ROBERT KWAN, Bankruptcy Judge.
Pending before the court are the Motion of Derek L. Tabone, counsel for Defendant Maria Virginia Marti ("Defendant"), for Protective Order, Electronic Case Filing Number ("ECF") 47, filed on September 22, 2016, and Defendant's Ex-Parte Application to Quash Subpoena, ECF 35, filed on August 24, 2016 (collectively, the "Motions").
On August 22, 2016, Counsel for Plaintiff Mario Romero ("Plaintiff"), Dimitrios P. Biller, of the law offices of LDT Consulting, Inc., caused a subpoena to be issued which directed Defendant's counsel, Derek L. Tabone of the Law Offices of Tabone, APC, to appear for a deposition and to produce documents. The subpoena commanded Defendant's counsel, Mr. Tabone, to appear for a deposition and produce documents, including counsel's emails with Jose De La Hoya, a defendant in a state court civil action where Debtor is a plaintiff, documents that counsel received from Mr. De La Hoya, documents filed by counsel in state court on behalf of his clients, Debtor and her former spouse, Donato Cortes, documents regarding settlement of Debtor's state court action against Mr. De La Hoya, copies of pleadings filed by counsel in the state court action against Mr. De La Hoya on behalf of his clients, Debtor and Mr. Cortes, documents related to any release agreement his clients entered into with Mr. De La Hoya, retainer fee agreements between counsel and Debtor, Mr. Cortes, ARMEX Construction, Inc., and ARMEX Design & Construction, Inc., billing statements, invoices and/or bills sent to these clients for any transactional work, emails between counsel and these clients, and any documents exchanged between counsel and these clients. Subpoena, Exhibit A to ECF 35.
On August 24, 2016, Defendant filed an ex parte application to quash Plaintiff's subpoena to compel Mr. Tabone to appear for deposition and produce documents. ECF 35. Because the parties had not met and conferred regarding this discovery dispute in order to file a joint discovery dispute stipulation in compliance with Local Bankruptcy Rule ("LBR") 7026-1(c), the court stayed the enforcement of the subpoena until September 27, 2016 in order for the parties to comply with LBR 7026-1(c). ECF 37. On September 22, 2016, Defendant filed a Motion for Protective Order, which also included a copy of Defendant's prior ex-parte application to quash the subpoena and the parties' discovery dispute stipulation referred to as a "joint report" regarding the discovery dispute. Motion for Protective Order, Joint Report re: Discovery Dispute, ECF 43. Pursuant to LBR 7026-1(c), the parties filed their discovery dispute stipulation after they had met telephonically on September 9, 2016. The court first heard the Motions on March 7, 2017. The court ruled that the protective order remain in place as to Mr. Tabone and continued the hearing on the Motions to May 2, 2017 at 3:00 p.m. so that Plaintiff could take Defendant's deposition and reconsider the need for taking the deposition of her counsel, Mr. Tabone.
In the parties' discovery dispute stipulation, Plaintiff asserted: "Plaintiff maintains that Tabone set up and close down, without notice, accounting, liquidation, and distribution, ARMEX Construction, Inc. to lay the foundation for the ultimate fraud that occurred in April 2014 when (1) Defendant Marti stop doing business in the name of ARMEX Construction, Inc. and (2) started doing business in the name of ARMEX Design & Construction, Inc., thereby cutting Plaintiff and his wife out of the business." Motion for Protective Order, Joint Report re: Discovery Dispute, ECF 43 at 15. According to Plaintiff, "Plaintiff is entitled to take Tabone's deposition because he has personal knowledge regarding the demise of ARMEX Construction, Inc., the start-up of ARMEX Design & Construction, Inc., the lawsuit involving Jose De La Hoya, and the assets, financial records, business records, and corporate records of ARMEX Design & Construction, Inc. because he [Tabone] stated "Will be produced" in response to discovery served Defendant and ARMEX Design & Construction, Inc. when requesting documents. Only Tabone can describe what he did in the discovery process, explain why he gave inconsistent statements in four declarations (five if the Declaration he filed in the Court of Appeals is included). He is the only person who can explain what the documents were not produce [sic] and why fallacious responses to discovery were served on Plaintiff. As the trial lawyer he is the only person who can explain way [sic] he called Leonardo Gomez and Jose De La Hoya as witnesses when they lack any knowledge about the subject matter of their testimony. Only Tabone can testify what steps he took to make sure that all relevant documents, and materials that are reasonably calculated to lead to the discovery of admissible evidence were preserved. Only Tabone can testify as to what he told his client regarding discovery responses, production of document[s], trial strategy on the NEW story they told to the jury that was never presented to Plaintiff in the discover[y] process. Know ARMEX Construction, Inc. produced (1) Check Registers, (2) financial statements, (3) tax returns, (4) construction folders, (5) QuickBooks, (6) by-laws, (7) minutes, (8) certificate of shares, and (9) all bank statements in discovery, why didn't ARMEX Design & Construction, Inc. produce the same documents in the same litigation and discovery process [in the state court litigation]. Only Tabone can testify as to what he did and did not do to obtain these records." Id. at 22.
