Dynamic Finance Corp. v. Chapter 11 Trustee Richard Kipperman (In Re North Plaza, LLC)Dynamic Finance Corp. v. Chapter 11 Trustee Richard Kipperman (In Re North Plaza, LLC)
ORDER DENYING APPELLANTS’ MOTION FOR STAY PENDING APPEAL (Dоc. No. 3.)
On July 7, 2008 Appellee Richard Kip-perman (“Trustee”), Chapter 11 Bankruptcy Trustee of the North Plaza, LLC bankruptcy estate, elected to have Appellants Dynamic Finance Corporation et al.’s (collectively, “Appellants”) appeal heard by this District Court pursuant to
On July 11, 2007, after unsuccessfully petitioning the Bankruptcy Court, Appellants moved this Court for an order staying Judge Bowie’s May 30, 2008 Order until the appeal is exhausted. (Doc. No. 3.) The Court takes the matter under submission and without oral argument. See S.D. Cal. Civ. R. 7.1(d)(1). For the following reasons, the Court DENIES Appellants’ motion for stay pending appeal.
I. Background
In July 1998, North Plaza, LLC (“North Plaza”) entered into two loan agreements with Appellant Dynamic Finance Corporation (“Dynamic”) and Appellant Angela Sa-bella (“Sabella”) (collectively, “Appellants”). {Appellants’ Mot. 2.) Sabella, the President of Dynamic, purchased a loan junior to Dynamic’s. {Id.) Because both loans were secured by deeds of trust on North Plaza’s real property, real estate broker Isaac Lei (“Lei”) and his company, the Alcon Group (“Alcon”) were enlisted to help negotiate and arrange the lоans. (Id.) In order for Lei to adequately accomplish his brokerage duties, Dynamic and Sabella authorized Lei to meet with their *117 respective legal counsel to obtain advice in connection with the North Plaza loans. (Id.) Appellants argue that Lei thereby became a “client representative” of Dynamic/Sabella.
On January 28, 2004 North Plaza was forced into Chapter 11 bankruptcy, and is the debtor in the underlying bankruptcy action. (Bankr.Doc. No. 1.) 1 Appellants Dynamic and Sabella are the largest secured creditors against the bankruptcy estate. (Appellants’ Mot. 2.) On June 11, 2006, following the bankruptcy court’s denial of a proposed settlement between North Plaza аnd Appellants, 2 the bankruptcy court appointed Richard M. Kipper-man (“Trustee”) as Chapter 11 Trustee of the bankruptcy estate. (Bankr.Doc. No. 484.)
On September 14, 2006 the Trustee filed an
ex parte
application for a
On May 2, 2007 the Trustee moved to compel responses for doсuments and testimony pursuant to the subpoenas issued to Lei and Alcon. (Bankr.Doc. No. 542.) In opposition, Lei and Sabella provided declarations to the effect that Appellants authorized Lei/Alcon to communicate with their attorneys to secure legal advice dur *118 ing the course of the loan negotiations, and that the attorney-client privilege insulated these documents from discovery. (Appellants’ Request for Judicial Notice Exs. 7-10.) That is, Appellants argued that the law of privilege protected the communications because Lei was serving as a “client representative” of Appellants when he communicated with Appellants’ counsel.
After briefing, the bankruptcy court was unаble to determine whether Lei was a “client representative” of Dynamic or Sa-bella and ordered an evidentiary hearing. (Bankr.Doc. No. 661.) Much delay followed, mostly due to Appellants’ change of counsel.
On January 28, 2008 Appellants filed an adversary proceeding for declaratory judgment against the Trustee. Dynamic Finance Corp. v. Kipperman, No. 08-90035 (Bankr.S.D. Cal. complaint filed January 28, 2008). On March 31, 2008 the Trustee counterclaimed for avoidance of fraudulent conveyance under Chapter 11, United States Code. Dynamic Finance Corp. v. Kipperman, No. 08-90035 (Bankr.S.D. Cal. answer and counterclaims filed March 31, 2008).
