by Bradley C. Friesen, Bell Davis & Pitt

In 2016, the North Carolina Court of Appeals issued three opinions that clarify aspects of the attorney-client privilege. They provide helpful refreshers on the basics of attorney-client privilege, as well as guidelines and warnings for how to maintain the privilege during litigation. Additionally, the Federal District Court for the Western District published an opinion about privilege in the context of real estate transactions, which seems to conflict with the view of many real estate practitioners.

The starting point for discussion of these cases is a review of the elements of attorney-client privilege. The privilege protects attorney-client communications from disclosure, thereby promoting full and frank communications between attorney and client. It arises under the following circumstances: (1) the relation of attorney and client existed at the time the communication was made, (2) the communication was made in confidence, (3) the communication relates to a matter about which the attorney is being professionally consulted, (4) the communication was made in the course of giving or seeking legal advice for a proper purpose, although litigation need not be contemplated, and (5) the privilege has not been waived.(1)

Friday Investments v. Bally Total Fitness: No Joint Defense or Common Interest Protection for Indemnity Relationship Arising from Asset Sale Agreement.

In Friday Investments, LLC v. Bally Total Fitness of the Mid-Atlantic, Inc.,(2) the Court of Appeals held that communications between indemnitee and indemnitor did not qualify for privilege under the joint defense or common interest doctrine. This doctrine extends the attorney-client privilege to persons outside of the attorney-client relationship when they “(1) share a common interest; (2) agree to exchange information for the purpose of facilitating legal representation of the parties; and (3) the information must otherwise be confidential.”(3)

This case arose from a lawsuit for back rent under a commercial lease. Friday Investments was the landlord and Bally was the tenant. Before the claims accrued, Bally sold its assets, including its rights under the lease. The asset purchase agreement included the following indemnification provision:

“[Purchaser agrees to] defend, indemnify, and hold [Bally] … harmless of, from and against any [l]osses incurred … on account of or relating to … any Assumed Liabilities, including those arising from or under the [lease] after closing.”

After Friday Investments filed suit, the purchaser agreed to provide a defense for Bally under the indemnification provision.

The plaintiff took the deposition of Bally’s general counsel. During the deposition, the plaintiff’s counsel asked Bally’s general counsel to describe “all of the conversations” after the lawsuit was filed that he personally had with the purchaser—i.e., the entity providing the defense and indemnity for Bally. Attorney-client privilege was asserted. The trial court later granted the plaintiff’s motion to compel the answers, and denied Bally’s motion for a protective order. Bally appealed.

The Court of Appeals held that the joint defense or common interest extension of the attorney-client privilege was limited to relationships formed primarily for the purpose of indemnification, like an insurance contract, or for coordination among parties in common litigation.(4) The Court held that the asset purchase agreement in this case arose out of a business relationship, and that the indemnity provision was ancillary to the business purposes of the parties. (5) The Court further distinguished the indemnity provision at issue from an insurance contract by noting that it did not allow the indemnitor any right to settle or effect the outcome of the litigation, further emphasizing its business purpose.

This rationale begs an important question: when would an indemnification provision in an asset purchase agreement be invoked, except in the “non-business” context of litigation? Additionally, while the indemnitor in this case lacked a contractual right to settle the litigation, it was paying for the defense and any ultimate judgment, which would seem to give it a stake in the outcome sufficient to warrant the right to be informed about the shape and strategy for the litigation without having to reveal it to the plaintiff. The North Carolina Supreme Court granted discretionary review for this case on December 8, 2016, so further clarification about this issue is likely.

Berens v. Berens: A Litigant’s Friend became her Agent to Help with Litigation, thereby Preserving Confidentiality and Privilege.

Berens v. Berens (6) is a family law case in which the plaintiff-husband subpoenaed communications between the defendant-wife and her friend, who was helping her with the case, as well as communications between the wife’s attorney and the friend. Ordinarily, the presence of a non-client or non-attorney during a communication destroys the confidentiality of the communication, and therefore, the privilege. However, the wife asserted that her friend, although not the wife’s attorney, was her “agent and personal advisor to specifically assist her in this litigation.”(7)

At the beginning of the friend’s involvement, and before any privilege dispute arose, the defendant and her friend formalized this principal-agent relationship in a written “Confidentiality Agreement and Acknowledgement of Receipt of Privileged Information.” The agreement provided (1) express authority for the friend to act as agent for the wife (2) subject to the wife’s control.(8) The agreement also provided that the friend-agent would “limit her communications concerning the Client’s litigation … to Client and Client’s attorneys and they [sic] will have no communication with anyone including, but not limited to Wife’s experts, accountants, consultants or attorneys or other advisors and consultants unless Client’s attorneys are present.”(9)

The trial court found that the communications in the presence of the wife’s friend were not privileged because there is “no good friend exception” to the strict elements of attorney-client privilege. However, the Court of Appeals, found that the agency relationship was sufficient to keep the communications within the attorney-client circle. The Court held that being a good friend and being a litigant’s agent are not mutually-exclusive roles.(10) In this case, the record before the trial court and the Court of Appeals contained the friend’s affidavit, describing the agency relationship, as well as a copy of the written agency agreement. The Court of Appeals found these items to be sufficient to establish a client-agent relationship sufficient to preserve the attorney-client privilege.

Sessions v. Sloane: A Checklist for How to Preserve and Present Privilege Disputes.