Having considered the moving and opposing papers, the court vacated the May 2, 2017 hearing through a tentative ruling and telephonic notice before the hearing, taking the Motions under submission, and now grants the Motions.
Federal Rule of Civil Procedure 45(d)(3)(A)(iii)-(iv), made applicable to this adversary proceeding by Federal Bankruptcy Procedure Rule 9016, states "[T]he court for the district where compliance is required must quash or modify a subpoena that: . . . (iii) requires disclosure of privileged or other protected matter, if no exception or waiver applies; or (iv) subjects a person to undue burden." One of the "exceptions" that could apply is the crime-fraud exception to attorney-client privilege.
Based on the crime-fraud exception, Plaintiff seeks to obtain from Defendant's counsel, Mr. Tabone, information that is otherwise privileged. "To invoke the crime-fraud exception, the party seeking disclosure must first `make out a prima facie case that the attorney was retained in order to promote intended or continuing criminal or fraudulent activity.'" In re National Mortgage Equity Corp. Mortgage Pool Certificates Litigation, 116 F.R.D. 297, 300 (C.D. Cal. 1987) quoting, United States v. Hodge and Zweig, 548 F.2d 1347, 1354 (9th Cir. 1977). "This prima facie case must be established through evidence independent of the communications sought to be disclosed." Id., citing, United States v. Zolin, 809 F.2d 1411, 1418 (9th Cir. 1987). "However, for the purpose of abrogating the attorney-client privilege, the party seeking disclosure need not show that the attorney knowingly participated in the crime or fraud." Id.
"If the party seeking disclosure successfully establishes this prima facie case, it must then be determined whether the particular communications sought were in furtherance of the crime or fraud." Id. (emphasis in original). "Unless the prima facie case is so broad that all communications can be considered in furtherance of the crime or fraud, the Court, a magistrate or master must conduct an in camera review of the documents or communications to determine whether they are reasonably related to, or within the scope of, the prima facie showing of the criminal act or fraud." Id. (emphasis in original), citing, In re A.H. Robins Co., 107 F.R.D. 2, 15 (D. Kan. 1985).
Based on this record, the court determines that Plaintiff has made out a prima facie showing for the crime-fraud exception on this record because there is sufficient independent evidence to show that the attorney, Mr. Tabone, was retained in order to promote intended or continuing criminal or fraudulent activity. Plaintiff alleges that Defendant used her corporations to embezzle and divert funds from Plaintiff through the creation of a new, but similarly named, business entity to transfer the assets in another entity in which Plaintiff had an interest, and retained counsel, Mr. Tabone, to assist Defendant and her business. Motion for Protective Order, Joint Report re: Discovery Dispute, ECF 43 at 9 ("In this case, Maria Virginia Marti (`Marti') and ARMEX Design & Construction, Inc. retained Derek Tabone to commit or assist them to commit crimes and frauds: embezzle money out of ARMEX Construction, Inc. and use that money to fraudulently start up ARMEX Design & Construction, Inc.; conceal the legal status of ARMEX Design & Construction, Inc.; conceal or destroy financial records, corporate records, and electronically stored e-mails."). In support of these assertions, Plaintiff has offered as an exhibit the state court judgment after a civil jury verdict in his favor, which upholds these allegations against Defendant, including claims for fraud and conversion. Judgment on Special Verdicts,
However, this does not necessarily mean that the attorney knowingly participated in the fraud,
Before the court proceeds to this second step in analyzing the crime-fraud exception, the court considers the factors for compelling the deposition of an opposing counsel, and whether the subpoenaed testimony under the totality of the circumstances of this case.