In March 2008, in the main bankruptcy action, the bankruptcy court finally held a three-day evidentiary hearing to determine whether Lei was a “client representative” of Dynamic or Sabella or both. Appellants and Trustee extensively briefed the issue both before and after the hearing. (Bankr.Doc.Nos.704, 712, 734, 735.)
On May 30, 2008, over a year after the Trustee moved to compel, the bankruptcy court entered an Order compelling Lei and Appellants to produce the documents to which they had asserted the attorney-client privilege (the “Order”). (Doc. No. 772.) The Order was primarily based on two findings. First, the relationship between Lei and Dynamic was really an individual relationship between Lei and Sabel-la, such that Lei could not properly be called a “client representative” of Dynamiс Finance Corporation. (Bankr.Court’s Order on Trustee’s Mot. to Compel Disc. 7.) Second, the Court reviewed the law surrounding the “client representative” extension of the attorney-client privilege and, given the particular circumstances, found no reason to extend the privilege to cover communications between Lei and Sabella’s counsel. (Id. 7-9.)
On June 9, 2008 Appellants timely appealed the bankruptcy court’s Order.
On June 12, 2008, pursuant to
On July 11, 2008 Appellаnts filed this motion to stay the bankruptcy court’s order pending the outcome of the appeal. (Doc. No. 3.) The parties agreed to a shortened briefing schedule and also agreed to informally stay the bankruptcy court’s Order until July 25, 2008.
II. Standard of Review
A motion for a stay of the judgment, order, or decree of a bankruptcy judge must ordinarily be presented to the bankruptcy judge in the first instance.
*119
Where the bankruptcy court has already denied a stay under
Initially, it is important to note that nowhere in their moving papers do Appellants argue that the bankruptcy court took an erroneous view of the facts. As discussed more fully below, whether or not this Court should issue a stay is determined almost entirely by a choice of law issue.
III. Discussion
A.
Legal Standard For Issuing a Stay Under
When deciding whether to issue a discretionary stay pending a bankruptcy appeal, courts use the following fоur factors: (1) Movant’s likelihood of success on the merits of the appeal; (2) significant and/or irreparable harm that will come to Movant absent a stay; (3) harm to the adverse party if a stay is granted; and (4) where the public interest lies.
Hilton v. Braunskill,
Because these factors were imported from the standard for deciding preliminary injunctions or staying them pending
*120
appeal, district courts in this circuit have not agreed on how to apply the discretionary stay factors when deciding whether to stay a final bankruptcy court order pending appeal.
Compare Rose Townsend Trust v. Johnston (In re: Johntson),
No. 06-80040,
After reviewing the different standards, the Court finds that
Lynch’s
“sliding scale” approach ignores the procedural posture of a
B. Appellants Have Not Shown That They More Likely Than Not Will Prevail On The Merits
It is fair to say that the success of Appellants’ appeal turns entirely on a question of choice and content of law; that is, whether California privilege law is applied to protect certain communications between Lei and Sabella/Dynamie’s counsel. Very simply, Appellants contend that California Evidence Code sections 952 and 951 and California ease law privileges Lei’s communications with Dynamic/Sabella’s counsel because Lei was acting as Dynamic/Sabella’s “client representative” at thе time. (Appellants’ Mot. 9-12.)
To that end, Appellants seek to bring California law into this federal bankruptcy proceeding in two ways: (1) by arguing that the bankruptcy court erred by applying the federal common law of privilege, and not California privilege law, to determine the scope of attorney-client privilege in response to the bankruptcy court’s
Showing a “likelihood of success” requires that the movant raise questions going to the merits so serious, substantial, difficult and doubtful as to make them a fair ground for litigаtion and thus for more deliberate inquiry.
County of Alameda v. Weinberger,
The Court finds that Appellants have not raised such questions.
