In re Carlson

In re: RYAN DAVID CARLSON, Debtor.

Misc. Proc. No. 20-71002-SWD

Case No. BK-S-19-16289-ABL

UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF MICHIGAN

April 21, 2020

U.S. Bankr. Court (D. Nev.)

Chapter 7

MEMORANDUM OF DECISION AND ORDER

PRESENT: HONORABLE SCOTT W. DALES Chief United States Bankruptcy Judge

I. INTRODUCTION

CP Food and Beverage, Inc.'s Motion to Compel Discovery of Documents Pursuant to Order for Rule 2004 Examination and Subpoena (the "Motion," ECF No. 1) seeks the court's assistance in resolving a document production dispute in connection with the chapter 7 bankruptcy case of Ryan David Carlson (the "Debtor"), now pending in the District of Nevada. The production occurred in connection with a Rule 2004¹ examination of Modern Bookkeeping, Inc. ("Modern") at the behest of the Debtor's judgment creditor, CP Food and Beverage, Inc. ("CP Food"). The dispute involves the assertion of the attorney-client privilege of Modern and its long-time clients, Harry Mohney and Déjà Vu Services, Inc. ("Déjà Vu") -- the Debtor's employer -- that initially arose in connection with CP Food's garnishment of the Debtor's wages from Déjà Vu.

The examination of Modern (and the document production) took place in the Western District of Michigan, so after Modern refused to produce a small number of documents (assertingthe attorney-client privilege) CP Food filed the Motion here, pursuant to Rules 45 and 9016. No one suggests that the Motion should be heard in Nevada. See Fed. R. Civ. P. 45(d)(2)(B)(i) and (f).

The court conducted a telephone hearing regarding the Motion on March 26, 2020, during which the parties narrowed the issues significantly. For example, CP Food agreed that the "crime-fraud" exception to the privilege is no longer at issue. The parties also agreed that the court could resolve the dispute by reviewing the documents, transcripts of two Rule 2004 examinations,² and other sworn statements submitted in connection with the matter,³ without conducting a full-blown evidentiary hearing. See Transcript of Hearing Held March 26, 2020 (ECF No. 15, the "Hearing Tr.") at p. 47:7-14; Fed. R. Civ. P. 43(c). The parties seem to agree that Modern, as the proponent of the privilege, has the burden of proving that it applies. United States v. Dakota, 188 F.3d 663, 667 (6th Cir. 1999).

At the conclusion of the hearing, the court directed Modern to submit the documents at issue under seal for in camera review, and authorized CP Food to supplement the record with a transcript of the Debtor's Rule 2004 examination. Modern filed the documents as ordered, as well as a revised privilege log (ECF No. 18, the "Privilege Log") and CP Food filed an additional transcript. The court has reviewed the sealed documents and other materials submitted in connection with the Motion, and for the following reasons will grant the Motion in part and deny it in part.

II. JURISDICTION

Despite the inter-district history of the proceeding, the court has jurisdiction to resolve the Motion. The grant of bankruptcy jurisdiction vests the "district courts" with original and exclusive jurisdiction over "all cases under title 11." 28 U.S.C. § 1334 (emphasis added). Which of the district courts is the proper venue for a proceeding is a matter for other law. See, e.g., 28 U.S.C. §§ 1409 and 1412.⁴ When it comes to the venue for enforcing a subpoena or protecting the target of a subpoena, Rule 45 specifies the proper venue as "the district court where compliance is required," rather than the issuing court (if the two are different). Here, the Debtor commenced a case under title 11 in the District of Nevada, and CP Food's Nevada counsel, as an officer of that court, issued a subpoena compelling Modern to comply in the Western District of Michigan. Our District Court has jurisdiction over the Debtor's case under 28 U.S.C. § 1334 and has referred the Motion to this court under 28 U.S.C. § 157(a). The court has authority to resolve the Motion under 28 U.S.C. § 157(b)(2)(A) as involving the administration of the Debtor's estate, and likely § 157(b)(2)(I) as bearing on the Debtor's discharge. No party has suggested otherwise.

III. ANALYSIS

The parties apparently assume that Michigan law governing the attorney-client privilege applies to their dispute, and the court sees no reason to disagree given that Modern and several of the attorneys involved in the communications are located here (or addressed clients with Michigan contacts). In addition, the parties rely largely on Michigan authorities in this civil proceeding. See Fed. R. Evid. 501. Moreover, no one has suggested any material differences in the scope of the privilege from state to state (or from federal common law) at least as applicable to the present controversy, and the court is aware of none. Finally, Michigan courts sometimes look to federalprecedent in determining the scope of the privilege. Estate of Nash by Nash v. City of Grand Haven, 909 N.W.2d 862, 866 (Mich. App. 2017).