In Sessions v. Sloane,(11) a group of business partners wanted to protect their internal communications from discovery by a creditor. Sloane and his partners won a $50 Million contract with the Royal Canadian Mounted Police to provide three cruise ships to house security forces during the 2010 Winter Olympics in Vancouver.

A key reason they won the contract was a letter of credit for 10% of the $50 Million bid, which was provided at the last minute by the plaintiff, John Sessions. The defendants agreed to pay plaintiff a fee of $5 Million out of the proceeds of the contract. The proceeds ended up in the trust account for the defendants’ attorney after litigation with the Canadian government. Plaintiff caught wind of a plan by defendants to avoid paying his $5 Million fee, and he sued the defendants and obtained an attachment of the funds in their attorney’s trust account.

During discovery, in response to a commonly-propounded discovery request for all documents “concerning” the plaintiff, the defendants asserted attorney-client privilege and work product protection. They produced a privilege log identifying some emails among the defendants—no attorneys—from the time period when the defendants were negotiating the terms of the letter of credit agreement with the plaintiff. The plaintiff moved to compel these communications, along with the To, From, CC, BCC, and Subject fields for other emails on the privilege log.

In response, one of the defendants submitted an affidavit stating that the defendants had hired counsel and planned from day one to deny the enforceability of the agreement with the plaintiff, and therefore, they involved an attorney and anticipated litigation from the beginning. The defendants did not provide the materials at issue to the trial court for in camera review. The parties disputed whether those materials were offered for in camera inspection, but unfortunately, the court reporter present in the court room did not “take down” the proceedings. (PRACTICE POINTER: Expressly request that the hearing be taken down by the court reporter). The trial court ordered the non-attorney communications to be produced, along with the email header information, including email subject lines, for the emails on the privilege log.

On appeal, the Court of Appeals addressed numerous aspects of privilege, which can be summarized in the following checklist about how to preserve and present privilege disputes:

• The party asserting privilege has the burden to establish it. Providing a privilege log with only the date, sender, and recipient information, along with a claim of privilege and the basis, “email seeking or containing legal advice,” without providing the documents for in camera review, does not meet the burden because the court lacks sufficient information to evaluate the claim of privilege. (12)
• Orally offering to allow the judge to review the material at issue is not the equivalent of actually submitting the material for review.(13)
• If the material was not submitted to the trial court, it will not be reviewed by the Court of Appeals. (14)
• “The better practice in privilege controversies would be to submit a motion, affidavit, privilege log, request for findings of fact and in camera review together with a sealed record of the documents to be reviewed.”(15)
• In a matter of first impression, the Court of Appeals held that email subject lines may contain privileged material, but the subject line must meet the elements of attorney-client privilege, and should be submitted for in camera review. “Email containing legal advice” is not a sufficient description to establish privilege.(16)

In re: Grand Jury Subpoena No. 2013R00691-009: Communications Made to Effectuate Real Estate Transaction are Not Privileged.

Finally, Judge Whitney issued an opinion in Grand Jury Subpoena No. 2013R00691-009.(17)  In this matter, a law firm was subpoenaed to produce “all documents, records, or files maintained by firm regarding the closing of real estate transactions” between its client and certain parties. The law firm objected to producing confidential communications on the grounds of attorney-client privilege. Judge Whitney issued a published opinion granting the government’s motion to compel, stating that “[b]ecause of the frequent recurrence of objections … the Court now memorializes its oral ruling with this published opinion.”(18)

The Court ordered the law firm to produce its communications with its client, stating that

First, the subpoenaed documents are real estate closing files. Second, Movant is admittedly in a position of dual representation. … [E]ither [reason] independently, would suffice to determine that attorney-client privilege does not protect the subpoenaed communications ….(19)

Perhaps alarmingly, the Court further stated that

A client communication made for the purpose of effectuating a real estate closing inherently must be made in contemplation of ultimate public disclosure. Therefore, no intention of confidentiality, and thus no privilege exists.(20)

This decision and rationale conflicts with the way many real estate practitioners view their communications with their clients. While some communications contain information contemplated to be included in the public record, other communications—including details related to negotiations, loan terms, and other matters—are intended to remain confidential. Real estate practitioners should be aware of this published decision.

Conclusion.

The mechanics of attorney-client privilege are often an afterthought during litigation. However, it is important to counsel our clients about privilege at the beginning of the representation so that it is not waived, as well as to avoid creating discoverable non-privileged material in the first place. Finally, remember to create an adequate record for the court to review so that privilege disputes are not waived.

Endnotes:

(1) Sessions v. Sloane, et al., 789S.E.2d 844 (N.C. App. 2016)
(2) Friday Investments, LLC v. Bally Total Fitness of the Mid-Atl., Inc., 788 S.E.2d 170 (N.C. App. 2016), review allowed, 793 S.E.2nd 685 (N.C. 2016)
(3) Id., 788 S.E.2d at 177.
(4) Id., at 178.
(5) Id.
(6) Berens v. Berens, 785 S.E.2d 733 (N.C. App. 2016)
(7) Id., at 739.
(8) Id., at 736.
(9) Id., at 737.
(10) Id., at 741.
(11) Sessions v. Sloane, et al., 789 S.E.2d 844 (N.C. App. 2016)
(12) Id., at 856-7.
(13) Id.
(14) Id., at 854.
(15) Id.
(16) Id., at 856.
(17) In re: Grand Jury Subpoena No. 2013R00691-009, No. 316MC00079FDWDCK, 2016 WL 4385874 (W.D.N.C. Aug. 16, 2016).
(18) Id., at 1.
(19) Id., at 5.
(20) Id.

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