Enron Broadband Services, L.P. v. Travelers Casualty & Surety Co. of America (In Re Enron Corp.)Enron Broadband Services, L.P. v. Travelers Casualty & Surety Co. of America (In Re Enron Corp.)
OPINION GRANTING DEFENDANT’S MOTION TO COMPEL
Travelers Casualty and Surety Company of America (“Travelers” or “Defendant”) issued a bond to guaranty performance by Global Crossing Bandwidth, Inc., (“Global Crossing”) in a transaction between Enron Broadband Services, L.P. (“EBS” or “Plaintiff’) and Global Crossing. EBS initiated the instant adversary proceeding against Travelers to compel payment on the bond.
This matter is presently before the Court for the resolution of a discovery
The Court holds not only that David Thames’s and Brian Spector’s deposition testimonies about their communications with in-house counsel regarding the bond and its underlying transaction are not privileged, but also that evidence of communications between EBS’s former employees and in-house counsel regarding the bond and its underlying transaction is not privileged. In case of further disputes regarding the privileged status of additional discrete items of evidence, the Court remains available for in camera review to determine whether those items fall within the ambit of the crime-fraud exception and the present opinion.
JURISDICTION
The Court has subject matter jurisdiction over this proceeding pursuant to sections 1334 and 157(b) of title 28 of the United States Code, under the July 10, 1984 “Standing Order of Referral of Cases to Bankruptcy Judges” of the United States District Court for the Southern District of New York (Ward, Acting C.J.), and under paragraph 60 of this Court’s Order Confirming Supplemental Modified Fifth Amended Joint Plan of Affiliated Debtors under chapter 11 of title 11 of the United States Code (July 15, 2004). The Court has jurisdiction over “core proceedings” including “matters concerning the administration of the estate” and “orders to turn over property of the estate.” 28 U.S.C. § 157(b)(2)(A), (E) (2000). Venue is properly before this Court pursuant to section 1409(a) of title 28 of the United States Code.
FACTS AND PROCEDURAL BACKGROUND
On March 28, 2001, EBS and Global Crossing entered into the Capacity Service Agreement (“CSA”). {See Declaration of Christopher G. Karagheuzoff in Support of Travelers Casualty and Surety Company of America’s Motion to Compel (“Karagheuzoff Deck”) Ex. A.) According to the CSA, Global Crossing was to provide broadband capacity to EBS and EBS to prepay the entire contract price in the amount of $17,745,000. Global Crossing also had to furnish a surety bond or other collateral for the full amount of the prepayment, for the benefit of EBS, in the event that Global Crossing failed to perform under the CSA.
Accordingly, also on March 28, 2001, Travelers issued a bond to Global Crossing in favor of EBS. {See Karagheuzoff Deck Ex. C.) The bond was issued for a one-year term and would extend automatically for additional one-year terms unless terminated by Travelers. In October 2001, Travelers delivered a termination notice to EBS. {See Karagheuzoff Deck Ex. D.) According to EBS, Global Crossing did not obtain another bond. (ComplY 22.)
EBS filed for bankruptcy in the United States Bankruptcy Court for the Southern District of New York on December 24, 2001. Global Crossing filed for bankruptcy in the United States Bankruptcy Court
On February 27, 2002, EBS demanded in writing that Travelers pay on the bond. (See Karagheuzoff Decl. Ex. E.) Travelers did not pay and submitted informal requests for information to EBS and Global Crossing regarding the transaction underlying the bond. (See Karagheuzoff Decl. Ex. F.) On November 8, 2002, EBS commenced the instant adversary proceeding against Travelers to compel payment on the bond pursuant to section 542 of title 11 of the United States Code (the “Bankruptcy Code”) and state contract law.
On January 13, 2003, EBS filed a motion for summary judgment. In response, Travelers alleged that, unbeknownst to Travelers, on March 28, 2001, the same day that the CSA was entered into and the bond issued, EBS sold bandwidth capacity to Global Crossing through Reliant Energy Services, Inc. (“Reliant”). (See Karagheuzoff Decl. Ex. B.) According to Travelers, the combination of this sale and the CSA constituted a loan. Travelers noted that applicable New York law contains the “Appleton Rule” (Travelers Casualty and Surety Company of America’s Memorandum of Law in Support of its Motion to Compel (“Travelers Mem.”) 1 n. 6.), which prohibits surety companies like Travelers to issue a bond guarantying a loan transaction. See N.Y. Ins. Law § 1113(a)(16)(E)(ii) (McKinney 2000). Travelers asserted that it was fraudulently induced to issue a bond in connection with a loan.