Appellants constantly intone that “the Order turns on a narrow and complex issue of law involving states’ right, comity, federalism, and vertical choice of law issues.” The Court, however, finds that the privilege question is clearly determined by federal common law, and that the bankruptcy court very likely properly applied the federal common law of privilege to the facts of the dispute. 8 That is, whether or not the California Evidence Code and California case law privileges Lei’s communications is irrelevant; Appellants have not shown that any argument in favor of аpplying or importing the broader California “client representative” privilege stands a fair chance of success.
1. The Law is Well-Settled that the Federal Common Law of Privilege Applies to Subpoenas Issued Pursuant to
Appellants first argue that the bankruptcy court erred in not applying California privilege law pursuant to
The Trustee contends, in response, that the bankruptcy court is a federal proceeding where the federal law of privilege, favoring admissibility, is controlling.
(Trustee’s Opp’n
10.) Moreover, the Trustee contends that it is “hornbook law” that discovery in connection with a
*122
An examination under Bankruptcy
Federal privilege law will control even if the evidence sought is relevant to both the federal and state claims,
von Bulow v. von Bulow,
Here, the Trustee’s subpoena, authorized by the bankruptcy court, requested documents from Lei pursuant to Bankruptcy
Although Appellants argue that applying federal privilege law is improper because the Trustee seeks information which could support state law claims, it is well-settled that
2. Appellants Have Not Shown It Is Likely That Principles of Comity Warrant Injecting California Privilege Law Into The Federal Common Law of Privilege
Appellants argue that, even if federal common law is applied, judicial comity dictates that federal courts should take into account the view of state authorities. (Appellants’ Mot. 16.) Thus, California law should be considered in deciding whether to extend an attorney-client privilege to a “client representative” like Lei. (Appellants’ Mot. 17.) Appellants find it troubling that the bankruptcy court overlooked favorable California law and instead applied “the [narrower privilege] laws from New York, Connecticut, Florida, and Michigan.” (Id. 1.) Because California law would insulate Lei’s communications with Sabella’s counsel as a “client representative,” Appellants contend, the bankruptcy court erred in applying law which did not so extend the privilege to protect Lei’s communications. (Id. 9-12.)
Courts recognize that, for more than three centuries, there has existed a fundamental maxim that “the public has the right to every man’s evidence.”
United States v. Bryan,
Because the Federal Rules of Evidence do not define the scope of the attorney-client privilege, courts start with proposed
A client has a privilege to refuse to disclose and to prevent any other person from disclosing confidential communications made for the purpose of facilitating the rеndition of professional legal services to the client, (1) between himself or his representative and his lawyer or his lawyer’s representative[... ], or (4) *124 between representatives of the client or between the client and a representative of the client.
(Bankr.Court’s Order on Trustee’s Mot. to Compel Disc. 4-5 (citing Supreme Court Standard 503(b)) (emphasis added).) Supreme Court Standard 503 does not define “representative of the client,” and the Advisory Committee Notes suggest that “the matter is better left to resolution by decision on a case-by-case basis.” Weinstein & Berger, Weinstein’s Federal, at § 503App.01.
To date, however, a federal “client representative” extension of the attorney-client privilege has only been recognized in two situations: (1) where the client is a corporation and requires communication on its behalf,
see Memry Corp. v. Ky. Oil Tech. N.V.,
No. 04-3843,
It is important to note that nowhere in Appellants’ moving papers do they argue that they are likely to succeed on the merits because the bankruptcy court got the facts wrong. Here, the bankruptcy court found — and Appellants do not here dispute — thаt Lei dealt with the individual Sabella, and not the corporation Dynamic. 12 Thus, the second, or Leone, situation was implicated. (Bankr.Court’s Order on Trustee’s Mot. to Compel Disc. 6-7.) Further, the bankruptcy court found — and Appellants do not here dispute — that Sabella had no disability or was in no unique position which required Lei to communicate with Sabella’s counsel on her behalf. (Id. 8-9.) Taken together, this compelled the conclusion that the correspondence between Lei and Sabella’s counsel was not protected by a federally-recognized client representative extension of the attorney-client privilege. Upon review, this Court finds it very likely that the bankruptcy court properly analyzed relevant federal precedent and proрerly constrained the attorney-client privilege in accordance with the federal and Ninth Circuit law on privileges.
