Whatley v. Meyer Wilson Co. (In re Chandar)

In re: DAYA RAM CHANDAR and JASWANTI DEVI CHANDAR, Debtor(s).

DOUGLAS M. WHATLEY, in his capacity as Chapter 7 Trustee for the bankruptcy estate ofDaya Ram Chandar and Jaswanti Devi Chandar, Plaintiff(s), v. MEYER WILSON CO., LPA, DAYA RAM CHANDAR and JASWANTI DEVI CHANDAR, Defendant(s).

Case No. 11-37360-B-7

Adversary No. 17-2057

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF CALIFORNIA

November 13, 2017

NOT FOR PUBLICATION

DC No. BHS-1

MEMORANDUM AND ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION TO COMPEL PRODUCTION OF DOCUMENTS

Before the court is a motion to compel the production of documents filed by plaintiff Douglas M. Whatley in his capacity as the chapter 7 trustee appointed in the above-referenced chapter 7 case. Plaintiff's motion is opposed by defendants Meyer Wilson Co., LPA, Daya Ram Chandar, and Jaswanti Devi Chandar. The Chandar defendants are also the debtors in the parent chapter 7 case and will be referred to as such when appropriate.

A hearing on the plaintiff's motion was held on October 3, 2017, and was continued to November 14, 2017. Appearance at the October 3, 2017, hearing were noted on the record. The continued hearing is vacated by this memorandum and order. This memorandum and order also constitutes the court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52 applicable by Federal Rules of Bankruptcy Procedure 7052 and 9014.

INTRODUCTION

The present dispute concerns the applicability of the attorney-client and work-product privileges to a request by the plaintiff for the production of documents. Defendants maintain the privileges apply to plaintiff's document request and therefore no document production is required. Plaintiff asserts that defendants have not established that privileges apply. Both parties also dispute who controls and may waive the privileges, i.e., the plaintiff as the chapter 7 trustee in the parent bankruptcy case or the chapter 7 debtor defendants.

If this adversary proceeding involved a corporate chapter 7 debtor, the answer to the latter dispute would be easy. In Commodity Futures Trading Com'n v. Weintraub, 471 U.S. 343 (1985), the U.S. Supreme Court sided with the chapter 7 trustee holding that the trustee controlled the privilege because the trustee controlled the corporate debtor as successor management. Id. at 358. But, as noted, Weintraub was a corporate chapter 7 case and in its opinion the Supreme Court also stated that its holding would not necessarily apply in an individual chapter 7case because the trustee does not control an individual in the same manner as the trustee controls a corporate entity after a petition is filed. See id., 471 U.S. at 356-57. That has led to substantial disagreement and no uniformity, including among courts in the Ninth Circuit. Three approaches have developed.

Some courts hold that an individual chapter 7 debtor's privileges transfer to the trustee and the trustee controls the privileges as a matter of law. In re Smith, 24 B.R. 3, 5 (Bankr. S.D. Fla. 1982); In re Ingram, 1999 WL 33486089, *5-6 (Bankr. D.S.C. 1999). Citing Weintraub's distinction in the trustee's control over a corporate and individual debtor, other courts hold that an individual chapter 7 debtor's privileges do not transfer to the trustee and therefore remain under the debtor's control. In re Bounds, 443 B.R. 729, 734-35 (Bankr. W.D. Tex. 2010); In re Hunt, 153 B.R. 445, 454 (Bankr. N.D. Tex. 1992). And still other courts take a balancing approach which weighs potential harm to the individual chapter 7 debtor by allowing the trustee to control the debtor's privileges against the trustee's need for privileged information in the administration of the estate. Foster v. Hill (In re Foster), 188 F.3d 1259, 1265-66 (10th Cir. 1999); In re Bame, 251 B.R. 367, 376 (Bankr. D. Minn. 2000); In re Miller, 247 B.R. 704, 709 (Bankr. N.D. Ohio 2000); In re Rice, 224 B.R. 464, 469 (Bankr. D. Or. 1998).¹

Fortunately, this court need not join the fray. The court agrees with plaintiff that defendants have not satisfied theirburden of establishing that the attorney-client and work-product privileges apply. Therefore, for the reasons explained below, plaintiff's motion to compel the production of documents will be granted in part and denied in part and defendants' objections to plaintiff's request for the production of documents will be overruled in part and sustained in part.

BACKGROUND²

The debtors filed a voluntary chapter 7 petition on July 14, 2011. The debtors' discharge was entered on October 31, 2011.

On November 16, 2011, Daya Chandar and Meyer Wilson entered into an Engagement Agreement in which Meyer Wilson agreed to pursue claims against World Group Securities ("WGS").³ According to the Engagement Agreement, those claims are based on conduct that occurred between October 2005 and December 2009. Thus, the claims that Meyer Wilson agreed to pursue under the Engagement Agreement were all based on conduct that occurred before the debtors filed their chapter 7 petition in July of 2011.