This Court denied EBS’s motion for summary judgment because of its concerns
with, inter alia, the following issues of material fact: (1) whether the substance of the [ajgreement underlying the ... [bond] is [a] bona fide broadband capacity service agreement and not a disguised loan or other type of transaction or, in the alternative, a component of other transactions not disclosed to the Defendant; and (2) whether the prepayment was a bona fide payment made pursuant to a bona fide [ajgreement.
Order Denying Plaintiffs Motion for Summary Judgment 4.
During the ensuing discovery, a number of depositions took place. EBS asserted its attorney-client privilege during the deposition of David Thames, former Manager of Finance at EBS, on November 11, 2005 and also during the deposition of Brian Spector, a former Director at EBS, on December 2, 2005. (See Karagheuzoff Decl. Ex. J-M.) In both instances, EBS contended that the privilege shielded from disclosure the deponent’s communications with EBS’s former General Counsel, Kristina Mordaunt, and another in-house attorney, Cynthia Harkness.
Travelers asserts that EBS would have also invoked the attorney-client privilege during the deposition of Evan Betzer, a former Associate at EBS, on December 3, 2005, if Travelers had had the opportunity to ask about the communications at issue. (See Karagheuzoff Decl. Ex. H.) Travelers claims that Evan Betzer and his attorney left before the deposition was finished. (Travelers Mem. 1 n. 1.)
On March 31, 2006, Travelers filed a motion to compel requesting that this Court
(1) overrule EBS’s objection, based on the attorney-client privilege, to the disclosure of communications between EBS’s former employees and members of EBS’s in-house legal department regarding (a) the CSA, (b) the simultaneous sale of bandwidth capacity by EBS to Global Crossing through Reliant, and (c) the bond, dated March 28, 2001;
(2) permit discovery regarding such communications in future depositions of former EBS employees; and
(3) reopen the depositions of EBS employees whose depositions have already occurred, including David Thames, Brian Spector, and Evan Betzer 1
(4) if the Court sustains EBS’s objection, issue an order “prohibiting EBS from arguing that it understood the transaction underlying the [bond] and/or the [bond] to be legal, inasmuch as permitting EBS to do so while at the same time prohibiting Travelers from testing the bases of such understanding would be inequitable.” (Travelers Mem. 1.)
On April 21, 2006, EBS filed Plaintiffs Memorandum of Law in Opposition to the Defendant’s Motion to Compel (“EBS Mem.”), accompanied by the Declaration of Sean P. McGrath in Opposition to Travelers Casualty & Surety Company of America’s Motion to Compel (“McGrath Deel.”). On May 1, 2006, Travelers filed its Reply Memorandum in Further Support of Travelers Casualty and Surety Company of America’s Motion to Compel (“Travelers Reply Mem.”), along with the Reply Declaration of Christopher G. Karagheuzoff in Further Support of Travelers Casualty and Surety Company of America’s Motion to Compel (“Karagheuzoff Reply Decl.”). A hearing was held regarding Travelers’s motion to compel on May 4, 2006.
DISCUSSION
Parties’ Contentions
Timeliness
EBS argues that Travelers’s motion to compel is untimely. EBS cites to several cases to support its argument.
See Cramer v. Fedco Auto. Components Co.,
No. 01-CV-0757,
Factors that courts have considered in determining whether a motion to compel is timely include: (1) the length of delay in bringing the motion; (2) whether such delay is likely to cause prejudice or impose an undue hardship on other parties to the case; (3) whether the delay was caused by matters about which the moving party was “justifiably ignorant” or over which the moving party had no control; (4) “[w]hether the delay was tactically inspired, the product of negligence, or was occasioned by good faith efforts to secure the information through negotiations, other discovery tools, or from other sources” and (5) whether permitting the motion to compel would interfere with pretrial scheduling.