"Litigation counsel are presumptively entitled to a protective order against being deposed by an adversary." 3 O'Connell and Stevenson, Rutter Group Practice Guide: Federal Civil Procedure Before Trial, ¶11:1142, at 11-176 (2017) (emphasis in original), citing, Shelton v. American Motors Corp., 805 F.2d 1323, 1327 (8th Cir. 1986) ("Shelton"); accord, Boughton v. Cotter Corp., 805 F.3d 823, 829-830 (10
The Second Circuit in Friedman took a somewhat holistic approach to lawyer depositions, stating that the court should "take[ ] into consideration all of the relevant facts and circumstances to determine whether the proposed deposition would entail an inappropriate burden or hardship." In re Subpoena Issued to Dennis Friedman, 350 F.3d at 72. According to the Second Circuit, "[s]uch considerations may include the need to depose the lawyer, the lawyer's role in connection with the matter on which discovery is sought and in relation to the pending litigation, the risk of encountering privilege or work-product issues, and the extent of discovery already conducted." Id.; accord, Younger Mfg. Co. v. Kaenon, 247 F.R.D. 586, 588 (C.D. Cal. 2007).
The Ninth Circuit has not expressly adopted the test in either Shelton or Friedman or its own test. See, Younger Mfg. Co. v. Kaenon, 247 F.R.D. at 588. The court in this instance will look at both tests in Shelton and Friedman.
Under the Shelton criteria, it appears to the court that Plaintiff has not rebutted the presumption as articulated in that case. First, the court determines that some of the information that Plaintiff seeks is relevant and/or may not be privileged, but some is not relevant and/or is privileged. In this case, Plaintiff seeks to depose opposing litigation counsel to elicit counsel's testimony regarding Defendant's actions. In this proceeding, the court is concerned with whether Plaintiff can meet his burden to prove that the statutory requirements of 11 U.S.C. § 727(c),(d), and (e) are met for revocation of Defendant's discharge in addition to the statutory requirements of 11 U.S.C. § 523(a)(2), (a)(4) and (a)(6) for the court to deem Defendant's debt owed to Plaintiff non-dischargeable. In the First Amended Complaint, ECF 9, filed on June 20, 2016, Plaintiff alleges two sets of claims that: (1) Defendant's discharge should be denied because she made false material statements under oath on her bankruptcy petition and schedules and (2) the judgment debt from his state court action against Defendant should be excepted from discharge.
Essentially, Plaintiff argues that Defendant's counsel, Mr. Tabone, helped his clients in legal work in forming business entities which his clients, Defendant and her businesses, used to allegedly defraud others, including Plaintiff, and then assisted Defendant in concealing documents in the state court litigation. Id. It appears to this court that these allegations Plaintiff made regarding counsel, Mr. Tabone, are not relevant to this case as to the claims in this case about what Defendant did in making statements on her bankruptcy documents, but would be relevant as to what she did to make the judgment debt she allegedly owed to Plaintiff nondischargeable, that is, as determined by the state trial court after a jury verdict, Defendant engaged in fraud and conversion of Plaintiff's assets, which allegedly occurred through the business entities that Defendant's counsel helped to organize for her. While counsel may not have knowingly participated in Defendant's fraud, his actions in forming business entities for Defendant may have assisted Defendant in the fraud, and are thus relevant, and in turn, the communications between Defendant and her counsel may also be relevant to the issue of fraud and debt dischargeabilility. As discussed previously, the crime-fraud exception to the attorney-client privilege may apply under the circumstances of this case. However, Plaintiff also seeks information from Defendant's counsel about litigation of Plaintiff's state court action, including litigation strategy and discovery dispute issues, which implicate the attorney-client privilege and the attorney work product doctrine. Plaintiff's theory is that counsel knowingly participated in Defendant's fraud scheme, and thus, none of this information is privileged under the crime-fraud exception. The court is not so sure on this record, and it would have to consider the information claimed to be privileged in camera under the two-step analysis set forth in National Mortgage Equity Corp. Mortgage Pool Certificates Litigation, 116 F.R.D. at 300.