The debtors' chapter 7 case was closed on November 21, 2011, five days after Daya Chandar and Meyer Wilson entered into the Engagement Agreement. The bankruptcy case was reopened on June 4, 2015, and plaintiff was appointed the trustee on June 5, 2015.

The complaint that commenced this adversary proceeding was filed on April 12, 2017. Defendants answered the complaint on June 30, 2017. The seventeenth affirmative defense in that answer is relevant. It states as follows: "DEFENDANTS are informed and believe and thereon allege that he relied in good faith upon the advice of counsel with regard to the allegations in Plaintiff's Complaint." Dkt. 29, ¶ 70, at 9.

The present discovery dispute arises out of a request for production of documents that plaintiff served on defendants on July 11, 2017. That document request states as follows:

REQUEST NO. 1: Any and all records, pleadings and correspondence (including, but not limited to, letters, facsimiles, emails and text messages) contained in Meyer Wilson's client file for Daya Ram Chandar and Jaswanti Devi Chandar, as listed on Defendants Initial Disclosures of documents.

REQUEST NO. 2: Any and all pleadings and Settlement Agreement from FINRA Arbitration Case against Transamerica Financial Advisors, Inc./World Group Securities and checks representing payment of net proceeds, as listed on Defendants Initial Disclosures of documents.

REQUEST NO. 3: Any and all records and files relating to the Adversary proceeding, entitled "Prasad v. Singh" case no. 10-02785, as listed on Defendants Initial Disclosures of documents.

REQUEST NO. 4: Each and every document you intend to introduce as either an exhibit or evidence at the trial on this matter.

Defendants responded to plaintiff's document request on August 17, 2017. Defendants withheld certain documents on the basis of the attorney-client and work-product privileges. The parties met and conferred between September 7, 2017, and September 12, 2017.

DISCUSSION

Defendants, as proponents, have the burden of establishing the applicability of the attorney-client privilege and the nonwaiver of it. Weil v. Investment/Indicators, Research and Management, 647 F.2d 18, 25 (9th Cir. 1981); Cargill, Inc. v. Budine, 2008 WL 2856642, *2 (E.D. Cal. 2008). The work-product proponent also has "[t]he burden of establishing protection of materials as work product[,]" Riverkeeper v. U.S. Corp. of Army Engineers, 38 F. Supp. 3d 1207, 1217 (D. Or. 2014) (quotations omitted), and nonwaiver. McMorgan & Co. v. First Calif. Mortg. Co., 931 F. Supp. 703, 707 (N.D. Cal. 1996). See also Skynet Elec. Co. Ltd. v. Flextronics Int'l, Ltd., No. C, 2013 WL 6623874, at *2 (N.D. Cal. 2013) (party asserting work-product privilege bears burden of establishing applicability and nonwaiver); accord Hanson v. Wells Fargo Home Mortg., Inc., 2013 WL 5674997, *5 (W.D. Wa. 2013). Defendants have not satisfied this burden with regard to either privilege.

I. Waiver of the Privileges.

Defendants' answer asserts an "advice of counsel" defense. Asserting the "advice of counsel" defense waives the attorney-client privilege as to communications and documents within the scope of counsel's advice. Bittaker v. Woodford, 331 F.3d 715, 719 (9th Cir. 2003) ("[s]ubstantial authority holds the attorney-client privilege to be impliedly waived where the client asserts a claim or defense that places at issue the nature of the privileged material.") (emphasis in original); Chevron Corp. v. Pennzoil Co., 974 F.2d 1156, 1162-63 (9th Cir. 1992). The work-product privilege may also be waived, Hernandez v. Tanninen, 604F.3d 1095, 1100 (9th Cir. 2010); Coleman v. Brown, 2013 WL 597491, *5 (E.D. Cal. 2013) (citations omitted). And it too is similarly waived by asserting the "advice of counsel" defense. In re EchoStar Communications Corp., 448 F.3d 1294, 1304 (Fed. Cir. 2006). Indeed, as the district court stated in Chiron Corp. v. Genentech, Inc., 179 F. Supp. 2d 1182 (E.D. Cal. 2001), with regard to both privileges: "Fairness requires that a party who seeks to be absolved of [liability] because it relied on counsel's advice pay the discovery price. The party asserting the defense waives attorney-client privilege and work product immunity to the broadest extent consonant with direct relevance to the advice of counsel itself." Id. at 1188-89.⁴

As noted above, the seventeenth affirmative defense in the defendants' answer asserts an "advice of counsel" defense. Based on the manner in which the defense is stated, i.e., "that he relied in good faith upon the advice of counsel with regard to the allegations in Plaintiff's Complaint[,]" the court reads the defense as an assertion by Daya Chandar that he relied on Meyer Wilson's advice with regard to all matters alleged in the complaint. Therefore, as to the subject of all matters alleged in the complaint, defendants have failed to establish the nonwaiver of the attorney-client...