(EBS Mem. 7) (quoting 7 James Wm. Moore et al., Moore’s Federal Practice-Civil, § 37.05[2] (Lexis 2006)).
EBS then proceeds to examine each factor in the context of the instant matter. First, EBS points out that Travelers did not move to compel for more than four months after EBS invoked the attorney-client privilege during the Thames deposition on November 11, 2005.
Second, EBS notes that the deadline for conclusion of non-expert depositions was April 15, 2006 and accordingly argues that granting the motion “will require the
Third, EBS emphasizes that Travelers was not “justifiably ignorant” of the basis for a motion to compel. On the contrary, EBS says, Travelers knew of the basis already by the date of the Thames deposition
Fourth, since the November 23, 2005, and December 1, 2005, letters, “the parties have had no substantive discussion regarding the issues raised by Travelers’[s] Motion other than colloquy occurring on the record during the Spector Deposition.” (EBS Mem. 9.) EBS argues that, therefore, the Court should find that Travelers’s delay was tactical.
Fifth, EBS reproaches Travelers with delaying the deposition of Cynthia Harkness and thus interfering with the discovery schedule.
In response, Travelers asserts that it was EBS in the first place who failed to prosecute its action diligently. {See Karagheuzoff Reply Decl. Ex. D, E, and F.) Travelers contends it waited over a year for EBS to produce its Rule 30(b)(6) witness.
Travelers refers to a historically cooperative counsel relationship in the instant adversary proceeding, including agreements to extend scheduling order deadlines. Extending those deadlines was necessary, Travelers explains, because EBS failed to prosecute its action diligently and because witnesses formerly employed at EBS or Global Crossing have been difficult to locate and many do not wish to testify. Travelers claims and EBS does not dispute that “[cjonsistent with past practice, the parties have mutually agreed to a further extension of the April 15 fact discovery deadline in this case.” (Travelers Reply Mem. 11.)
Travelers points out that the Federal Rules of Civil Procedure do not prescribe any deadline for filing motions to compel and that this Court has not determined a date by which motions to compel must be filed. Moreover, “Travelers’[s] Motion to Compel was served well in advance of the then-scheduled April 15, 2006 date by which fact witness depositions were to conclude, the August 19, 2006 date by which all discovery in this case had been scheduled to close, and the September 14, 2006 date by which dispositive motions were due.” (Travelers Reply Mem. 11.) Travelers concludes that there is no delay.
Travelers considers cases cited by EBS inapposite because “courts in those cases deemed the discovery motions at issue untimely largely or entirely because they were made
on or after
the date by which discovery was scheduled to close
and
long after the basis for making such motion became apparent.” (Travelers Reply Mem. 12) (citing
Cramer,
As to the prejudice factor, Travelers contends that EBS suffers no harm because the motion to compel was not made on the eve of trial, but well before the end
As for Evan Betzer’s and Cynthia Harkness’s depositions, Travelers says there is no prejudice because the former’s deposition is not finished and the latter’s deposition has not taken place yet.
Finally, Travelers argues that the cases cited by EBS for the proposition that additional depositions of witnesses already deposed are disfavored are distinguishable from the present situation because of different facts. (Travelers Reply Mem. 14 n. 11.)
Attorney-Client Privilege
a) Travelers’s Contentions
Travelers contends that EBS is improperly asserting the attorney-client privilege to avoid disclosures of communications between EBS employees and in-house counsel regarding the bond and its underlying transaction. Travelers argues that EBS has not met the burden of showing that the privilege covers these communications. Additionally, according to Travelers, EBS’s objection to disclosure on privilege grounds fails because EBS’s in-house counsel acted as a business advisor, the crime-fraud exception to the privilege- applies, and EBS waived the privilege.
First, Travelers reproaches EBS with asserting the privilege regardless of the distinction between legal and business advice. Travelers notes that communications with in-house counsel are not privileged if they pertain to business advice.
See Reino de Espana v. Am. Bureau of Shipping,
No. 03 Civ. 3573,
As additional proof that in-house counsel provided business advice, Travelers points to EBS’s admission in its memorandum of law that the documents produced by EBS are not privileged.
