Harleysville Insurance Company v. Holding Funeral Home, Inc., 1:15-cv-00057

Background

Harleysville sued for a declaratory judgment denying fire-insurance coverage to Holding Funeral Home, Golden Rule Family Management, and L.J. Horton Florist; defendants counterclaimed for breach of contract.
The district-court proceedings on the merits are stayed pending a related criminal prosecution.
Harleysville’s counsel moved to disqualify defendants’ counsel, alleging defendants’ counsel had accessed privileged claims-file documents, concealed that access, and refused to destroy the materials.
Defendants’ counsel argued Harleysville failed to prove the file was privileged and alternatively that any privilege was waived when Harleysville uploaded the file to a public, non-password-protected Internet folder.
Magistrate Judge Sargent held a hearing, excluded certain supplemental evidence submitted after the hearing, ruled that any privilege was waived by the public posting and denied disqualification, but imposed monetary sanctions on defendants’ counsel for failing to disclose their access.
Both sides objected to portions of the magistrate judge’s ruling; the district judge exercised discretion to receive additional evidence and ordered an evidentiary hearing, including in camera review of the disputed documents and witness testimony, before resolving the objections.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the Claims File was privileged	The Claims File contains privileged communications and Harleysville did not waive privilege	Harleysville waived any privilege by posting the file on a publicly accessible website	Magistrate found waiver; district judge did not adopt final resolution and ordered further evidentiary hearing and in camera review
Whether defendants’ counsel should be disqualified for accessing privileged material	Accessing privileged material and concealing it warrants disqualification	Disqualification is unwarranted if privilege was waived or insufficiently established	Magistrate denied disqualification based on waiver; district judge ordered more fact-finding before ruling
Admissibility of post-hearing supplemental evidence	Supplemental declarations and exhibits should be considered to show facts supporting privilege and conduct	Such material should have been introduced at hearing via testimony and cross-examination	Magistrate excluded the supplements; district judge accepted some objections were well-founded and ordered testimonial development at new hearing
Whether sanctions against defendants’ counsel were appropriate	Sanctions insufficient; disqualification should be ordered or other relief	Sanctions were unwarranted and unjust because counsel relied on public posting/waiver	Magistrate imposed fees; district judge preserved the issue for further factual development and ordered an evidentiary hearing including expert opinion on counsel conduct

Key Cases Cited

Gairola v. Va. Dep’t of Gen. Servs., 753 F.2d 1281 (4th Cir. 1985) (standard for reviewing magistrate judge factual findings)
United States v. U.S. Gypsum Co., 333 U.S. 364 (U.S. 1948) (definition of "clearly erroneous" review)
In re Robertson, 772 F.2d 1150 (4th Cir. 1985) (clarifying standard for reviewing factual findings)
PowerShare, Inc. v. Syntel, Inc., 597 F.3d 10 (1st Cir. 2010) (interpretation of Rule 72(a) "contrary to law" review as plenary for legal questions)
Haines v. Liggett Group, Inc., 975 F.2d 81 (3d Cir. 1992) (plenary review for legal issues under Rule 72(a))
United States v. Caro, 461 F. Supp. 2d 478 (W.D. Va. 2006) (district court may receive additional evidence when reviewing magistrate rulings)
United States v. Frans, 697 F.2d 188 (7th Cir. 1983) (district court’s authority to consider additional evidence on magistrate review)