The court should consider the remaining two Shelton factors for whether the lawyer deposition may be taken. The second factor that the court should determine is whether the information to be obtained through counsel, Mr. Tabone, personally is crucial to the preparation of the case. The court is not so sure about this because Plaintiff has already obtained a state court judgment in his favor that Defendant is indebted to him and that Defendant engaged in acts of fraud and conversion with malicious intent. These findings of fact of the state court, if entitled to preclusive effect, would establish Plaintiff's claims of nondischargeability under 11 U.S.C. § 523(a)(2) and (6), if not, (a)(4). However, the judgment debt is under appellate review, and under California law, a state court judgment is not final for res judicata purposes until it is final after appeal. California Code of Civil Procedure, § 1235.120; Southern Public Utility District v. Silva, 47 Cal.2d 163, 165 (1956) (citing predecessor statute to California Civil Code § 1235.120). Thus, the court should consider whether or not it should abstain in hearing Plaintiff's debt dischargeability claims under 11 U.S.C. § 523 in light of the pending resolution of the state court appeal since resolution of the appeal in Plaintiff's favor would make the requested discovery of Defendant's counsel unnecessary. See In re Tucson Estates, Inc., 912 F.2d 1162, 1166-1167 (9
The third Shelton factor is whether the information that Plaintiff seeks to obtain from Defendant's counsel can be obtained by other means. Any of the documents of Defendant, ARMEX Construction Inc., and ARMEX Design Construction, Inc. could be obtained by seeking discovery of these documents directly from those parties directly and not through counsel personally. The state court pleadings that Plaintiff requests of Defendant's counsel are publically available documents that Plaintiff already has ready access to, so counsel should not be forced to provide them to Plaintiff. In this case, where the parties have been engaged in extensive discovery in past litigation, and where multiple parties have been involved, Plaintiff cannot reasonably argue that there are no other means of obtaining this information other than to take the deposition of the opposing counsel. As such, the court determines that this would not be a sufficient reason to subject Defendant's counsel, Mr. Tabone, to a deposition taken by the opposing counsel. If there are inconsistencies in Defendant's testimony as Plaintiff asserts, Plaintiff will be able to show this at trial without having to take the deposition of her attorney. Furthermore, Plaintiff's counsel has also stated on the record that he has "gathered a lot of evidence in the other state cases." Audio Recording of the Hearing on March 7, 2017 at 3:02 p.m. The fact that Plaintiff has "a lot" of evidence already suggests to the court that Plaintiff has what he needs to present his case without having to take the deposition of Defendant's counsel.
Under the "more flexible" approach of the Second Circuit in Friedman, the court considers "all of the relevant facts and circumstances to determine whether the proposed deposition would entail an inappropriate burden or hardship." In re Subpoena Issued to Dennis Friedman, 350 F.3d at 72. The non-exclusive considerations that the court may look at under Friedman include: (1) the need to depose the lawyer; (2) the lawyer's role in connection with the matter on which discovery is sought and in relation to the pending litigation; (3) the risk of encountering privilege or work-product issues, and (4) the extent of discovery already conducted." Id. Under the Friedman factors, the analysis should come out the same in this court's view. As discussed previously, the need to depose the lawyer is questionable, given the probable res judiciata effect of the state court judgment and the lack of relevance of the discovery to the other claims under 11 U.S.C. § 727. The lawyer was involved in the formation of businesses for Defendant, which allegedly perpetrated a fraud on Plaintiff, and there may be some justification for some discovery once the court reviews information in camera relating to Plaintiff's argument for discovery under the crime-fraud exception. However, Plaintiff's claim that the crime-fraud exception is more tenuous as to what counsel did in the litigation between the parties in state court since it appears from the pleadings that Plaintiff is seeking to establish liability of counsel rather than Defendant, which is not germane to claims at issue in this adversary proceeding. As discussed earlier, there is substantial risk on encountering attorney-client privilege and attorney work product doctrine issues, and the court would have to engage in in camera review to determine whether it is appropriate to apply the crime-fraud exception here. As to the extent of discovery already conducted, it appears that Plaintiff has conducted substantial discovery in the state court litigation and is already taking discovery of Defendant and other persons in this proceeding, and it is not clear that Plaintiff cannot get the discovery he needs through these persons directly as opposed to counsel indirectly.
Accordingly, it is hereby ordered that the Motions of Defendant and her counsel, Mr. Tabone, the Motion for Protective Order and Defendant's Ex-Parte Application to Quash Subpoena Served on Derek Tabone, are granted only in a limited extent that the deposition subpoena and subpoena duces tecum to Defendant's counsel, Mr. Tabone, are stayed under further order of the court, pending a ruling on whether the court should permissively abstain on hearing Plaintiff's claims under 11 U.S.C. § 523.
