Shumaker, Loop & Kendrick, Llp v. Zaremba

403 B.R. 480

SHUMAKER, LOOP & KENDRICK, LLP, Appellant, v. Thomas S. ZAREMBA, Appellee.

No. 3:08 CV 1855.

United States District Court, N.D. Ohio, Western Division.

March 30, 2009.

Gerald R. Kowalski, Sarah K. Skow, Cooper & Walinski, Toledo, OH, Craig D. Singer, John K. Villa, John S. Williams, Katherine Leong, Williams & Connolly, for Appellant.

Bruce R. Schrader, II, John W. Becker, Stephen W. Funk, Roetzel & Andress, Akron, OH, John P. Donahue, Donahue & Nunnari, Perrysburg, OH, Patricia B. Fugee, Roetzel & Andress, Thomas A. Matuszak, II, Toledo, OH, for Appellee.

MEMORANDUM OPINION AND ORDER

JACK ZOUHARY, District Judge.

INTRODUCTION

This is a bankruptcy appeal. The question on appeal is: Who bears the burden of proving the validity of a written waiver of the attorney-client privilege? Appellant Shumaker, Loop & Kendrick, LLP ("SLK") is the proponent of the privilege and has filed briefing in support of its position (Doc. Nos. 35 & 37). Appellee Thomas Zaremba, Trustee ("Trustee") opposes assertion of the privilege and has filed briefing in support of his position (Doc. No. 36). A hearing was held on February 5, 2009 (Doc. No. 40).

FACTUAL BACKGROUND

Debtors in this matter are broker-dealers Continental Capital Investment Services, Inc. ("CCIS") and Continental Capital Securities, Inc. ("CCS"). Debtors are being liquidated under the Securities Investor Protection Act, 15 U.S.C. § 78aaa, et seq. ("SIPA"). Zaremba is the appointed SIPA Trustee on behalf of Debtors' investors. SLK was legal counsel to Debtors prior to liquidation proceedings.

SLK also served as legal counsel for Continental Capital Corporation ("CCC"), the parent of CCIS and CCS, and certain non-debtor related entities, including:

• Continental Capital Advisors, Inc. ("CCAdvisors"),

bull; Continental Capital Merchant Bank ("CCMBank"),

• Active Leisure, Inc. ("Active"),

• Americus Communications ("Americus"), and

• IVES, Inc. ("IVES").¹

During the course of SLK's representation of CCC and its related entities, William Davis ("Davis"), the former president, chairman, and chief executive officer of CCC and an investment advisor with Debtors, engaged in a Ponzi scheme that included mail fraud, bank fraud, and theft resulting in the loss of millions of dollars for customers of Debtors. Davis was convicted and sentenced to 188 months incarceration. See United States v. Davis, No. 3:05-CR-744 (N.D.Ohio).

Davis' fraud and theft caused the financial collapse of Debtors, in addition to CCC and its affiliated companies. In August 2003, the Securities Investor Protection Corporation filed a Complaint seeking protection under SIPA for the customers of Debtors and requesting the appointment of a Trustee to oversee the liquidation and investigation of the affairs of Debtors.

During the course of his investigation, the Trustee obtained ten waivers from Davis, each purporting to waive attorneyclient privilege with respect to ten separate entities. Each waiver was identical, save for a "Re" subtitle to each waiver which names the entity and then refers to the entity as "the Company." Each waiver is dated September 28, 2006 and states:

I, William C. Davis, irrevocably waive, on behalf of the Company, any attorneyclient privilege, work product, or other privileges of any kind or nature and request that all documents and files in your possession or under you control related to the Company be delivered to Thomas S. Zaremba, SIPA Trustee for the Liquidation of Continental Capital Investment Services, Inc. and Continental Capital Securities, Inc.

/s/ William C. Davis
    William C. Davis on behalf of
    [Continental Capital Merchant Bank
    LLC] [variable]

(SLK Exs. 6 A-J). The documents bear the signature of John Minock as witness. At oral argument, Minock was identified as legal counsel for Davis in his criminal prosecution (Tr., p. 11). However, neither Davis nor Minock offered sworn testimony about the waivers, and no opportunity was given below for discovery. Indeed, no evidence, outside the plain text of the written waivers themselves, was presented. And the waivers do not recite Davis' authority to waive on behalf of the ten companies or his position with those companies.

PROCEDURAL BACKGROUND

The Trustee served investigatory subpoenas on SLK requesting billing-related records and correspondence relating to 48 entities and individuals, including SLK clients Active, Americus, and IVES. SLK refused to produce the documents, citing attorney-client privilege. The Trustee then moved to compel production in the Bankruptcy Court. The Bankruptcy Court denied the Trustee's motion to compel on the ground that he could not pursue discovery after having sued SLK in a separate adversary proceeding (Opinion pp. 5-8).

