ashok Kumar Khosla and Alliance Industries Limited ("Alliance"), who requested a phone call to discuss the time and expense associated with producing every logged document. The Court agreed that requiring Alliance to produce upwards of 20,000 pages of documents was unnecessary at that juncture, and a compromise was reached whereby Alliance and Impala would each select one month of documents for the Court to review. After this first step, the Court would determine whether further review was necessary.

Alliance submitted 578 emails to the Court, from the months of May and June 2015. The vast majority of the communications were innocuous discussion of litigation filings, scheduling, and strategy. In a few instances, the documents showed the clients asking counsel for legal advice regarding the consequences of the proposed settlements, or of A-1 filing for bankruptcy. But, contrary to Impala's position, we do not find that documents of this sort are sufficient to meet the stringent standard for piercing the attorney-client privilege.

The Third Circuit has established that to pierce the attorney-client privilege under the crime-fraud exception, the court must find that the movant has demonstrated there is a reasonable basis that "(1) the client was committing or intending to commit a fraud or crime, and (2) the attorney-client communications were in furtherance of that alleged crime or fraud." In re Grand Jury Subp., 705 F.3d 133, 151, 153 (3d Cir. 2012). "The reasonable basis standard is intended to be reasonably demanding; neither speculation nor evidence that shows only a distantlikelihood of corruption is enough." Id. at 153 (quoting In re Grand Jury Proceedings, 417 F.3d at 23). "Only when a client knowingly seeks legal counsel to further a continuing or future crime does the crime-fraud exception apply." United States v. Doe, 429 F.3d 450, 454 (3d Cir. 2005). In addition, before compelling production of the privileged documents, the court must hold an evidentiary hearing at which "the party defending the privilege [is] given the opportunity to be heard, by evidence and argument." Haines v. Liggett Group Inc., 975 F.2d 81, 97 (3d Cir. 1992).

We have found no precedent for piercing the attorney-client privilege under circumstances similar to these, where there is no evidence of intent to defraud or commit a crime. In Alliance's letter dated January 25, 2017, there are citations to several cases that show the stringent standard courts apply before compelling production of privileged documents under the crime-fraud exception. Most factually similar to the instant case is Tindall v. H & S Homes, LLC, 757 F. Supp. 2d 1339 (M.D. Ga. 2011), in which the communications at issue were likewise alleged to be in...