Second, Travelers claims, “[e]ven if in-house counsel had served in some legal capacity on the Bandwidth Team [people who worked on the transaction underlying the bond], EBS’s attorney-client privilege would not apply because communications made in furtherance of the underlying transactions- — the CSA, the EBS Sale [the sale executed on the same day as the CSA], and the [bond]- — were in furtherance of, or in contemplation of, the EBS misconduct that lies at the heart of this lawsuit.” (Travelers Mem. 17.)
Travelers asserts that its submissions opposing EBS’s motion for summary judgment provide sufficient evidence for allegations of fraud. Travelers contends that although EBS admitted knowing about the Appleton Rule, the documents EBS produced show that EBS treated the bonded transaction as a loan. “Indeed, it is clear that EBS regarded the [bond] as nothing more than security for a loan obligation (rather than a performance obligation), inasmuch as it continued to-receive from Global Crossing the bandwidth that EBS was obliged to deliver under the terms of the CSA after EBS made its demand on the bond. (See Zimmerman Deposition at 101:17-102:4, Dec. 13, 2005, Karagheuzoff Decl. Ex. I.)” (Travelers Mem. 18.)
Travelers concludes that the crime-fraud exception to the attorney-client privilege applies because there is prima facie evidence of wrongdoing and the communications at issue relate to this wrongdoing. Travelers asks for at least an in camera review of documents evidencing communications at issue to determine if the privilege applies.
Third, “[i]n this case, EBS has waived any claim of privilege with respect to communications with in-house counsel regarding the relevant transactions because it has already produced e-mails and other documents memorializing communications with EBS’s in-house counsel regarding the same transactions at issue in this case.” (Travelers Mem. 19-20) (footnote 16 citing Karagheuzoff Decl. Ex. O, Q).
Further, Travelers points to investigations by Congress, the Securities and Exchange Commission, the United States Attorney, the Examiner appointed by this Court, and the Creditors’ Committee. Travelers contends that EBS has the burden to show that the privilege was not waived as a result of these investigations.
Finally, Travelers argues that EBS has put its good faith and motive at issue. According to Travelers, EBS’s action to collect on the bond means that EBS believes the bond and the underlying transaction to be legal. Travelers concludes that EBS has waived the privilege as to communications with in-house counsel regarding the legality of the transaction.
b) EBS’s Contentions
EBS responds that it seeks to protect exactly what the attorney-client privilege covers. EBS believes that under applicable law “there is more than sufficient evidence on the record of the depositions to show that the content of the communications was protected by the attorney/client privilege.” (Tr. 29.)
Moreover, EBS argues that the crime-fraud exception does not apply. First, EBS asserts that there is no probable cause. EBS says that this Court never evaluated evidence, as it only denied EBS’s motion for summary judgment. Further, EBS contends that Travelers’s “good faith basis for its allegations of fraud” (Travelers Mem. 17) is not enough to reach the level of probable cause.
According to EBS, Travelers has not even alleged the elements of fraud. EBS also asserts that “[ejvidence produced by Travelers indicates that it knew of the facts — which it contends were concealed — ■ months before the transaction was consummated.” (EBS Mem. 17.) (footnote 8 citing to Osburn Dep., Nov. 16, 2005, McGrath Decl. Ex. G-H.).
Second, EBS argues that no evidence submitted by Travelers satisfies the second prong of the applicable test, which requires that communications at issue be secured in furtherance of the crime or fraud.
Finally, EBS denies any waiver of the privilege. EBS starts by noting that the law is not clear on which side has the burden to prove waiver. EBS also claims that the documents produced by EBS are not privileged, so their production does not mean waiver. As to the issue of implied waiver, EBS contends that it has only
The Court’s Determination
Travelers’s motion to compel is timely. The Court holds that communications between EBS’s in-house counsel and former employees regarding the bond and the underlying transaction are not privileged because the crime-fraud exception applies. Thus, the Court need not decide whether the communications constitute business advice not covered by the privilege or whether EBS explicitly or impliedly waived the privilege. The Court grants the motion to compel and also grants leave for additional depositions of witnesses who may be able to testify as to communications between the deponents and in-house counsel at EBS regarding the bond and the underlying transaction, whether the witnesses were already deposed or not. If necessary, the Court is available to examine additional evidence in camera to make itemized determination as to the application of the privilege.