The Bankruptcy Court also addressed the Trustee's claims that certain former SLK clients had waived their privileges. The Bankruptcy Court concluded that valid waivers existed for CCC, CCAdvisors, and CCMBank (p. 11). For CCC, the Trustee offered a written waiver signed by Thomas Williams, executive vice president, chief operating officer, secretary and treasurer of CCC, in addition to a board resolution signed by Robert Franklin and John Ayling, the two remaining directors of CCC. For CCAdvisors and CCMBank, the Trustee offered board resolutions also signed by Franklin and Ayling. SLK does not appeal the Bankruptcy Court's finding that the waivers were effective as to CCC, CCAdvisors, and CCMBank.

As to the ten waivers signed solely by Davis, the Bankruptcy Court concluded that two of the waivers—those for CCAdvisors and CCMBank—were invalid because Davis' position with those companies had been terminated in April 2003, several years before he signed the waivers, and therefore he "clearly lacked authority to waive any privilege as to these two entities" (p. 12). As to the eight remaining Davis waivers, the court held that SLK had failed to fulfill its obligation to present evidence that Davis lacked authority to waive with respect to these entities (id.). It is the Bankruptcy Court's conclusion as to these eight waivers which SLK appeals.

JURISDICTION

This Court has jurisdiction under 28 U.S.C. § 158(a)(3) to review the interlocutory order issued by the Bankruptcy Court on June 27, 2008. This Court granted SLK's Motion seeking leave to appeal on October 21, 2008 (Doc. No. 17).

STANDARD OF REVIEW

On appeal from a bankruptcy court decision, a district court reviews questions of law de novo. In re Gardner, 360 F.3d 551, 557 (6th Cir.2004). Before this Court are questions of law—namely which party bears the burden of proof as to the validity of express waivers and the quantum of proof necessary to meet the burden. See Fuji Kogyo Co. v. Pacific Bay Int'l, Inc., 461 F.3d 675, 681 (6th Cir.2006) (holding a "court's allocation of the burden of proof is a question of law").

DISCUSSION

General Principles

The general rule is that the burden of establishing the existence of the privilege rests with the party claiming it. United States v. Dakota, 197 F.3d 821, 825 (6th Cir.1999). Case law is clear that it is the burden of the proponent of the privilege to establish that the privilege has not been waived, for example, by disclosure to a third party. In re Grand Jury Subpoena, 341 F.3d 331, 335 (4th Cir.2003); In re OM Sees. Litig., 226 F.R.D. 579 (N.D.Ohio 2005); Shields v. Unum Provident Corp., No. 2:05 CV 744, 2007 WL 764298 (S.D.Ohio Mar. 9, 2007). The Bankruptcy Court relied on this point of law in its Opinion below (p. 9). However, the validity of a written waiver is a separate question from the initial question of whether the privilege exists.

There is also general agreement among many courts and circuits that once a prima facie case of privilege is established by a proponent, the party challenging the privilege then has the burden to establish that the communications in question are otherwise discoverable under an exception or waiver. See Mass. Eye & Ear Infirmary v. QLT Phototherapeutics, Inc., 412 F.3d 215, 225 (1st Cir.2005); Sampson v. Sch. Dist. of Lancaster, No. 05-6414, 2008 WL 4822023, at *8 (E.D.Pa. Nov.5, 2008); Martin Marietta Materials, Inc. v. Bedford Reinforced Plastics, Inc., 227 F.R.D. 382, 390 (W.D.Pa.2005); Perkins v. Gregg County, 891 F.Supp. 361, 363 (E.D.Tex. 1995); Texaco, Inc. v. La. Land & Exploration Co., 805 F.Supp. 385, 387 (M.D.La. 1992).

There is however no general agreement as to which party bears the burden to prove the ultimate validity of an express written waiver, and precisely what that burden entails. None of the cases cited above involve an alleged express waiver put forward by the opponent of the privilege.

Holding

This Court adopts a burden-shifting approach. When a claim of privilege through express waiver is raised, burdens shall be distributed as follows: (1) the proponent of the privilege has the burden of demonstrating, by a preponderance of the evidence, that the elements of privilege have been satisfied; (2) the opponent of the privilege must present sufficient evidence upon which a reasonable person may find that the privilege has been waived; (3) if the opponent meets its burden, the proponent of the privilege must disprove each demonstrated claim of waiver by a preponderance of the evidence.

Legal Support

There is no case law from the Sixth Circuit addressing this issue. The most instructive case appears to be In re Grand Jury Proceedings, 73 F.R.D. 647 (M.D.Fla. 1977). The case is very similar to the facts at issue here; an express written waiver was also involved, although in the context of a criminal prosecution. The court described the facts as follows:

In this instance movant (who is an attorney) has been served with a document that purports to be an express waiver by his former client of the attorney-client privilege. When movant resisted an attempt by F.B.I, agents to take possession of movant's files, pursuant to the waiver, a factual issue concerning the validity of...