Appellants mistakenly argue that because there was a “void” in the federal common law, the bankruptcy court should have simply applied California law as a matter of comity. There are two problems with this argument. First, the bankruptcy court did properly apply existing federal common law of client-representative privi lege — Leone—to the facts of the case. Although Leone reviews state court decisions *125 in determining the privilege’s reach, Leone is still persuasive authority as federal common law. 13 While precedent is scant, federal common law simply has not extended the client-representative privilege as far as California law has.
Nor did
Leone
or the bankruptcy court likely err in considering
Hendrick v. Avis Rent A Car Sys., Inc.,
Second, where Appellants seek to import a California privilege into a federal bankruptcy proceeding, Appellants likely overstate the case for comity. There is indeed authority for the proposition that federal cоurts should recognize state privileges where this can be done at no substantial cost to federal policies.
See In re: Int’l Horizons,
In sum, it is crystal clear that the federal common law of privilege applies to objections to
C. The Possibility of Irreparable Harm Does Not Entitle Appellant to a Stay Pending Appeal
Appellants contend that they will be irreparably harmed if a stay does not issue because the Court will be unable to undo the effect of improper disclosure, even if it eventually grants Appellants’ appeal.
CAppellants’ Mot.
18.) Appellants’ arguments are nicely summarized by
In re: Napster,
The Trustee argues that merely pointing to the possibility of irreparable harm is not sufficient to warrant an automatic stay. (:Trustee’s Opp’n 18.) If this were the law, the Trustee contends, there would no reason for the four-prong test, for every appellant could make a meritless privilege claim in order to obtain a “free pass” to a stay. (Id.) The Trustee also points out the bankruptcy court’s concerns over the ongoing delay in this case and argues that a stay would harm the bankruptcy estate. (Id.)
The Court agrees with the Trustee. As mentioned above, an appellate court must view the possibility of irreparable harm differеntly when reviewing a final determination on the merits rather than a preliminary determination not on the merits. Appellants have had three chances in front of two courts to argue extending the California client representative privilege into federal court: first by opposing the motion to compel, then by petitioning the bankruptcy court for a stay, and finally by the instant motion. At this point, the argument that potentially privileged documents might be disclosed is less powerful when one ruling has already found the privilege inapplicable, and two rulings have found it unlikely that the issue was wrongly decided. Because Appellants have not shown a likelihood of success on the merits, the slim possibility that the cat might jump out of the bag does not operate to automatically warrant a stay under the facts of this case. 15
IV. Conclusion
In conclusion, the Court finds that Appellants have not shown that they are like *127 ly to succeed on the merits of their appeal because federal common law applies to Appellants’ privilege claims, and Appellants have not shown that it is likely that federal law recognizes California’s broader individual “client representative” extension of attorney-client privilege. Although there is the possibility that Appellants will be irreparably harmed should privileged documents be disclosed pending apрeal, under the circumstances of this case the quantum of harm is not sufficient to outweigh the unlikelihood of success on the merits. When also considering the great delay since the Trustee first moved to compel, the Court finds that the public interest in speedy and accurate bankruptcy proceedings warrants DENYING the application for stay of the bankruptcy court’s Order.
IT IS SO ORDERED.
Notes
. The Court GRANTS both parties’ requests for judicial notice of the bankruptcy court docket, proceedings, and related paperwork.
. The bankruptcy court noted several serious conflict-of-interest issues when denying the proposed settlement. (Appellants’ Request for Judicial Notice, Ex. 3.)
. Federal Rule of Bankruptcy Proсedure provides, in relevant part:
(a) Examination on motion. On motion of any party in interest, the court may order the examination of any entity.