Timeliness
As in
Gault,
“[t]he Federal Rules of Civil Procedure and the Local Rules of this district do not specify a time limit for filing a motion to compel. Therefore, the court is called upon to establish a reasonable time for a party to bring a motion to compel.”
EBS correctly identifies the factors that this Court should examine to decide whether the motion to compel should be denied, as untimely. See 7 James Wm. Moore et al., Moore’s Federal Practice-Civil, § 37.05[2] (Lexis 2006). However, the Court doubts that there is any delay at all.
“A motion to compel filed during the discovery period would rarely be considered untimely.”
Gault,
In
Purcell,
the United States District Court for the District of Columbia examined four cases, including
Gault,
in which the court found that the motion to compel had been untimely filed, and came to the conclusion that “while each judge who found that a motion to compel was untimely filed considered that deadline for the close of discovery had passed when the motion to compel was filed, the common dispositive factor was that any order requiring further discovery would have disturbed either the consideration of a dispositive motion or the conduct of the trial.”
Cases cited by EBS are not directly on point.
Wells
does not provide sufficiently detailed guidance as to why the court denied the motion to compel. 203 F.R.D. at
Therefore, Travelers’s motion to compel is timely.
Attorney-Client Privilege
a) Generally
Initially, the Court must determine whether federal or state law governs the privilege. EBS is suing Travelers both under federal law (section 542 of the Bankruptcy Code) and state law (breach of contract). (Compl.1ffl 30-39.) In this situation, federal law, rather than state law, governs the issue of privilege.
Nikkal Indus. v. Salton, Inc.,
The general requirements and the purpose of the attorney-client privilege are well established. “The attorney-client privilege forbids an attorney from disclosing confidential communications that pass in the course of professional employment from client to lawyer. ‘The relationship of attorney and client, a communication by the client relating to the subject matter upon which professional advice is sought, and the confidentiality of the expression for which protection is claimed, all must be established in order for the privilege to attach.’ ”
Carter,
EBS, as a corporate entity, may also benefit from the privilege as “[t]he Supreme Court has held that the attorney-client privilege attaches to corporations as well as to individuals. Communications made between an attorney and a corporate client’s employees are privileged so long as they are made to attorneys (or their representatives) for the purpose of securing legal advice and concern matters within the scope of the employees’ corporate duties.”
Id.,
b) Crime-Fraud Exception
“The crime-fraud exception strips the privilege from attorney-client communications that ‘relate to client communications in furtherance of contemplated or ongoing criminal or fraudulent conduct.’ ”
John Doe, Inc. v. United States (In re John Doe, Inc.),
“The first condition may be met by showing that the client was engaged in planning a fraudulent scheme when seeking advice
from
counsel, or attempted fraud after receiving the benefit of counsel’s work .... (all that is required is that the likelihood of violation be sufficient as a
prima facie
matter). The second condition may be met by finding that the communications reasonably relate to the subject matter of the possible violations.”
In re Bairnco Corp. Sec. Litig.,
As to the first condition, the Court notes that whether EBS’s conduct legally constituted a crime is irrelevant if the conduct amounted to fraud.
Marc Rich & Co.,
Travelers has submitted enough evidence to provide a “reasonable basis to suspect the perpetration ... of a ... fraud” and to establish
prima facie
that, at the time of the communications at issue, EBS “was engaged in planning a fraudulent scheme when seeking advice from counsel.”