The attorney-client privilege, which our Supreme Court has called "the oldest of the privileges for confidential communications known to the common law," Upjohn Co. v. United States, 449 U.S. 383, 389 (1981), is easy to articulate, though sometimes difficult to apply. An influential Sixth Circuit opinion, cited by Modern, frames the privilege as follows by recognizing that it applies:

(1) where legal advice of any kind is sought, (2) from a professional legal adviser in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence (5) by the client, (6) are at his instance permanently protected (7) from disclosure by himself or by the legal adviser, (8) unless the protection is waived.

Reed v. Baxter, 134 F.3d 351, 355-56 (6th Cir.), cert. denied, 525 U.S. 820 (1998). Courts construe the privilege narrowly⁵ but guard it jealously⁶ because it has a dual aspect: on the one hand, it stands in the way of a court's truth-seeking function;⁷ on the other, it encourages people to conform their conduct to the law by letting them consult counsel without fear of embarrassment from later disclosure of the communications, back and forth. Upjohn, 449 U.S. at 389 (the privilege "promote[s] broader public interests in the observance of law and administration of justice").

Not every communication is privileged, of course, only communications seeking or giving legal advice, not business advice. For example, discussion of arrangements regarding fees and retainers cannot be construed as communications involving legal advice, although certainly related to establishing the relationship. Blonde v. Long, No. 304653, 2014 WL 316478, at *11 (Mich. Ct.App. Jan. 28, 2014); Morganroth & Morganroth v. DeLorean, 123 F.3d 374, 383 (6th Cir. 1997) (District Court properly regarded discussion between attorney and client about fees at the start of the action as non-privileged "financial discussion that did not involve the seeking or provision of legal advice").

It is well-settled that a client may waive the privilege by disclosing communications to third parties in certain circumstances, yet those circumstances generally do not include sharing the communications with the client's employees or other agents, or with joint clients. As the Michigan Court of Appeals explained:

Where an attorney's client is an organization, the privilege extends to those communications between attorneys and all agents or employees of the organization authorized to speak on its behalf in relation to the subject matter of the communication.

Reed Dairy Farm, 576 N.W.2d at 711-12; Wrench LLC v. Taco Bell Corp., 212 F.R.D. 514, 517 (W.D. Mich. 2002); see generally Restatement (Third) of the Law Governing Lawyers §§ 75 and 76 (2000) (discussing co-client and common interest privilege).

The historical facts bearing on this dispute are not complicated or seriously in dispute.⁸ Modern served as the bookkeeper for Déjà Vu and other entities comprising Harry Mohney's adult entertainment enterprises. Although technically a distinct entity, Modern functioned largely as the payroll and accounting department for Déjà Vu.

The Debtor's relationship with Déjà Vu started as a contract consulting arrangement, but that changed in July 2017 when he became Déjà Vu's employee. He has been the company's "W-2" employee since that time. At the time of the communications at issue, he was employed as Déjà Vu's "Director of Operations" according to Ms. Swank. See Supp. Swank Decl. at ¶ 9.

The Debtor's testimony at his Rule 2004 examination tended to downplay his role in affecting Modern's response to CP Food's garnishment, Debtor Tr. at 56:9-57:24, but he evidently had a substantial role in his employer's business generally. Ms. Swank testified in her Rule 2004 Examination that the Debtor "oversees the Lansing and Las Vegas Deja Vu Services offices," and has "staff at the Las Vegas office that help him with his paperwork, and stuff like that." Swank Tr. at 20:20-23. The Debtor's communications with Ms. Swank were not limited to the garnishment but "about all different subjects almost every day." Swank Tr. at 80:19-20. She calculated that during the relevant period she received "on average, 23.72 emails per day from Ryan Carlson on business-related matters, the vast majority of which would not relate in any way to any monies owed or paid to Ryan Carlson (or any entity on his behalf)." Swank Aff. at ¶ 12. Ms. Swank described the Debtor as "management people." Swank Tr. at 81:8-23; see also Supp. Swank Decl. at ¶ 9.

The court acknowledges that in response to a question about whether he gave Modern instructions about the garnishment, the Debtor said, "I don't have any authority to instruct them for anything there." Debtor Tr. at 57:15-18. This statement, as CP Food argued, tends to support the company's view that the Debtor's involvement in the various emails at issue was not necessary, and reveals his frustration about his inability to "find some way to get around the garnishment for...