(b) Scope of examination. The examination of an entity under this rule or of the debtor under § 343 of the Code may relate only to the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor's estate, or to the debtor’s right to a discharge. In a family farmer's debt adjustment case under chapter 12, an individual’s debt adjustment case under chapter 13, or a reorganization case under chapter 11 of the Code, оther than for the reorganization of a railroad, the examination may also relate to the operation of any business and the desirability of its continuance, the source of any money or property acquired or to be acquired by the debtor for purposes of consummating a plan and the consideration given or offered therefor, and any other matter relevant to the case or to the formulation of a plan.
(c) Compelling attendance and production of documents. The attendance of an entity for examination and for the production of documents, whether the examination is to be conducted within or without the district in which the case is pending, may be compelled as provided in Rule 9016 for the attendance of a witness at a hearing or trial. As an officer of the court, an attorney may issue and sign a subpoena on behalf of the court for the district in which the examination is to be held if the attorney is admitted to practice in that court or in the court in which the case is pending.
(d) Time and place of examination of debt- or. The court may for cause shown and on terms as it may impose order the debtor to be examined under this rule at any time or place it designates, whether within or without the district wherein the case is pending.
. Unless otherwise slated, all references to "Rule” shall be to the Federal Rule of Bankruptcy Procedure.
. Appellants argue that the Court should be applying a pure
de novo
determination of whether or not a stay is warranted, contending that
At any rate, in this case whether the standard is a de novo determination or a review for abuse of discretion hardly matters. Nowhere in their moving papers do Appellants argue a likelihood of success because the bankruptcy court's findings or fact (a) that Sabella and Lei enjoyed a personal relationship, such that Lei was Sabella's individual "client representative,” and (b) that Appellants did not establish a "disability” which required Lei to communicate with counsel on Sabella’s behalf were erroneous. (Appellant’s Mot. 4.) Rather, Appellants only argue that the bankruptcy court applied the wrong law to the facts. Even under a review for abuse of discretion, the Court reviews the law de novo.
.
See also In re: Deep,
. The instant motion to stay is presumably at least the third time Appellants have briefed the choice of law issue, aftеr initially contesting the Trustee’s motion to compel and subsequently moving the bankruptcy court for a stay of the Order pending appeal.
. Appellant also plucks the following line from Judge Bowie's order denying the stay to bolster their "likelihood of success" argument:
This case has been an interesting case and I’ve wrestled with this particular motion for a couple of reasons. One is because, philosophically, it’s always an intriguing question when you have a test that requires a deciding judge to decide whether there's, you know, whatever standard you choose to call it; a probability or likelihood that I am wrong.
(Appellant’s Request for Judicial Notice 306.) Judge Bowie’s comments, however, only suggest that he gave careful thought to the issue before ruling on it, not that it is likely that he decided the issue wrongly or it was an especially close call.
. It is well established that the scope of a
. Commentators suggest that proposed
. In the bankruptcy proceedings, both parties agreed that should federal law apply, and should Lei be considered a client-representative of Dynamic, Memry Corporation and In re: Beiter were controlling.
. In dicta, the bankruptcy court also provided an independent basis for compelling disclosure under the Memry Corporation test. It found that Lei's relationship with Dynamic, if one existed at all, was too tenuous for Lei to be labeled a "client representative” of the corporation. Thus, Memry Corporation’s federally recognized "client representative” extension of the attorney-client privilege did not attach. (Bankr.Court’s Order on Trustee’s Mot. to Compel Disc. 9.)
. The legislative history to
. Moreover, considering Leone, importing California’s "client representative” privilege into the federal common law would be inviting a split of federal authority.
. In regards to the third factor, the Trustee’s harm absent a stay, the Court accepts the bankruptcy court’s concerns regarding Lei's and Appellants’ continued delay in the case, even though the bankruptcy estate is in cash. In regards to the final factor, serving the public interest, the Court finds that while the public interest in confidential attorney-client communications is great,
United States v. Chen, 99
F.3d 1495, 1499 (9th Cir.1996), in light of a federal court’s unlikeliness to import California’s client representative privilege, the public interest in the just, speedy, inexpensive, and accurate determination of every bankruptcy case is greater.