See
First, Travelers’s submissions confirm suspicions that EBS knew that the underlying transaction was a loan and not a capacity service agreement. The CSA, the sale executed on the same day as the CSA, and the bond
(see
Karagheuzoff Decl. Ex. A-C) appear to be the components of a transaction similar to the “Mahonia transaction” at issue in
JPMorgan Chase Bank v. Liberty Mzdual Ins. Co.,
189 F.Supp.2d
Travelers’s submissions also show that EBS knew about the Appleton Rule prohibiting Travelers from issuing a bond to guaranty payment of a loan {See Thames Dep. 112:10-18, Nov. 11, 2005, McGrath Deck Ex. A.), and that, despite such knowledge, EBS did not reveal the true nature of the underlying transaction to Travelers. (Aff. of Philip N. Bair ¶ 9.) Travelers did not know about the true nature of the transaction at issue. {See Wicks Dep., 31:17-32:11, 87:24-90:17, 93:3-94:17, Feb. 27, 2006, Karagheuzoff Reply Deck Ex. B; Osburn Dep. 164:13-24, Karagheuzoff Reply Deck Ex. C.) The evidence that EBS offers to the contrary (Osburn Dep., 165-174, McGrath Deck Ex. G-H.) is inconclusive at best.
Thus, Travelers has established fraud prima facie and satisfied the first condition of the crime-fraud exception.
As to the second condition, “[t]he communication with counsel need only reasonably relate to the subject matter of the violation.”
In re Bairnco Corp. Sec. Litig.,
David Thames had conversations with in-house counsel regarding the Appleton Rule and the transaction at issue. (Thames Dep. 46:15-24, 112:10-18, McGrath Deck Ex. A.) As for Brian Spec-tor, he did have communications with in-house counsel about the transaction at issue. (Spector Dep. 149:13-20, Dec. 2, 2005, Karagheuzoff Deck Ex. M.) Therefore, David Thames’s and Brian Spector’s communications with in-house counsel at EBS regarding the transaction at issue are not privileged.
In sum, the Court holds that communications between EBS’s former employees and members of EBS’s in-house legal department regarding the CSA, the same-day sale of bandwidth capacity by EBS to Global Crossing through Reliant, and the bond dated March 28, 2001, are not privileged because the crime-fraud exception applies. In case of future discovery disputes, the Court may decide to use
in camera
proceedings to assess the applicability of the privilege and the crime-fraud exception.
John Doe, Inc.,
Leave for Additional Depositions
Leave of court must be obtained “if, without the written stipulation of the parties, ... the person to be examined already has been deposed in the case.” Fed.R.Civ.P. 30(a)(2)(B). “The decision to permit a second deposition is left to the discretion of the trial court, and the court should balance the burdens of the various parties in exercising this discretion.” 7 James Wm. Moore et ah,
Moore’s Federal Practice-Civil,
§ 30.05[l][c] (Lexis 2006) (citing
Tri-Star Pictures, Inc. v. Unger,
Evan Betzer’s deposition, which was not completed, and all depositions that have not occurred yet do not require leave of court. Only persons who have already been fully deposed are concerned here, including David Thames and Brian Spector.
In the instant situation, second depositions would not be “unreasonably cumulative or duplicative” because assertion of the privilege by EBS prevented any inquiry into the communications at issue between the deponents and in-house counsel. Travelers has not had any “ample opportunity to obtain the information sought” for the same reason. EBS has not offered another source for this information that is “more convenient, less burdensome, or less expensive.”
Disclosure of communications between the deponents and in-house counsel would materially help this Court in assessing the validity of Travelers’s defense that EBS procured the bond fraudulently. If Travelers’s defense is valid, EBS will not collect millions of dollars on the bond. Thus, despite difficulties in locating deponents and securing their cooperation, the likely benefit of additional depositions outweighs their burden and expense.
Bonnie,
cited by EBS, is inapposite. The court in that case denied leave for a second deposition because the person already deposed was a non-party witness and the party seeking an additional deposition intended “simply to rehash old testimony.”
Therefore, the Court grants Travelers’s request for additional depositions of witnesses already deposed in order to elicit testimony as to communications between the deponents and in-house counsel at EBS regarding the bond and the underlying transaction.
CONCLUSION
The Court holds that communications between EBS’s former employees, including David Thames and Brian Spector, and members of EBS’s in-house legal department regarding the CSA, the same-day sale of bandwidth capacity by EBS to Global Crossing through Reliant, and the bond dated March 28, 2001, are not privileged. If need be, the Court remains available for in camera proceedings to assess the applicability of the privilege regarding additional specific items of evidence.
Notes
. Evan Betzer’s deposition does not need to be reopened; it would continue from the point where it was interrupted. (Travelers Mem. In. 1.)